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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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(Mark One)

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



For the quarterly period ended October 1, 2006



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



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MAGMA DESIGN AUTOMATION, INC.

(Exact name of registrant as specified in its
charter)



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|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Delaware                                                       |  | 77-0454924                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)



5460 Bayfront Plaza

Santa Clara, California 95054

(Address of principal executive offices)



Telephone: (408) 565-7500

(Registrants telephone number, including area code)



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



Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):    Large Accelerated Filer ̈Accelerated Filer  x    Non-accelerated
Filer ̈



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



On November 1, 2006, 37,513,840 shares of Registrants Common
Stock, $.0001 par value were outstanding.



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MAGMA DESIGN AUTOMATION, INC.



FORM
10-Q



QUARTERLY PERIOD ENDED OCTOBER 1, 2006



TABLE OF CONTENTS



|                              |  |                                                                                                                        |  |     
|----------------------------- |  | ---------------------------------------------------------------------------------------------------------------------- |  | ----
|                              |  |                                                                                                                        |  | Page
|Part I: Financial Information |  | 4                                                                                                                     
|                              |  |                                                                                                                       
|Item 1:                       |  | Financial Statements (unaudited)                                                                                       |  | 4   
|                              |  |                                                                                                                       
|                              |  | Condensed Consolidated Balance Sheets at October 1, 2006 and April 2, 2006                                             |  | 4   
|                              |  |                                                                                                                       
|                              |  | Condensed Consolidated Statements of Operations for the Three and Six Months Ended October 1, 2006 and October 2, 2005 |  | 5   
|                              |  |                                                                                                                       
|                              |  | Condensed Consolidated Statements of Cash Flows for the Six Months Ended October 1, 2006 and October 2, 2005           |  | 6   
|                              |  |                                                                                                                       
|                              |  | Notes to Condensed Consolidated Financial Statements                                                                   |  | 7   
|                              |  |                                                                                                                       
|Item 2:                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                  |  | 28  
|                              |  |                                                                                                                       
|Item 3:                       |  | Quantitative and Qualitative Disclosures About Market Risk                                                             |  | 45  
|                              |  |                                                                                                                       
|Item 4:                       |  | Controls and Procedures                                                                                                |  | 45  
|                              | 
|Part II: Other Information    |  | 47                                                                                                                    
|                              |  |                                                                                                                       
|Item 1:                       |  | Legal Proceedings                                                                                                      |  | 47  
|                              |  |                                                                                                                       
|Item 1A:                      |  | Risk Factors                                                                                                           |  | 52  
|                              |  |                                                                                                                       
|Item 2:                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                            |  | 68  
|                              |  |                                                                                                                       
|Item 4:                       |  | Submission of Matters to a Vote of Security Holders                                                                    |  | 68  
|                              |  |                                                                                                                       
|Item 6:                       |  | Exhibits                                                                                                               |  | 70  
|                              | 
|Signatures                    |  | 71                                                                                                                    
|                              | 
|Exhibit Index                 |  | 72                                                                                                                    



Cautionary Note Regarding Forward-Looking Statements



In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements subject to the safe harbor protection offered by Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These statements relate to future events and involve known and unknown risks and uncertainties that may cause actual outcomes to be materially different from those indicated by any forward-looking statements. 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
and various operating expenses. Although we believe that the expectations reflected in these forward-looking statements are reasonable, and we have based these expectations on our beliefs and assumptions, such expectations may prove to be incorrect.
Our actual results of operations and financial performance could differ significantly from those expressed in or implied by our forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to:
competition in the electronic design automation (EDA) market; Magmas ability to integrate acquired businesses and technologies; potentially higher-than-anticipated costs of litigation; uncertainty surrounding the outcome of the
Synopsys litigation; potentially higher-than-anticipated costs of compliance with regulatory requirements, including those relating to internal control over financial



2



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reporting; any delay of customer orders or failure of customers to renew licenses; adoption of products by customers; weaker-than-anticipated sales of
Magmas products and services; weakness in the semiconductor or electronic systems industries; the ability to manage expanding operations; the ability to attract and retain the key management and technical personnel needed to operate Magma
successfully; the ability to continue to deliver competitive products to customers; and changes in accounting rules. For a discussion of these and other risk factors, see Part I, Item 1A, Risk Factors of our Annual Report on Form
10-K for the year ended April 2, 2006 and Part II, Item 1A, Risk Factors of this Form 10-Q. All of the forward-looking statements are qualified in their entirety by reference to the risk factors discussed therein. These risk
factors may not be exhaustive. We operate in a continually changing business environment, and new risk factors emerge from time to time. Management cannot predict such new risk factors, nor can it assess the impact, if any, of such new risk factors
on our business or events described in any forward-looking statements after the date of this report to conform them to actual results. Over time, our actual results, performance or achievements will likely differ from the anticipated results,
performance or achievements that are expressed or implied by our forward-looking statements, and such differences might be significant and materially adverse.





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PART I: FINANCIAL INFORMATION



|ITEM 1. | FINANCIAL STATEMENTS.
|------- | ---------------------



MAGMA DESIGN AUTOMATION, INC.



CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

(unaudited)



|                                           |  |                 |          |   |               |   |          |  
|------------------------------------------ |  | --------------- | -------- | - | ------------- | - | -------- | -
|                                           |  | October 1, 2006 |          |   | April 2, 2006 |  
|ASSETS                                     |  |                 |          |   |               |   |          |  
|Current assets:                            |  |                 |          |   |               |   |          |  
|Cash and cash equivalents                  |  | $               | 48,552   |   |               | $ | 58,550   |  
|Restricted cash                            |  |                 | 3,781    |   |               |   | 58       |  
|Short-term investments                     |  |                 | 13,909   |   |               |   | 38,608   |  
|Accounts receivable, net                   |  |                 | 33,554   |   |               |   | 33,849   |  
|Prepaid expenses and other current assets  |  |                 | 5,108    |   |               |   | 4,096    |  
|                                           |  |                 |          |   |               |   |          |  
|Total current assets                       |  |                 | 104,904  |   |               |   | 135,161  |  
|Property and equipment, net                |  |                 | 18,427   |   |               |   | 20,062   |  
|Intangibles, net                           |  |                 | 67,008   |   |               |   | 75,735   |  
|Goodwill                                   |  |                 | 45,485   |   |               |   | 43,985   |  
|Restricted cash                            |  |                 | 150      |   |               |   | 3,841    |  
|Other assets                               |  |                 | 5,102    |   |               |   | 5,280    |  
|                                           |  |                 |          |   |               |   |          |  
|Total assets                               |  | $               | 241,076  |   |               | $ | 284,064  |  
|                                           |  |                 |          |   |               |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY       |  |                 |          |   |               |   |          |  
|Current liabilities:                       |  |                 |          |   |               |   |          |  
|Accounts payable                           |  | $               | 3,581    |   |               | $ | 2,479    |  
|Accrued expenses                           |  |                 | 32,750   |   |               |   | 31,833   |  
|Deferred revenue                           |  |                 | 30,116   |   |               |   | 24,622   |  
|                                           |  |                 |          |   |               |   |          |  
|Total current liabilities                  |  |                 | 66,447   |   |               |   | 58,934   |  
|Convertible subordinated notes             |  |                 | 65,155   |   |               |   | 105,500  |  
|Other long-term liabilities                |  |                 | 2,383    |   |               |   | 5,727    |  
|                                           |  |                 |          |   |               |   |          |  
|Total liabilities                          |  |                 | 133,985  |   |               |   | 170,161  |  
|Commitments and contingencies (Note 11)    |  |                 |          |   |               |   |          |  
|Stockholders equity:                      |  |                 |          |   |               |   |          |  
|Common stock                               |  |                 | 4        |   |               |   | 4        |  
|Additional paid-in capital                 |  |                 | 300,669  |   |               |   | 286,336  |  
|Deferred stock-based compensation          |  |                 |         |   |               |   | (2,020   | )
|Accumulated deficit                        |  |                 | (159,715 | ) |               |   | (136,581 | )
|Treasury stock                             |  |                 | (32,650  | ) |               |   | (32,650  | )
|Accumulated other comprehensive loss       |  |                 | (1,217   | ) |               |   | (1,186   | )
|                                           |  |                 |          |   |               |   |          |  
|Total stockholders equity                 |  |                 | 107,091  |   |               |   | 113,903  |  
|                                           |  |                 |          |   |               |   |          |  
|Total liabilities and stockholders equity |  | $               | 241,076  |   |               | $ | 284,064  |  
|                                           |  |                 |          |   |               |   |          |  



See accompanying notes
to unaudited condensed consolidated financial statements.





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MAGMA DESIGN AUTOMATION, INC.



CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)



|                                                                                                        |  |                    |         |   |                  |   |        |                 |  |   |                 |   |  |   |         |  
|------------------------------------------------------------------------------------------------------- |  | ------------------ | ------- | - | ---------------- | - | ------ | --------------- |  | - | --------------- | - |  | - | ------- | -
|                                                                                                        |  | Three Months Ended |         |   | Six Months Ended |  
|                                                                                                        |  | October 1, 2006    |         |   | October 2, 2005  |   |        | October 1, 2006 |  |   | October 2, 2005 |  
|Revenue:                                                                                                |  |                    |         |   |                  |   |        |                 |  |   |                 |   |  |   |         |  
|Licenses                                                                                                |  | $                  | 34,859  |   |                  | $ | 32,704 |                 |  | $ | 69,399          |   |  | $ | 66,614  |  
|Services                                                                                                |  |                    | 7,103   |   |                  |   | 7,182  |                 |  |   | 13,522          |   |  |   | 12,104  |  
|                                                                                                        |  |                    |         |   |                  |   |        |                 |  |   |                 |   |  |   |         |  
|Total revenue                                                                                           |  |                    | 41,962  |   |                  |   | 39,886 |                 |  |   | 82,921          |   |  |   | 78,718  |  
|                                                                                                        |  |                    |         |   |                  |   |        |                 |  |   |                 |   |  |   |         |  
|Cost of revenue:                                                                                        |  |                    |         |   |                  |   |        |                 |  |   |                 |   |  |   |         |  
|Licenses                                                                                                |  |                    | 7,678   |   |                  |   | 6,483  |                 |  |   | 15,086          |   |  |   | 10,897  |  
|Services                                                                                                |  |                    | 5,533   |   |                  |   | 4,525  |                 |  |   | 10,691          |   |  |   | 8,382   |  
|                                                                                                        |  |                    |         |   |                  |   |        |                 |  |   |                 |   |  |   |         |  
|Total cost of revenue                                                                                   |  |                    | 13,211  |   |                  |   | 11,008 |                 |  |   | 25,777          |   |  |   | 19,279  |  
|                                                                                                        |  |                    |         |   |                  |   |        |                 |  |   |                 |   |  |   |         |  
|Gross profit                                                                                            |  |                    | 28,751  |   |                  |   | 28,878 |                 |  |   | 57,144          |   |  |   | 59,439  |  
|                                                                                                        |  |                    |         |   |                  |   |        |                 |  |   |                 |   |  |   |         |  
|Operating expenses:                                                                                     |  |                    |         |   |                  |   |        |                 |  |   |                 |   |  |   |         |  
|Research and development                                                                                |  |                    | 15,608  |   |                  |   | 12,543 |                 |  |   | 31,057          |   |  |   | 25,152  |  
|Sales and marketing                                                                                     |  |                    | 14,567  |   |                  |   | 10,726 |                 |  |   | 28,414          |   |  |   | 21,936  |  
|General and administrative                                                                              |  |                    | 8,211   |   |                  |   | 9,885  |                 |  |   | 20,006          |   |  |   | 18,528  |  
|Amortization of intangible assets                                                                       |  |                    | 2,922   |   |                  |   | 2,882  |                 |  |   | 5,812           |   |  |   | 6,470   |  
|                                                                                                        |  |                    |         |   |                  |   |        |                 |  |   |                 |   |  |   |         |  
|Total operating expenses                                                                                |  |                    | 41,308  |   |                  |   | 36,036 |                 |  |   | 85,289          |   |  |   | 72,086  |  
|                                                                                                        |  |                    |         |   |                  |   |        |                 |  |   |                 |   |  |   |         |  
|Operating loss                                                                                          |  |                    | (12,557 | ) |                  |   | (7,158 | )               |  |   | (28,145         | ) |  |   | (12,647 | )
|                                                                                                        |  |                    |         |   |                  |   |        |                 |  |   |                 |   |  |   |         |  
|Other income:                                                                                           |  |                    |         |   |                  |   |        |                 |  |   |                 |   |  |   |         |  
|Interest income                                                                                         |  |                    | 671     |   |                  |   | 586    |                 |  |   | 1,558           |   |  |   | 1,246   |  
|Interest expense                                                                                        |  |                    | (133    | ) |                  |   | (224   | )               |  |   | (308            | ) |  |   | (432    | )
|Other income (expense), net                                                                             |  |                    | (493    | ) |                  |   | (352   | )               |  |   | 4,210           |   |  |   | 7,098   |  
|                                                                                                        |  |                    |         |   |                  |   |        |                 |  |   |                 |   |  |   |         |  
|Other income, net                                                                                       |  |                    | 45      |   |                  |   | 10     |                 |  |   | 5,460           |   |  |   | 7,912   |  
|                                                                                                        |  |                    |         |   |                  |   |        |                 |  |   |                 |   |  |   |         |  
|Net loss before income taxes                                                                            |  |                    | (12,512 | ) |                  |   | (7,148 | )               |  |   | (22,685         | ) |  |   | (4,735  | )
|Provision for (benefit from) income taxes                                                               |  |                    | (91     | ) |                  |   | (528   | )               |  |   | 770             |   |  |   | 1,908   |  
|                                                                                                        |  |                    |         |   |                  |   |        |                 |  |   |                 |   |  |   |         |  
|Net loss before cumulative effect of change in accounting principle                                     |  |                    | (12,421 | ) |                  |   | (6,620 | )               |  |   | (23,455         | ) |  |   | (6,643  | )
|Cumulative effect of change in accounting principle                                                     |  |                    |        |   |                  |   |       |                 |  |   | 321             |   |  |   |        |  
|                                                                                                        |  |                    |         |   |                  |   |        |                 |  |   |                 |   |  |   |         |  
|Net loss                                                                                                |  | $                  | (12,421 | ) |                  | $ | (6,620 | )               |  | $ | (23,134         | ) |  | $ | (6,643  | )
|                                                                                                        |  |                    |         |   |                  |   |        |                 |  |   |                 |   |  |   |         |  
|Net loss per common share before cumulative effect of change in accounting principle, basic and diluted |  | $                  | (0.34   | ) |                  | $ | (0.19  | )               |  | $ | (0.64           | ) |  | $ | (0.19   | )
|                                                                                                        |  |                    |         |   |                  |   |        |                 |  |   |                 |   |  |   |         |  
|Net loss per common share, basic and diluted                                                            |  | $                  | (0.34   | ) |                  | $ | (0.19  | )               |  | $ | (0.64           | ) |  | $ | (0.19   | )
|                                                                                                        |  |                    |         |   |                  |   |        |                 |  |   |                 |   |  |   |         |  
|Shares used in calculation, basic and diluted                                                           |  |                    | 36,140  |   |                  |   | 34,098 |                 |  |   | 35,900          |   |  |   | 34,115  |  
|                                                                                                        |  |                    |         |   |                  |   |        |                 |  |   |                 |   |  |   |         |  



See accompanying notes
to unaudited condensed consolidated financial statements.



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MAGMA DESIGN AUTOMATION, INC.



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



|                                                                                                                |  |                  |         |   |                 |   |         |  
|--------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | - | --------------- | - | ------- | -
|                                                                                                                |  | Six Months Ended |        
|                                                                                                                |  | October 1, 2006  |         |   | October 2, 2005 |  
|Cash flows from operating activities:                                                                           |  |                  |         |   |                 |   |         |  
|Net loss                                                                                                        |  | $                | (23,134 | ) |                 | $ | (6,643  | )
|Adjustments to reconcile net loss to net cash provided by operating activities:                                 |  |                  |         |   |                 |   |         |  
|Cumulative effect of change in accounting principle                                                             |  |                  | (321    | ) |                 |   |        |  
|Depreciation and amortization                                                                                   |  |                  | 5,149   |   |                 |   | 4,685   |  
|Amortization of intangible assets                                                                               |  |                  | 20,548  |   |                 |   | 16,898  |  
|Provision for (recovery from) doubtful accounts                                                                 |  |                  | 41      |   |                 |   | (150    | )
|Amortization of debt issuance costs                                                                             |  |                  | 249     |   |                 |   | 371     |  
|Loss on strategic equity investments                                                                            |  |                  | 308     |   |                 |   | 511     |  
|Gain on repurchase of convertible notes, net of debt issuance cost write-off                                    |  |                  | (4,809  | ) |                 |   | (8,781  | )
|Loss on sale of short-term investments                                                                          |  |                  | 3       |   |                 |   | 661     |  
|Stock-based compensation                                                                                        |  |                  | 9,013   |   |                 |   | 2,992   |  
|Income tax benefit realized from gain on repurchase of convertible notes                                        |  |                  |        |   |                 |   | 50      |  
|Income tax benefit realized from debt issuance costs                                                            |  |                  |        |   |                 |   | 106     |  
|Change in operating assets and liabilities, net of effect of acquisitions:                                      |  |                  |         |   |                 |   |         |  
|Accounts receivable                                                                                             |  |                  | 538     |   |                 |   | 5,196   |  
|Prepaid expenses and other assets                                                                               |  |                  | (1,076  | ) |                 |   | 175     |  
|Accounts payable                                                                                                |  |                  | 942     |   |                 |   | (1,160  | )
|Accrued expenses                                                                                                |  |                  | (5,667  | ) |                 |   | 7,664   |  
|Deferred revenue                                                                                                |  |                  | 5,494   |   |                 |   | 1,241   |  
|Other long-term liabilities                                                                                     |  |                  | (109    | ) |                 |   | (390    | )
|                                                                                                                |  |                  |         |   |                 |   |         |  
|Net cash provided by operating activities                                                                       |  |                  | 7,169   |   |                 |   | 23,426  |  
|                                                                                                                |  |                  |         |   |                 |   |         |  
|Cash flows from investing activities:                                                                           |  |                  |         |   |                 |   |         |  
|Purchase of intangible assets                                                                                   |  |                  | (6,793  | ) |                 |   | (20,435 | )
|Purchase of property and equipment                                                                              |  |                  | (1,504  | ) |                 |   | (1,995  | )
|Purchase of short-term investments                                                                              |  |                  | (9,292  | ) |                 |   | (56,297 | )
|Proceeds from sale and maturities of short-term investments                                                     |  |                  | 34,010  |   |                 |   | 136,349 |  
|Purchase of strategic equity investments                                                                        |  |                  | (900    | ) |                 |   | (750    | )
|                                                                                                                |  |                  |         |   |                 |   |         |  
|Net cash provided by investing activities                                                                       |  |                  | 15,521  |   |                 |   | 56,872  |  
|                                                                                                                |  |                  |         |   |                 |   |         |  
|Cash flows from financing activities:                                                                           |  |                  |         |   |                 |   |         |  
|Proceeds from issuance of common stock, net                                                                     |  |                  | 3,250   |   |                 |   | 3,670   |  
|Repurchase of common stock                                                                                      |  |                  |        |   |                 |   | (16,045 | )
|Repurchase of convertible notes, net                                                                            |  |                  | (35,000 | ) |                 |   | (34,668 | )
|Repayment of lease obligation                                                                                   |  |                  | (601    | ) |                 |   | (332    | )
|                                                                                                                |  |                  |         |   |                 |   |         |  
|Net cash used in financing activities                                                                           |  |                  | (32,351 | ) |                 |   | (47,375 | )
|                                                                                                                |  |                  |         |   |                 |   |         |  
|Effect of foreign currency translation on cash and cash equivalents                                             |  |                  | (337    | ) |                 |   | (74     | )
|                                                                                                                |  |                  |         |   |                 |   |         |  
|Net (decrease) increase in cash and cash equivalents                                                            |  |                  | (9,998  | ) |                 |   | 32,849  |  
|Cash and cash equivalents at beginning of period                                                                |  |                  | 58,550  |   |                 |   | 20,622  |  
|                                                                                                                |  |                  |         |   |                 |   |         |  
|Cash and cash equivalents at end of period                                                                      |  | $                | 48,552  |   |                 | $ | 53,471  |  
|                                                                                                                |  |                  |         |   |                 |   |         |  
|Supplemental disclosure:                                                                                        |  |                  |         |   |                 |   |         |  
|Non-cash investing and financing activities:                                                                    |  |                  |         |   |                 |   |         |  
|Deferred stock-based compensation                                                                               |  | $                | 514     |   |                 | $ | (1,089  | )
|                                                                                                                |  |                  |         |   |                 |   |         |  
|Issuance of common stock in connection with asset purchase                                                      |  | $                | 4,411   |   |                 | $ | 11,747  |  
|                                                                                                                |  |                  |         |   |                 |   |         |  
|Issuance of common stock warrant in connection with intangible asset purchase                                   |  | $                |        |   |                 | $ | 3,080   |  
|                                                                                                                |  |                  |         |   |                 |   |         |  
|Purchase of fixed assets under capital leases                                                                   |  | $                | 1,596   |   |                 | $ | 2,048   |  
|                                                                                                                |  |                  |         |   |                 |   |         |  
|Common stock received from termination of hedge and warrants in connection with repurchase of convertible notes |  | $                | 102     |   |                 | $ |        |  
|                                                                                                                |  |                  |         |   |                 |   |         |  

See accompanying notes to unaudited condensed consolidated financial statements.





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MAGMA DESIGN AUTOMATION, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



Note 1. Basis of Presentation



The interim unaudited condensed consolidated financial statements included
herein have been prepared by Magma Design Automation, Inc. (Magma or the Company), pursuant to the rules and regulations of the United States Securities and Exchange Commission (SEC). Certain information and note
disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted, pursuant to these rules and regulations. However,
management believes that the disclosures are adequate to ensure that the information presented is not misleading. The interim unaudited condensed consolidated financial statements reflect, in the opinion of management, all adjustments necessary
(consisting only of normal recurring adjustments) to present a fair statement of results for the interim periods presented. The operating results for any interim period are not necessarily indicative of the results that may be expected for the
entire fiscal year ending April 1, 2007. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Companys Form 10-K for the year ended April 2, 2006, as filed with the SEC on
June 15, 2006. The accompanying unaudited condensed consolidated balance sheet at April 2, 2006 is derived from audited consolidated financial statements at that date.



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



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.



Reclassifications



Certain amounts in the
prior year financial statements have been reclassified to conform with the current year presentation. Specifically, the Company has reclassified certain prior year amounts relating to stock-based compensation as detailed in the statements of
operations and in Note 2.



Change in Fiscal Year End



On January 26, 2005, the Companys Board of
Directors approved a change in Magmas fiscal year end from March 31 to a 52-53 week fiscal year ending on the first Sunday subsequent to March 31. After the fiscal year ended March 31, 2005, Magmas fiscal years consist of
four quarters of 13 weeks each except for each fifth or sixth fiscal year, which includes one quarter with 14 weeks. All references to years or quarters in these notes to consolidated financial statements represent fiscal years or fiscal quarters,
respectively, unless otherwise noted. As a result of this change, the first quarter of Magmas fiscal year 2006 included three additional days, the results of which were included in Magmas Form 10-Q for that quarter.



Recently Issued Accounting Pronouncements



In September 2006, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards No. 157 Fair Value Measurements ( SFAS 157). SFAS 157 defines fair value,



7



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##### Table of Contents

MAGMA DESIGN AUTOMATION, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157
applies only to other accounting pronouncements that require or permit fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact of the adoption of SFAS 157
on its consolidated financial position or results of operations.



In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108 (SAB 108) addressing how the effects of prior-year uncorrected financial statement misstatements should be considered in
current-year financial statements. SAB 108 requires registrants to quantify misstatements using both balance-sheet and income-statement approaches in evaluating whether or not a misstatement is material. SAB 108 is effective for fiscal years ending
after November 15, 2006. The Company does not anticipate the adoption of SAB 108 will have a material impact on its consolidated financial position or results of operations.



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



In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections (SFAS 154). This new standard replaces APB Opinion No. 20, Accounting Changes in Interim Financial Statements, and SFAS No. 3, Reporting Accounting Changes
in Interim Financial Statements, and represents another step in the FASBs goal to converge its standards with those issued by the International Accounting Standards Board (IASB). Among other changes, SFAS 154 requires
retrospective application to prior periods financial statements of a voluntary change in accounting principle unless it is impracticable. SFAS 154 also provides that (1) a change in method of depreciating or amortizing a long-lived
nonfinancial asset be accounted for as a change in estimate (prospectively) that was effected by a change in accounting principle, and (2) correction of errors in previously issued financial statements should be termed a
restatement. The new standard is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. The adoption of SFAS 154 has not had a material effect on the Companys
consolidated financial position or results of operations.



Note 2. Stock-based Compensation



Adoption of
SFAS 123R



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 (APB) 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 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



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##### Table of Contents

MAGMA DESIGN AUTOMATION, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



and awards granted prior to April 3, 2006, and options and awards granted subsequent to that date. Additionally, the Company elected to use the
straight-line method to recognize its stock-based compensation expenses over the option and awards vesting periods. For options and awards granted prior to adoption of SFAS 123R, the Company continues to record stock-based compensation
expenses under the accelerated attribution method. As required by SFAS 123R, on April 3, 2006, the Company eliminated the unamortized deferred stock compensation of $2.0 million and reduced the Companys additional paid-in
capital by the same amount, which had been included in stockholders equity in the Companys condensed consolidated balance sheet as of April 2, 2006.



Unlike APB 25, which allows adjustments to compensation costs for actual forfeitures, SFAS 123R requires the rate of
forfeiture to be estimated and recorded during the option term. Accordingly, during the first quarter of fiscal 2007, the Company recorded a credit of $321,000, reflecting the cumulative effect of the change in accounting principle for forfeitures
primarily related to unvested restricted stock that had previously been recognized as stock-based compensation expense without consideration of forfeitures. No income tax benefit related to the cumulative effect of the change in accounting for stock
option forfeitures was recorded as the Company has provided full valuation allowance against its net deferred tax assets.



In March 2005, the Commission issued Staff Accounting Bulletin (SAB) No. 107, which provided supplemental implementation guidance for
SFAS 123R. SAB 107 requires stock-based compensation to be classified in the same expense line items as cash compensation. Accordingly, the Company recorded stock-based compensation for the three and six months ended October 1, 2006 and
reclassified stock-based compensation for the three and six months ended October 2, 2005 as follows (in thousands):



|                                       |  |                   |       |                 |   |                 |  |                 |       |  |   |      
|-------------------------------------- |  | ----------------- | ----- | --------------- | - | --------------- |  | --------------- | ----- |  | - | -----
|                                       |  | Three MonthsEnded |       | Six MonthsEnded
|                                       |  | October 1, 2006   |       | October 2, 2005 |   | October 1, 2006 |  | October 2, 2005
|Cost of revenue                        |  | $                 | 344   |                 | $ | 47              |  | $               | 686   |  | $ | 47   
|Research and development expense       |  |                   | 1,593 |                 |   | 1,162           |  |                 | 3,607 |  |   | 2,796
|Sales and marketing expense            |  |                   | 983   |                 |   | 68              |  |                 | 2,253 |  |   | 76   
|General and administrative expense     |  |                   | 1,120 |                 |   | 43              |  |                 | 2,467 |  |   | 73   
|                                       |  |                   |       |                 |   |                 |  |                 |       |  |   |      
|Total stock-based compensation expense |  | $                 | 4,120 |                 | $ | 1,320           |  | $               | 9,013 |  | $ | 2,992
|                                       |  |                   |       |                 |   |                 |  |                 |       |  |   |      



The Company has not
provided an income tax benefit for stock-based compensation expense for current and prior year periods, since it is more likely than not that the deferred tax assets associated with this expense will not be realized. To the extent the Company
realizes the deferred tax assets associated with the stock-based compensation expense in the future, the income tax effects of such an event may be recognized at that time. Prior to the adoption of SFAS 123R, the Company presented all tax benefits
for deductions resulting from the exercise of stock options as operating cash flows on its statement of cash flows. SFAS 123R requires the cash retained as a result of tax benefits for tax deductions in excess of the compensation expense recorded
for those options to be classified as cash from financing activities. The Company recorded no excess tax benefits for the three and six months ended October 1, 2006.



The adoption of SFAS 123R had a material effect on the Companys financial results since April 3, 2006. The
Companys operating loss for the three and six months ended October 1, 2006 increased by $3.3 million and $6.7 million, respectively, and net loss by $3.3 million and $6.4 million, respectively, than if the Company had



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##### Table of Contents

MAGMA DESIGN AUTOMATION, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



continued to account for stock-based compensation under APB 25. Basic and diluted net loss per share for the three and six months ended October 1,
2006 was $0.09 and $0.19, respectively, higher than if the Company had continued to account for stock-based compensation under APB 25. For the three and six months ended October 2, 2005, the Company recognized $1.3 million and $3.0 million,
respectively, of stock-based compensation expense under the intrinsic value method.



Stock-based compensation expense by type of awards during the three and six months ended October 1, 2006 was as follows (in thousands):



|                                            |  |                                   |       |                                 |   |      
|------------------------------------------- |  | --------------------------------- | ----- | ------------------------------- | - | -----
|                                            |  | Three Months EndedOctober 1, 2006 |       | Six Months EndedOctober 1, 2006
|Stock options                               |  | $                                 | 2,723 |                                 | $ | 5,746
|Restricted stock and restricted stock units |  |                                   | 851   |                                 |   | 2,000
|Employee stock purchase plan                |  |                                   | 546   |                                 |   | 1,267
|                                            |  |                                   |       |                                 |   |      
|Total stock-based compensation expense      |  | $                                 | 4,120 |                                 | $ | 9,013
|                                            |  |                                   |       |                                 |   |      



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. As of October 1, 2006, the Company had remaining 12.8 million and 2.7 million shares, respectively, of common stock authorized for issuance under its stock
incentive plans and the ESPP.



Stock Options



Stock options are granted at the market price of the Companys common
stock on the date of grant under the Companys stock incentive plans. Option grants vest over two to four years, expire no later than five or ten years from the grant date and are subject to the employees continuing service to the
Company. The Company uses the Black-Scholes option pricing model to determine the fair value of its stock options, which is consistent with what was used for pro forma disclosures under SFAS 123, Accounting for Stock-Based Compensation,
prior to the adoption of SFAS 123R. The Black-Scholes option pricing model was developed to estimate the fair value of short lived exchange-traded options that have no vesting restrictions and are fully transferable. In addition, the Black-Scholes
option-pricing model incorporates various highly subjective assumptions including expected future stock price volatility and expected terms of instruments. The weighted average grant date fair value of options granted during the three and six months
ended October 1, 2006 was $3.69 and $3.56, respectively. The weighted average assumptions used in the model for the three and six months ended October 1, 2006 were as follows:





|                        |  |                                   |  |                                
|----------------------- |  | --------------------------------- |  | -------------------------------
|                        |  | Three Months EndedOctober 1, 2006 |  | Six Months EndedOctober 1, 2006
|Expected life (years)   |  | 3.96                              |  | 4.16                           
|Volatility              |  | 51%                               |  | 50%                            
|Risk-free interest rate |  | 4.61% - 4.92%                     |  | 4.61% - 5.15%                  
|Expected dividend yield |  | 0%                                |  | 0%                             



In refining estimates
used in the adoption of SFAS 123R, the Company established the expected life assumption for employee options and awards, as well as expected forfeiture rates, based on the historical



10



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##### Table of Contents

MAGMA DESIGN AUTOMATION, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



settlement experience, while giving consideration to vesting schedules and 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 volatility under SFAS 123R was developed based on the average 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.



A summary of the changes in stock options outstanding and exercisable under
the Companys stock incentive plans during the three and six months ended October 1, 2006 is as follows (in thousands, except per share amount):



|                                               |  |                  |   |  |                                  |       |                                                   |      |                          |   |      
|---------------------------------------------- |  | ---------------- | - |  | -------------------------------- | ----- | ------------------------------------------------- | ---- | ------------------------ | - | -----
|                                               |  | Number of Shares |   |  | Weighted Average Price per Share |       | Weighted Average RemainingContractual Term(Years) |      | Aggregate IntrinsicValue
|Options outstanding at April 2, 2006           |  | 8,979            |   |  | $                                | 10.64 |                                                   |      |                          | $ | 2,940
|Granted                                        |  | 2,153            |   |  | $                                | 7.77  |                                                   |      |                          |   |      
|Exercised                                      |  | (1               | ) |  | $                                | 6.08  |                                                   |      |                          |   |      
|Cancelled and forfeited                        |  | (324             | ) |  | $                                | 14.13 |                                                   |      |                          |   |      
|                                               |  |                  |   |  |                                  |       |                                                   |      |                          |   |      
|Options outstanding at July 2, 2006            |  | 10,807           |   |  | $                                | 9.96  |                                                   | 5.60 |                          | $ | 1,194
|                                               |  |                  |   |  |                                  |       |                                                   |      |                          |   |      
|Granted                                        |  | 460              |   |  | $                                | 8.31  |                                                   |      |                          |   |      
|Exercised                                      |  | (14              | ) |  | $                                | 6.73  |                                                   |      |                          |   |      
|Cancelled and forfeited                        |  | (142             | ) |  | $                                | 10.29 |                                                   |      |                          |   |      
|                                               |  |                  |   |  |                                  |       |                                                   |      |                          |   |      
|Options outstanding at October 1, 2006         |  | 11,111           |   |  | $                                | 9.89  |                                                   | 5.34 |                          | $ | 7,186
|                                               |  |                  |   |  |                                  |       |                                                   |      |                          |   |      
|Vested and expected to vest at October 1, 2006 |  | 10,654           |   |  | $                                | 9.95  |                                                   | 5.36 |                          | $ | 6,836
|Exercisable at October 1, 2006                 |  | 5,756            |   |  | $                                | 10.91 |                                                   | 5.76 |                          | $ | 3,371



The total intrinsic
value of options exercised was $13,912 and $15,520, respectively, during the three and six months ended October 1, 2006, and $61,677 and $233,105, respectively, during the three and six months ended October 2, 2005. As of October 1,
2006, there was approximately $15.4 million of unrecognized stock-based compensation expense, net of estimated forfeitures, related to stock option grants, which will be recognized over the remaining weighted average vesting period of approximately
1.47 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. The cost of restricted stock and restricted stock unit awards is determined using the fair value of the Companys common stock on the date of the grant, and compensation expense
is recognized over the vesting period.



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##### Table of Contents

MAGMA DESIGN AUTOMATION, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



A summary of the changes in restricted stock outstanding during the three and six months ended
October 1, 2006 is presented below (in thousands, except per share amount):



|                                    |  |                  |   |  |                                        |      
|----------------------------------- |  | ---------------- | - |  | -------------------------------------- | -----
|                                    |  | Number of Shares |   |  | Weighted Average Grant Date Fair Value
|Shares nonvested at April 2, 2006   |  | 389              |   |  | $                                      | 11.87
|Granted                             |  | 307              |   |  | $                                      | 7.11 
|Vested                              |  | (129             | ) |  | $                                      | 12.04
|Forfeited                           |  |                 |   |  | $                                      |     
|                                    |  |                  |   |  |                                        |      
|Shares nonvested at July 2, 2006    |  | 567              |   |  | $                                      | 9.26 
|                                    |  |                  |   |  |                                        |      
|Granted                             |  | 50               |   |  | $                                      | 9.50 
|Vested                              |  | (72              | ) |  | $                                      | 7.84 
|Forfeited                           |  | (7               | ) |  | $                                      | 7.11 
|                                    |  |                  |   |  |                                        |      
|Shares nonvested at October 1, 2006 |  | 538              |   |  | $                                      | 9.49 
|                                    |  |                  |   |  |                                        |      



As of October 1,
2006, there was $2.9 million of unrecognized stock-based compensation expense, net of estimated forfeitures, related to restricted stock awards, which will be recognized over the remaining weighted average vesting period of approximately 1.47 years.



A summary of the changes in restricted stock units outstanding
during the three and six months ended October 1, 2006 is presented below (in thousands, except per share amount):



|                                               |  |                  |   |  |                                  |        |                                                   |      |                          |   |    
|---------------------------------------------- |  | ---------------- | - |  | -------------------------------- | ------ | ------------------------------------------------- | ---- | ------------------------ | - | ---
|                                               |  | Number of Shares |   |  | Weighted Average Price per Share |        | Weighted Average RemainingContractual Term(Years) |      | Aggregate IntrinsicValue
|Shares nonvested at April 2, 2006              |  |                 |   |  | $                                |       |                                                   |      |                          |   |    
|Granted                                        |  | 51               |   |  | $                                | 0.0001 |                                                   |      |                          |   |    
|Vested                                         |  |                 |   |  | $                                |       |                                                   |      |                          |   |    
|Forfeited                                      |  | (1               | ) |  | $                                | 0.0001 |                                                   |      |                          |   |    
|                                               |  |                  |   |  |                                  |        |                                                   |      |                          |   |    
|Shares nonvested at July 2, 2006               |  | 50               |   |  | $                                | 0.0001 |                                                   | 4.94 |                          | $ | 369
|                                               |  |                  |   |  |                                  |        |                                                   |      |                          |   |    
|Granted                                        |  |                 |   |  | $                                |       |                                                   |      |                          |   |    
|Vested                                         |  | (9               | ) |  | $                                | 0.0001 |                                                   |      |                          |   |    
|Forfeited                                      |  | (1               | ) |  | $                                | 0.0001 |                                                   |      |                          |   |    
|                                               |  |                  |   |  |                                  |        |                                                   |      |                          |   |    
|Shares nonvested at October 1, 2006            |  | 40               |   |  | $                                | 0.0001 |                                                   | 4.69 |                          | $ | 362
|                                               |  |                  |   |  |                                  |        |                                                   |      |                          |   |    
|Vested and expected to vest at October 1, 2006 |  | 38               |   |  | $                                | 0.0001 |                                                   | 4.43 |                          | $ | 341
|                                               |  |                  |   |  |                                  |        |                                                   |      |                          |   |    



As of October 1,
2006, there was $0.3 million of unrecognized stock-based compensation expense, net of estimated forfeitures, related to restricted stock unit awards, which will be recognized over the remaining weighted average vesting period of approximately 1.50
years.



The total fair value of restricted stock and restricted
stock units that were vested was $0.6 million and $2.2 million, respectively, during the three and six months ended October 1, 2006, and was $0.2 million and $0.7 million, respectively, during the three and six months ended
October 2, 2005.



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##### Table of Contents

MAGMA DESIGN AUTOMATION, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



Employee Stock Purchase Plan



The 2001 Employee Stock Purchase Plan (2001 Purchase Plan) provides for a series of overlapping offering periods
with a duration of 24 months, with new offering periods beginning in February, May, August, and November of each year. The 2001 Purchase Plan allows employees to purchase common stock through payroll deductions of up to 15% of their eligible
compensation. Such deductions will accumulate over a three-month accumulation period without interest. After such accumulation period, shares of common stock will be purchased at a price equal to 85% of the fair market value per share of common
stock on either the first day preceding the offering period or the last date of the accumulation period, whichever is less. In the event that the fair market value on the last date of the accumulation period is lower than the fair market value at
the beginning of the offering period, participants are automatically re-enrolled in a new 24-month offering period at the lower fair market value. During the three and six months ended October 1, 2006, a total of 334,260 and 647,906,
respectively, shares were issued under the 2001 Purchase Plan at an average price of $5.37 and $5.37, respectively, per share. As of October 1, 2006, a total of 2,722,072 shares of common stock remained available for issuance under the 2001
Purchase Plan.



Compensation expense for ESPP is calculated
using the fair value of the employees purchase rights under the Black-Scholes option pricing model. The weighted average estimated grant date fair value of purchase rights granted under the ESPP during the three and six months ended
October 1, 2006 was $2.64 and $2.65, respectively. The weighted average assumptions used in the model for the three and six months ended October 1, 2006 were as follows:



|                        |  |                                   |   |  |                                 |  
|----------------------- |  | --------------------------------- | - |  | ------------------------------- | -
|                        |  | Three Months EndedOctober 1, 2006 |   |  | Six Months EndedOctober 1, 2006 |  
|Expected life (years)   |  | 1.13                              |   |  | 1.13                            |  
|Volatility              |  | 51                                | % |  | 50 - 51                         | %
|Risk-free interest rate |  | 5.10                              | % |  | 5.10 - 5.11                     | %
|Expected dividend yield |  | 0                                 | % |  | 0                               | %



Expected volatility
under SFAS 123R was developed based on the average of Magmas historical weekly stock price volatility and average implied volatility. The expected life assumption is based on the average exercise date for the eight purchase periods in each
24-month offering period. The risk-free interest rate for the period within the expected life of the purchase right is based on the yield of United States Treasury notes in effect at the time of grant.



As of October 1, 2006, the Company had $1.6 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 0.54 years.



Tax Effects of Stock-Based Compensation Awards



In November 2005, FASB issued Financial Statement Position (FSP), on SFAS No. 123R-3, Transition
Election Related to Accounting for Tax Effects of Stock-Based Payment Awards. Effective upon issuance, FSP 123R-3 provides for an alternative transition method for calculating the tax effects of stock-based compensation pursuant to
SFAS No. 123R. The alternative transition method provides simplified approaches to establish the beginning balance of a tax benefit pool comprised of the additional paid-in capital, or APIC, related to the tax effects of employee
stock-based compensation, and to determine the subsequent impact on the APIC tax benefit pool and the statement of cash flows of stock-based awards that were outstanding upon the adoption of SFAS



13



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##### Table of Contents

MAGMA DESIGN AUTOMATION, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



No. 123R. Companies have one year from the later of the adoption of SFAS No. 123R or the effective date of the FSP to evaluate their
transition alternatives and make a one-time election. Upon adoption of SFAS No. 123R, the Company elected to calculate its historical pool of windfall tax benefits using the long-form method provided in paragraph 81 of SFAS
123R, which resulted in an APIC windfall pool of tax benefits position.



Stock-Based Compensation for the Three and Six Months Ended October 2, 2005



During the three and six months ended October 2, 2005, the Company accounted for its stock-based employee compensation arrangements in accordance
with provisions of APB 25 and related guidance. The Company recognized in its Condensed Consolidated Statements of Operations $1.3 million and $3.0 million, respectively, of stock-based compensation expense primarily for the intrinsic value of
restricted stock awarded during the three and six months ended October 2, 2005.



During the three and six months ended October 2, 2005, the Company complied with the disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based Compensation, as amended. Had
compensation cost for the Companys stock-based compensation plan been determined using the Black-Scholes option pricing model at the grant date for awards granted in accordance with the provisions of SFAS 123, the Companys net loss would
have been the amounts indicated below (in thousands, except per share amount):



|                                                                                                    |  |                                   |         |   |                                 |   |         |  
|--------------------------------------------------------------------------------------------------- |  | --------------------------------- | ------- | - | ------------------------------- | - | ------- | -
|                                                                                                    |  | Three Months EndedOctober 2, 2005 |         |   | Six Months EndedOctober 2, 2005 |  
|Net loss:                                                                                           |  |                                   |         |   |                                 |   |         |  
|As reported                                                                                         |  | $                                 | (6,620  | ) |                                 | $ | (6,643  | )
|Add: Stock-based employee compensation expense included in reported net loss                        |  |                                   | 1,320   |   |                                 |   | 2,992   |  
|Deduct: Stock-based employee compensation expense determined under fair value method for all awards |  |                                   | (6,288  | ) |                                 |   | (11,609 | )
|                                                                                                    |  |                                   |         |   |                                 |   |         |  
|Pro forma                                                                                           |  | $                                 | (11,588 | ) |                                 | $ | (15,260 | )
|                                                                                                    |  |                                   |         |   |                                 |   |         |  
|Net loss per share, basic and diluted:                                                              |  |                                   |         |   |                                 |   |         |  
|As reported                                                                                         |  | $                                 | (0.19   | ) |                                 | $ | (0.19   | )
|                                                                                                    |  |                                   |         |   |                                 |   |         |  
|Pro forma                                                                                           |  | $                                 | (0.34   | ) |                                 | $ | (0.45   | )
|                                                                                                    |  |                                   |         |   |                                 |   |         |  



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



|                              |  |                                   |      |                                 |   |     
|----------------------------- |  | --------------------------------- | ---- | ------------------------------- | - | ----
|                              |  | Three Months EndedOctober 2, 2005 |      | Six Months EndedOctober 2, 2005
|Stock options                 |  | $                                 | 4.02 |                                 | $ | 3.85
|Employee stock purchase plans |  | $                                 | 3.93 |                                 | $ | 2.58



14



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##### Table of Contents

MAGMA DESIGN AUTOMATION, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



The fair value of options at the date of grant and share purchase rights granted under the employee
stock purchase plans was estimated using the Black-Scholes option pricing model, with the following weighted-average assumptions:



|                               |  |                                   |   |  |                                 |  
|------------------------------ |  | --------------------------------- | - |  | ------------------------------- | -
|                               |  | Three Months EndedOctober 2, 2005 |   |  | Six Months EndedOctober 2, 2005 |  
|Stock options:                 |  |                                   |   |  |                                 |  
|Risk-free interest rate        |  | 4.01                              | % |  | 3.97                            | %
|Expected dividend yield        |  | 0                                 | % |  | 0                               | %
|Volatility                     |  | 63                                | % |  | 62                              | %
|Expected life (years)          |  | 2.94                              |   |  | 3.00                            |  
|                               |  |                                  
|Employee stock purchase plans: |  |                                   |   |  |                                 |  
|Risk-free interest rate        |  | 4.36                              | % |  | 4.24                            | %
|Expected dividend yield        |  | 0                                 | % |  | 0                               | %
|Volatility                     |  | 62                                | % |  | 62                              | %
|Expected life (years)          |  | 1.14                              |   |  | 1.16                            |  



Note 3. Comprehensive Income (Loss)



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



|                                                         |  |                    |         |   |                  |   |        |                 |  |   |                 |   |  |   |        |  
|-------------------------------------------------------- |  | ------------------ | ------- | - | ---------------- | - | ------ | --------------- |  | - | --------------- | - |  | - | ------ | -
|                                                         |  | Three Months Ended |         |   | Six Months Ended |  
|                                                         |  | October 1, 2006    |         |   | October 2, 2005  |   |        | October 1, 2006 |  |   | October 2, 2005 |  
|Net loss                                                 |  | $                  | (12,421 | ) |                  | $ | (6,620 | )               |  | $ | (23,134         | ) |  | $ | (6,643 | )
|Unrealized gain (loss) on available-for-sale investments |  |                    | (35     | ) |                  |   | (6     | )               |  |   | 22              |   |  |   | 817    |  
|Foreign currency translation adjustments                 |  |                    | 143     |   |                  |   | 81     |                 |  |   | (53             | ) |  |   | 180    |  
|                                                         |  |                    |         |   |                  |   |        |                 |  |   |                 |   |  |   |        |  
|Comprehensive loss                                       |  | $                  | (12,313 | ) |                  | $ | (6,545 | )               |  | $ | (23,165         | ) |  | $ | (5,646 | )
|                                                         |  |                    |         |   |                  |   |        |                 |  |   |                 |   |  |   |        |  



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



|                                                  |  |                 |        |   |               |   |        |  
|------------------------------------------------- |  | --------------- | ------ | - | ------------- | - | ------ | -
|                                                  |  | October 1, 2006 |        |   | April 2, 2006 |  
|Unrealized loss on available-for-sale investments |  | $               | (50    | ) |               | $ | (72    | )
|Foreign currency translation adjustments          |  |                 | (1,167 | ) |               |   | (1,114 | )
|                                                  |  |                 |        |   |               |   |        |  
|Accumulated other comprehensive loss              |  | $               | (1,217 | ) |               | $ | (1,186 | )
|                                                  |  |                 |        |   |               |   |        |  



Note 4. Basic and Diluted Net
Income (Loss) Per Share



The Company computes net income
(loss) per share in accordance with SFAS 128, Earnings per Share. Basic net income (loss) per share is computed by dividing net income attributable to common stockholders (numerator) by the weighted average number of common shares
outstanding (denominator) during the period.



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##### Table of Contents

MAGMA DESIGN AUTOMATION, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



Diluted net income per share gives effect to all dilutive potential common shares outstanding during the period including stock options and redeemable
convertible subordinated notes using the as-if-converted method.



For the three and six months ended October 1, 2006 and October 2, 2005, all potential common shares outstanding during the period were excluded from the computation of diluted net loss per share as their effect was anti-dilutive.
Such shares included the following (in thousands, except per share data):



|                                                                                         |  |                            |        |                 |   |      
|---------------------------------------------------------------------------------------- |  | -------------------------- | ------ | --------------- | - | -----
|                                                                                         |  | Three and Six Months Ended
|                                                                                         |  | October 1, 2006            |        | October 2, 2005
|Shares of common stock upon full conversion of convertible subordinated notes            |  |                            | 2,850  |                 |   | 4,615
|Shares of common stock issuable for all outstanding instruments under stock option plans |  |                            | 11,111 |                 |   | 8,809
|Weighted average price of shares issuable under stock option plans                       |  | $                          | 9.89   |                 | $ | 10.83



Note 5. Cash Equivalents and
Investments



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



|                          |  |                |        |                  |   |                   |  |   |                      |   |  |   |       
|------------------------- |  | -------------- | ------ | ---------------- | - | ----------------- |  | - | -------------------- | - |  | - | ------
|                          |  | Cost           |        | Unrealized Gains |   | Unrealized Losses |  |   | Estimated Fair Value
|                          |  | (In Thousands)
|October 1, 2006           |  |                |        |                  |   |                   |  |   |                      |   |  |   |       
|Cash                      |  | $              | 15,738 |                  | $ |                  |  | $ |                     |   |  | $ | 15,738
|Money market funds        |  |                | 7,567  |                  |   |                  |  |   |                     |   |  |   | 7,567 
|Commercial paper          |  |                | 25,297 |                  |   |                  |  |   | (50                  | ) |  |   | 25,247
|Auction rate preferred    |  |                | 13,900 |                  |   |                  |  |   |                     |   |  |   | 13,900
|Government agencies       |  |                | 9      |                  |   |                  |  |   |                     |   |  |   | 9     
|                          |  |                |        |                  |   |                   |  |   |                      |   |  |   |       
|                          |  | $              | 62,511 |                  | $ |                  |  | $ | (50                  | ) |  | $ | 62,461
|                          |  |                |        |                  |   |                   |  |   |                      |   |  |   |       
|April 2, 2006             |  |                |        |                  |   |                   |  |   |                      |   |  |   |       
|Cash                      |  | $              | 13,167 |                  | $ |                  |  | $ |                     |   |  | $ | 13,167
|Money market funds        |  |                | 4,899  |                  |   |                  |  |   |                     |   |  |   | 4,899 
|Commercial paper          |  |                | 40,556 |                  |   |                  |  |   | (72                  | ) |  |   | 40,484
|Auction rate preferred    |  |                | 3,250  |                  |   |                  |  |   |                     |   |  |   | 3,250 
|Government agencies       |  |                | 158    |                  |   |                  |  |   |                     |   |  |   | 158   
|Auction rate certificates |  |                | 35,200 |                  |   |                  |  |   |                     |   |  |   | 35,200
|                          |  |                |        |                  |   |                   |  |   |                      |   |  |   |       
|                          |  | $              | 97,230 |                  | $ |                  |  | $ | (72                  | ) |  | $ | 97,158
|                          |  |                |        |                  |   |                   |  |   |                      |   |  |   |       



As of October 1,
2006, the stated maturities of the Companys current investments (including $25.2 million classified as cash equivalent investments in the table above) are $25.3 million within one year and $13.9 million after ten years.



As of October 1, 2006, all unrealized losses related to instruments with
durations of less than twelve months. The gross unrealized losses on these investments were primarily due to interest rate fluctuations and market-price movements. The Company reviewed the investment portfolio and determined that the gross



16



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##### Table of Contents

MAGMA DESIGN AUTOMATION, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



unrealized losses on these investments at October 1, 2006 were temporary in nature. The Company has the ability and intent to hold these investments
until recovery of their carrying values. The Company also believes that it will be able to collect both principal and interest amounts due to the Company at maturity, given the high credit quality of these investments.



In May 2005, the Company liquidated certain investments to repurchase a
portion of the convertible subordinated notes, resulting in a realized loss of approximately $0.7 million. There were no significant losses realized in connection with the convertible subordinated note repurchases in May 2006. See Note 7 for
information regarding the repurchase of convertible subordinated notes.



Note 6. Business Combination



On
November 29, 2005, the Company acquired ACAD, a privately-held company that develops circuit simulation software, for an initial consideration of approximately $453,000 in cash and assumption of its net liabilities of approximately $3.9
million. 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 October 1, 2006, $1.5 million of the
contingent consideration, which was in connection with achievement of certain technical milestones during the second quarter of fiscal 2007, has been earned and become payable, and was recorded as an addition to goodwill on the Companys
unaudited condensed consolidated balance sheet as of October 1, 2006.



Note 7. Asset Purchases



Technology
Licenses



On May 3, 2006, the Company acquired a
license to technology relating to electronic design automation from Stabie-Soft, Inc. The Company paid $2.5 million for the license in May 2006 and, upon the completion and delivery of technology meeting certain milestones, the Company paid
additional fees of $0.5 million in the second quarter of fiscal 2007.



On June 30, 2005, the Company acquired a technology license from International Business Machines Corporation (IBM) and extended the term of Magmas patent license with IBM to 2010. Both arrangements cover IBMs
patents and significant technology with respect to the development of EDA tools and products that perform physical implementation. Included in intangible assets were license fees of $7.0 million and $3.1 million fair value of a warrant to purchase
500,000 shares of Magma common stock at $4.73 per share. In August 2006, IBM exercised the warrant on a cashless exercise basis. In connection with the exercise, 149,005 shares of the Companys common stock were issued to IBM.



Acquisition-Related Earnouts



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



For the three and six months
ended October 1, 2006, the Company recorded $4.0 million and $8.4 million, respectively, approximately half in cash and half in stock, of intangible assets resulting from contingent consideration that was paid or became payable to stockholders
of Mojave, Inc.



17



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##### Table of Contents

MAGMA DESIGN AUTOMATION, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



Note 8. Goodwill and Intangible Assets



The following table summarizes the components of goodwill, intangible assets and related accumulated amortization balances
as of October 1, 2006 and April 2, 2006 (in thousands):



|                              |  |                                |                       |                 |                          |               |   |                     |   |                       |   |                          |  |   |                     |  |   |         |   |  |   |       
|----------------------------- |  | ------------------------------ | --------------------- | --------------- | ------------------------ | ------------- | - | ------------------- | - | --------------------- | - | ------------------------ |  | - | ------------------- |  | - | ------- | - |  | - | ------
|                              |  | Weighted Average Life (months) |                       | October 1, 2006 |                          | April 2, 2006
|                              |  |                                | Gross Carrying Amount |                 | Accumulated Amortization |               |   | Net Carrying Amount |   | Gross Carrying Amount |   | Accumulated Amortization |  |   | Net Carrying Amount
|Goodwill                      |  |                                |                       | $               | 45,485                   |               | $ |                    |   |                       | $ | 45,485                   |  | $ | 43,985              |  | $ |        |   |  | $ | 43,985
|                              |  |                                |                       |                 |                          |               |   |                     |   |                       |   |                          |  |   |                     |  |   |         |   |  |   |       
|Intangible assets:            |  |                                |                       |                 |                          |               |   |                     |   |                       |   |                          |  |   |                     |  |   |         |   |  |   |       
|Developed technology          |  | 44                             |                       | $               | 98,013                   |               | $ | (50,506             | ) |                       | $ | 47,507                   |  | $ | 89,192              |  | $ | (37,824 | ) |  | $ | 51,368
|Licensed technology           |  | 38                             |                       |                 | 36,093                   |               |   | (23,694             | ) |                       |   | 12,399                   |  |   | 33,093              |  |   | (17,962 | ) |  |   | 15,131
|Customer relationship or base |  | 60                             |                       |                 | 2,310                    |               |   | (1,318              | ) |                       |   | 992                      |  |   | 2,310               |  |   | (1,086  | ) |  |   | 1,224 
|Patents                       |  | 58                             |                       |                 | 12,690                   |               |   | (7,343              | ) |                       |   | 5,347                    |  |   | 12,690              |  |   | (5,934  | ) |  |   | 6,756 
|Acquired customer contracts   |  | 32                             |                       |                 | 1,090                    |               |   | (996                | ) |                       |   | 94                       |  |   | 1,090               |  |   | (782    | ) |  |   | 308   
|Assembled workforce           |  | 45                             |                       |                 | 1,235                    |               |   | (845                | ) |                       |   | 390                      |  |   | 1,235               |  |   | (675    | ) |  |   | 560   
|No shop right                 |  | 24                             |                       |                 | 100                      |               |   | (100                | ) |                       |   |                         |  |   | 100                 |  |   | (100    | ) |  |   |      
|Non-competition agreements    |  | 36                             |                       |                 | 300                      |               |   | (83                 | ) |                       |   | 217                      |  |   | 300                 |  |   | (33     | ) |  |   | 267   
|Trademark                     |  | 45                             |                       |                 | 400                      |               |   | (338                | ) |                       |   | 62                       |  |   | 400                 |  |   | (279    | ) |  |   | 121   
|                              |  |                                |                       |                 |                          |               |   |                     |   |                       |   |                          |  |   |                     |  |   |         |   |  |   |       
|Total                         |  |                                |                       | $               | 152,231                  |               | $ | (85,223             | ) |                       | $ | 67,008                   |  | $ | 140,410             |  | $ | (64,675 | ) |  | $ | 75,735
|                              |  |                                |                       |                 |                          |               |   |                     |   |                       |   |                          |  |   |                     |  |   |         |   |  |   |       



The Company has
included the amortization expense on intangible assets that relate to products sold in cost of license revenue, while the remaining amortization is shown as a separate line item on the Companys unaudited condensed consolidated statement of
operations. For the three and six months ended October 1, 2006 and October 2, 2005, the amortization expense related to intangible assets was as follows (in thousands):



|                                               |  |                    |        |                  |   |                |  |                |        |  |   |       
|---------------------------------------------- |  | ------------------ | ------ | ---------------- | - | -------------- |  | -------------- | ------ |  | - | ------
|                                               |  | Three Months Ended |        | Six Months Ended
|                                               |  | October 1,2006     |        | October 2,2005   |   | October 1,2006 |  | October 2,2005
|Amortization of intangible assets included in: |  |                    |        |                  |   |                |  |                |        |  |   |       
|Cost of revenuelicenses                       |  | $                  | 7,570  |                  | $ | 6,264          |  | $              | 14,736 |  | $ | 10,428
|Operating expenses                             |  |                    | 2,922  |                  |   | 2,882          |  |                | 5,812  |  |   | 6,470 
|                                               |  |                    |        |                  |   |                |  |                |        |  |   |       
|Total                                          |  | $                  | 10,492 |                  | $ | 9,146          |  | $              | 20,548 |  | $ | 16,898
|                                               |  |                    |        |                  |   |                |  |                |        |  |   |       



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MAGMA DESIGN AUTOMATION, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



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



|                                          |  |                                |       
|----------------------------------------- |  | ------------------------------ | ------
|Fiscal Year                               |  | Estimated Amortization Expense
|2007 (remaining six months)               |  | $                              | 20,693
|2008                                      |  |                                | 24,880
|2009                                      |  |                                | 18,409
|2010                                      |  |                                | 2,347 
|2011 and thereafter                       |  |                                | 679   
|                                          |  |                                |       
|Total expected future annual amortization |  | $                              | 67,008
|                                          |  |                                |       



Note 9. Segment Information



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



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



|                               |  |                    |        |                  |   |                 |  |                 |        |  |   |       
|------------------------------ |  | ------------------ | ------ | ---------------- | - | --------------- |  | --------------- | ------ |  | - | ------
|                               |  | Three Months Ended |        | Six Months Ended
|                               |  | October 1, 2006    |        | October 2, 2005  |   | October 1, 2006 |  | October 2, 2005
|North America*                 |  | $                  | 24,241 |                  | $ | 29,344          |  | $               | 52,601 |  | $ | 57,505
|Europe                         |  |                    | 5,848  |                  |   | 4,495           |  |                 | 10,386 |  |   | 8,696 
|Japan                          |  |                    | 9,542  |                  |   | 3,739           |  |                 | 12,798 |  |   | 7,975 
|Asia-Pacific (excluding Japan) |  |                    | 2,331  |                  |   | 2,308           |  |                 | 7,136  |  |   | 4,542 
|                               |  |                    |        |                  |   |                 |  |                 |        |  |   |       
|                               |  | $                  | 41,962 |                  | $ | 39,886          |  | $               | 82,921 |  | $ | 78,718
|                               |  |                    |        |                  |   |                 |  |                 |        |  |   |       

|                               |  |                    |   |  |                  |   |  |                 |   |  |                 |  
|------------------------------ |  | ------------------ | - |  | ---------------- | - |  | --------------- | - |  | --------------- | -
|                               |  |                   
|                               |  | Three Months Ended |   |  | Six Months Ended |  
|                               |  | October 1, 2006    |   |  | October 2, 2005  |   |  | October 1, 2006 |   |  | October 2, 2005 |  
|North America*                 |  | 58                 | % |  | 74               | % |  | 63              | % |  | 73              | %
|Europe                         |  | 14                 |   |  | 11               |   |  | 13              |   |  | 11              |  
|Japan                          |  | 23                 |   |  | 9                |   |  | 15              |   |  | 10              |  
|Asia-Pacific (excluding Japan) |  | 5                  |   |  | 6                |   |  | 9               |   |  | 6               |  
|                               |  |                    |   |  |                  |   |  |                 |   |  |                 |  
|                               |  | 100                | % |  | 100              | % |  | 100             | % |  | 100             | %
|                               |  |                    |   |  |                  |   |  |                 |   |  |                 |  

---

|* | Substantially all its North America revenue related to the United States for all periods presented.
|- | ---------------------------------------------------------------------------------------------------



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MAGMA DESIGN AUTOMATION, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



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



|           |  |                    |   |  |                  |   |  |                 |   |  |                 |  
|---------- |  | ------------------ | - |  | ---------------- | - |  | --------------- | - |  | --------------- | -
|           |  | Three Months Ended |   |  | Six Months Ended |  
|           |  | October 1, 2006    |   |  | October 2, 2005  |   |  | October 1, 2006 |   |  | October 2, 2005 |  
|Customer A |  | 11                 | % |  | 13               | % |  | 13              | % |  | 22              | %
|Customer B |  | 10                 | % |  | **               |   |  | **              |   |  | **              |  
|Customer C |  | **                 |   |  | 15               | % |  | **              |   |  | **              |  

---

|** | Less than 10% of total revenue.
|-- | -------------------------------



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



Note 10. Repurchase of Convertible Subordinated Notes



In May 2006, the Company repurchased, in privately negotiated transactions, $40.3 million face amount (or approximately 38.2
percent of the remaining principal) of the Companys zero coupon convertible subordinated notes due May 2008 at an average discount to face value of approximately 13 percent. The Company spent approximately $35.0 million on the repurchases. The
repurchase left approximately $65.2 million principal amount of convertible subordinated notes outstanding. In addition, a portion of the hedge and warrant transactions entered into by Magma in 2003 to limit potential dilution from conversion of the
notes was terminated in connection with the repurchase. In the first quarter of fiscal 2007, the Company recorded a pre-tax gain of $5.3 million on the repurchase, which was partially offset by the write-off of $0.5 million of deferred financing
costs associated with the convertible subordinated 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 recorded against additional paid-in-capital.



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



Note 11. Contingencies



Synopsys, Inc. v. Magma Design Automation, Inc., Civil Action No. C04-03923, United States District Court, Northern
District of California. In this action, filed September 17, 2004, Synopsys has sued the Company for alleged infringement of U.S. Patent Nos. 6,378,114 (the 114 Patent), 6,453,446 (the 446 Patent), and
6,725,438 (the 438 Patent). The patents-in-suit relate to methods for designing integrated circuits. The Complaint seeks unspecified monetary damages, injunctive relief, trebling of damages, fees and costs, and the imposition of a
constructive trust for the benefit of Synopsys over any profits, revenues or other benefits allegedly obtained by the Company as a result of its alleged infringement of the patents-in-suit. In addition to the below discussion, this case was also
discussed in our Annual Report on Form 10-K for the fiscal year ended April 2, 2006.



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MAGMA DESIGN AUTOMATION, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



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



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



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



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



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



On July 29, 2005,
Synopsys moved to preliminarily enjoin the Company from abandoning or dedicating to the public the 446 Patent or the 438 Patent. Also on July 29, 2005, Synopsys moved for partial summary judgment seeking dismissal of certain
counterclaims and defenses asserted by the Company on the grounds of



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MAGMA DESIGN AUTOMATION, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



estoppel by contract. On September 16, 2005, Synopsys filed a revised motion for preliminary injunction. On September 30, 2005, the Company filed
its oppositions to Synopsyss preliminary injunction motion and estoppel by contract motion.



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



On August 30, 2005, the Court issued a temporary restraining order against the Company restraining and enjoining the Company from taking any steps in
the United States Patent and Trademark Office (USPTO) to abandon, suspend or disclaim the 446 and 438 Patents, failing or refusing to pay the maintenance fees for the 446 and 438 Patents, or seeking reexamination
of the 446 and 438 Patents. The temporary restraining order was scheduled to remain in effect until the hearing on Synopsyss motion for a preliminary injunction that was scheduled for December 2, 2005. On December 1,
2005, the Court, vacated the hearing and granted Synopsyss motion for preliminary injunction. The Court entered the preliminary injunction enjoining the Company from abandoning, dedicating to the public or seeking reexamination in the USPTO of
the 446 Patent or the 438 Patent.



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



On October 14, 2005, the Court granted Synopsyss request for
permission to file an amended opposition to Magmas motion for summary judgment on the second through sixth causes of action in the Second Amended Complaint. Synopsys filed its amended opposition on December 20, 2005, and the Company filed
its reply on January 13, 2006. The motion was set for hearing on January 27, 2006, but the Court vacated the hearing date and took the matter under submission.



On October 19, 2005, the Court granted in part and denied in part Synopsyss motion to strike certain affirmative
defenses and to dismiss certain counterclaims in the Companys Answer and Counterclaims to Synopsyss Third Amended Complaint. The Court dismissed without leave to amend the Companys counterclaims seeking correction of inventorship
of the 446 and 438 Patents. The Court also struck without leave to amend the Companys affirmative defenses of (1) invalidity of the 446 and 438 Patents based on failure to name all inventors,
(2) unenforceability of the 446 and 438 patents due to inequitable conduct, and (3) unclean hands. The Court struck with leave to amend the Companys affirmative defenses of invalidity of the 446 and 438
Patents based on 35 U.S.C. §§ 102, 103 and 112, as well as the Companys affirmative defense that Synopsys is not the owner of any invention defined by the claims of the 446 and 438 Patents. On October 24, 2005, the
Company filed a motion for summary judgment as to the first cause of action (for patent infringement) in Synopsyss Third Amended Complaint on the grounds that IBM is an owner of all the patents-in-suit. Also on October 24, 2005, Synopsys
filed (1) a motion for partial summary judgment to dismiss the Companys joint ownership defenses and counterclaims, and (2) a motion for partial summary judgment to dismiss allegations of co-ownership based on judicial and
quasi-estoppel.



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##### Table of Contents

MAGMA DESIGN AUTOMATION, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



On November 2, 2005, the Company filed a motion for leave to file an amended answer and
counterclaims to Synopsyss Third Amended Complaint, requesting leave to amend the Companys answer to add affirmative defenses of invalidity of the 446 and 438 Patents based on 35 U.S.C. §§ 102, 103 and 112. The
Companys motion was set for hearing on December 16, 2005, but the Court vacated the hearing date and took the matter under submission.



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



On November 8, 2005, the Company filed a motion seeking leave to file a
motion for reconsideration of the Courts October 19, 2005 Order striking certain of the Companys defenses without leave to amend. The Court granted the Companys request on November 21, 2005. On December 9, 2005, the
Company filed a motion for reconsideration of the Courts October 19, 2005 Order striking the Companys affirmative defense of unclean hands and for leave to amend the Companys answer to assert an unclean hands defense. The
motion was set for hearing on January 13, 2006, but the Court vacated the hearing and took the matter under submission.



On December 23, 2005, Synopsys filed a motion for partial summary judgment regarding the Companys statute of limitations defense. The Company
opposed the motion, which was set for hearing on January 27, 2006. The hearing was vacated and the motion taken under submission by the Court.



On December 29, 2005, the Company filed a notice of interlocutory appeal to the Court of Appeals for the Federal Circuit of the Courts
December 1, 2005, preliminary injunction against the Company. By agreement of the parties, Magma has dismissed the appeal.



On January 20, 2006, the Company filed a motion to bifurcate the trial into issues of patent ownership and all other issues. The parties subsequently
stipulated to bifurcate the case with patent ownership to be tried first.



Fact and expert discovery relating to patent ownership have closed. By stipulation so-ordered on March 13, 2006, the parties have agreed to schedule any remaining discovery after the patent ownership trial is
resolved.



By order dated March 30, 2006, the Court denied
Magmas motion for summary judgment regarding patent ownership, as well Synopsyss motions (1) for partial summary judgment based on estoppel by contract, (2) for partial summary judgment to dismiss the Companys joint
ownership defenses and counterclaims, and (3) for partial summary judgment to dismiss allegations of co-ownership based on judicial and quasi-estoppel. The parties subsequently stipulated (a) that Magma would withdraw its claim to
ownership of the 446 and 438 Patents on the basis that the buckets claims (i.e., Claims 17, 18, 31, and 32 of the 446 Patent and Claims 17 and 18 of the 438 Patent) were conceived by Magma engineers after Lukas
van Ginneken left Synopsys and (b) that Synopsys would withdraw its assertion that Magma would be foreclosed from arguing that the inventions in the 446 and 438 Patents were reduced to practice after van Ginneken left Synopsys.



The ownership case was tried to the Court, without a jury,
from April 24, 2006 through May 10, 2006. The parties opening post-trial briefs and findings of fact and conclusions of law were filed June 9, 2006. The parties reply post-trial briefs were filed June 30, 2006. The
parties are currently awaiting the Courts ruling.



On
August 8, 2005, the Company filed a request for ex parte reexamination of the 114 Patent. On September 22, 2005, the USPTO instituted a reexamination proceeding, indicating that a substantial new question



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MAGMA DESIGN AUTOMATION, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



of patentability was raised by the request. On August 5, 2006, the USPTO rejected all pending claims (1-15) of the 114 Patent.



On August 18, 2006, a third party submitted requests for ex parte
reexamination of the 446 and 438 Patents to the USPTO. The USPTO received those requests on August 23, 2006.



On September 1, 2006, Synopsys filed a motion for preliminary injunction that sought to require the Company (1) to seek a stay of reexamination
of the 446 and 438 Patents or transfer ownership of the 446 and 438 Patents to Synopsys so that Synopsys may participate in the reexamination proceedings, and (2) to refrain from filing a patent owners statement in
any reexamination proceedings for the 446 and 438 Patents. On September 14, 2006, the Company filed an opposition to Synopsyss motion. On September 29, 2006, the Court issued an order denying the motion, without prejudice
to Synopsyss refiling the motion if and when the USPTO issues an order for reexamination of the 446 or 438 Patent.



On September 7, 2006, the USPTO issued a Notice of Failure to Comply with Ex Parte Reexamination Request Filing Requirements (37 C.F.R. 1.510(c)) in
connection with the reexamination request for the 438 Patent. The third-party requester responded on September 21, 2006. On October 20, 2006, the USPTO issued a Notice of Failure to Comply with Ex Parte Reexamination Request Filing
Requirements (37 C.F.R. 1.510(c)) in connection with the reexamination request for the 446 Patent. The USPTO has not yet ruled on the merits of the requests for reexamination of the 446 and 438 Patents.



On April 18, 2005, Synopsys, Inc. filed an action against the Company in
Germany at the Landgericht München I (District Court in Munich) seeking to obtain ownership of the European patent application corresponding to the Companys 446 Patent. The action has been stayed pending the outcome of the
above-referenced Synopsys action filed in the United States. This action was also discussed in our Annual Report on Form 10-K for the fiscal year ended April 2, 2006.



On July 29, 2005, Synopsys, Inc. filed an action against the Company in Japan in Civil Department No. 40 of the
Tokyo District Court seeking to obtain ownership of the Japanese patent application corresponding to the Companys 446 Patent. The court has entered a defacto stay pending the outcome of the above-referenced Synopsys action filed in the
United States. The Japanese Court held hearings on January 18, 2006, March 6, 2006, July 11, 2006, and October 23, 2006, and set a further hearing for December 26, 2006. This action was also discussed in our Annual
Report on Form 10-K for the fiscal year ended April 2, 2006.



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 several of the defendants. The case is now proceeding on the remaining claims.
This lawsuit was also discussed in our Annual Report on Form 10-K for the fiscal year ended April 2, 2006.



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



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##### Table of Contents

MAGMA DESIGN AUTOMATION, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



Clara. The Complaint seeks unspecified damages purportedly on behalf of the Company for alleged breaches of fiduciary duties by various directors and
officers, as well as for alleged violations of insider trading laws by executives during a period between October 23, 2002 and April 12, 2005. Defendants have demurred to the Complaint, and the action has been stayed pending further
developments in the putative shareholder class action referenced above. This lawsuit was also discussed in our Annual Report on Form 10-K for the fiscal year ended April 2, 2006.



On September 26, 2005, Synopsys, Inc. filed an action against the Company in the Superior Court of the State of
California in and for the County of Santa Clara, entitled Synopsys, Inc. v. Magma Design Automation, Inc., et al., Case Number 105 CV 049638. Synopsys alleges that Magma committed unfair business practices by asserting defenses of
non-infringement and invalidity to patent infringement allegations brought by Synopsys in the patent infringement action already pending against Magma in the Northern District of California. The Complaint seeks unspecified monetary damages, an
unspecified restitutionary/disgorgement award, injunctive relief, fees and costs, and an accounting of all revenues and profits derived from licensing the technology at issue. On October 19, 2005, the Company removed the action to the United
States District Court for the Northern District of California. On October 26, 2005, the Company moved to strike and dismiss the complaint. On October 27, 2005, the Court granted the Companys motion to relate the removed action with
the preexisting patent infringement action, and both actions are now assigned to Judge Maxine M. Chesney. The Court vacated the hearing on the Companys motion to strike and dismiss the complaint and has taken the matter under submission. This
action was also discussed in our Annual Report on Form 10-K for the fiscal year ended April 2, 2006.



On September 26, 2005, Synopsys, Inc. filed an action against the Company in Delaware federal court, Synopsys, Inc. v. Magma Design Automation,
Inc., Civil Action No. 05-701. The Complaint alleges infringement of U.S. Patent Nos. 6,434,733 (the 733 Patent), 6,766,501 (the 501 Patent), and 6,192,508 (the 508 Patent). The
patents-in-suit relate to methods for designing integrated circuits. The Complaint seeks unspecified monetary damages, injunctive relief, trebling of damages, fees and costs, and the imposition of a constructive trust for the benefit of Synopsys
over any profits, revenues or other benefits allegedly obtained by the Company as a result of its alleged infringement of the patents-in-suit. In addition to the below discussion, this case was also discussed in our Annual Report on Form 10-K for
the fiscal year ended April 2, 2006.



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



On
October 25, 2005, the Company filed an Amended Answer, adding a counterclaim for infringement of U.S. Patent No. 6,505,328 (the 328 Patent). The 328 Patent relates to methods for designing integrated circuits. The
Company seeks treble damages and an injunction against Synopsys for the sale and manufacture of products the Company alleges infringe the 328 Patent.



On November 22, 2005, Synopsys filed a motion to dismiss the Companys antitrust and other commercial counterclaims. The Company opposed that
motion on December 7, 2005. Synopsys filed its reply brief on December 14, 2005. The Court denied Synopsyss motion on May 25, 2006.



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##### Table of Contents

MAGMA DESIGN AUTOMATION, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



On January 9, 2006, Synopsys filed a request for the United States Patent and Trademark Office
to reexamine its 733 and 501 Patents in light of two prior art references that it had not previously disclosed to the Patent Office. On January 23, 2006, Synopsys filed a motion with the Delaware federal court to bifurcate and stay
its claims for infringement of its 733 and 501 Patents and the Companys counterclaims except for its claim for infringement of the 328 Patent, based in part on Synopsyss having filed the request for patent
reexamination. The Companys opposition to that motion was filed on February 6, 2006. The Court denied Synopsyss motion on May 25, 2006.



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



On
June 13, 2006, the parties held a conference with the Court at which, among other things, Synopsys requested that the trial be delayed until late 2007. The Court denied Synopsyss request. Fact discovery is ongoing and is currently
scheduled to close on January 12, 2007, and trial remains scheduled for June 11, 2007.



On August 25, 2006, the Company dropped its allegation that Synopsys infringes the 610 Patent. On September 15, 2006, Synopsys dropped its
claims that the Company infringes the 733 and 501 Patents. On October 13, 2006, Synopsys filed a second motion to bifurcate the trial as to the antitrust claims and to stay antitrust discovery, based in part on the fact that the
733 and 501 Patents are no longer being asserted. The Company filed its opposition to that motion on October 27, 2006.



A claim construction hearing before the Court is scheduled for November 29, 2006. The Company intends to vigorously defend against all claims asserted by
Synopsys and to fully enforce its rights against Synopsys. However, the results of any litigation are inherently uncertain and the Company can not assure that it will be able to successfully defend against the Synopsys claims. A favorable outcome
for Synopsys could have a material adverse effect on the Companys financial position, results of operations or cash flows. The Company is currently unable to assess the extent of damages and/or other relief, if any, that could be awarded to
Synopsys.



In addition to the above, from time to time, the
Company is involved in disputes that arise in the ordinary course of business. The number and significance of these disputes is increasing as the Companys business expands and it grows larger. Any claims against the Company, whether
meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time and result in the diversion of significant operational resources. As a result, these disputes could harm the Companys
business, financial condition, results of operations or cash flows.



Indemnification Obligations



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



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MAGMA DESIGN AUTOMATION, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



normal business practices. The Company estimates the fair value of its indemnification obligations as insignificant, based upon its historical experience
concerning product and patent infringement claims. Accordingly, the Company has no liabilities recorded for indemnification under these agreements as of October 1, 2006.



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 October 1, 2006.



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



Warranties



The Company offers its customers a warranty that its products will conform to the documentation provided with the products. To date, there have been no
payments or material costs incurred related to fulfilling these warranty obligations. Accordingly, the Company has no liabilities recorded for these warranties as of October 1, 2006. 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.



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|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------



This Managements Discussion and Analysis of Financial Condition and Results of Operations section should be read in
conjunction with Selected Consolidated Financial Data and our condensed consolidated financial statements and results appearing elsewhere in this report. Throughout this section, we make forward-looking statements subject to the safe
harbor protection of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements in the following discussion that are not reports of historical information or descriptions of current
accounting policy are forward-looking statements. 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. Please consider our
forward-looking statements in light of the risks referenced in this reports introductory cautionary note. We undertake no additional obligation to update these forward-looking statements.



Overview



Magma Design Automation provides EDA software products and related services. Our software enables chip designers to reduce
the time it takes to design and produce complex integrated circuits (ICs) 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 ICs, specifically those with minimum feature sizes of 0.13 micron and smaller.



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



The semiconductor industry is highly volatile and cost-sensitive. Our customers focus on controlling costs and reducing risk, lowering R&D expenditures, decreasing design starts through chip integration,
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 the most
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 the second quarter of fiscal 2007:



| |  |  | We achieved quarterly revenue of $42.0 million during the second quarter of fiscal 2007, up 2% from the prior quarter and up 5% from the same quarter in fiscal 2006. License
sales for the quarter ended October 1, 2006 accounted for approximately 83% of total revenue, compared to 84% in the prior quarter and 82% from the same quarter in the prior year.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We continued to penetrate our market, and during the second quarter of fiscal 2007 we added 7 new customers and now have approximately 259 customers.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our total employee headcount increased to 711 as of October 1, 2006 up from 639 as of April 2, 2006. Most of the additional headcount represents additions to our R&D
and application engineering organizations. Our investments in these organizations will enable us to continue to provide leading-edge design solutions for our customers in all key areas of chip design.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | During the first two quarters of fiscal 2007, cash flows generated from operations were $7.2 million, or 9% of revenue for the first two quarters of fiscal 2007.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We continue to offer the best products for delivering the best quality of results as defined by chip performance, area and manufacturability.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



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, investments, asset purchases and business combinations, income taxes and valuation of long-lived assets to be our most critical policies due to the estimation processes involved
in each.



Revenue recognition



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



Our revenue recognition policy is detailed in Note 1 of the Notes to
Consolidated Financial Statements on Form 10-K for the year ended April 2, 2006. Management has made significant judgments related to revenue recognition; specifically, in connection with each transaction involving our products (referred to as
an arrangement in the accounting literature) we must evaluate whether our fee is fixed or determinable and we must assess whether collectibility is probable. These judgments are discussed below.



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



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



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



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



In order for an arrangement to be
considered fixed or determinable, 100% of the arrangement fee must be due within one year or less from the order date. We have a history of collecting fees on such arrangements



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according to contractual terms. Arrangements with payment terms extending beyond 12 months are considered not to be fixed or determinable.



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



License revenue



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



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



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



For our perpetual licenses and some time-based license
arrangements, we unbundle maintenance by including maintenance for up to first year of the license term, with maintenance thereafter renewable by the customer at the substantive rates stated in their agreements with us. In these unbundled licenses,
the aggregate renewal period is greater than or equal to the initial maintenance period. The stated rate for maintenance renewal in these contracts is VSOE of the fair value of maintenance in both our unbundled time-based and perpetual licenses.
Where the only undelivered element is maintenance, we recognize license revenue using the residual method. If an arrangement involves extended payment terms, revenue recognized using the residual method is limited to amounts due and payable.



If we were to change any of these assumptions or judgments, it
could cause a material increase or decrease in the amount of revenue that we report in a particular period. Amounts invoiced relating to arrangements where 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 from the first quarter of fiscal 2007, we account for stock-based employee compensation arrangements under SFAS No. 123 (revised 2004),
Share-Based Payment (SFAS 123R) and no longer apply the intrinsic value method to recognize deferred compensation of fixed and variable awards. We adopted SFAS 123R using the modified-prospective-transition method,
resulting in the inclusion in our operating results of compensation costs related to unvested options granted prior to April 3, 2006, and options granted subsequent to that date. Under the modified-prospective-transition method of
SFAS 123R, prior periods were not restated for comparative purposes to reflect the impact of SFAS 123R.



Adoption of SFAS 123R had a material effect on the Companys financial results since April 3, 2006, increasing total stock-based compensation
expenses from $1.3 million and $3.0 million, respectively, for the three and six months ended October 2, 2005 using the intrinsic value method to $4.1 million and $9.0 million, respectively, for the three and six months ended
October 1, 2006 using the SFAS 123R fair value method. We continue to evaluate the terms of our stock-based compensation arrangements to provide appropriate incentives to recruit and retain our employees. We expect our quarterly
stock-based compensation expense in each of the remaining two quarters of fiscal 2007 to be consistent with the amount in the second quarter of fiscal 2007. In March 2005, the Commission issued Staff Accounting Bulletin (SAB)
No. 107, which provided supplemental implementation guidance for SFAS 123R. SAB 107 requires stock-based compensation to be classified in the same expense line items as cash compensation as provided in Note 2 to the financial
statements.



We use the Black-Scholes option pricing model to
determine the fair value of stock options and employee stock purchase plan awards. The Black-Scholes option pricing model was developed for use in estimating the fair value of short lived exchange-traded options that have no vesting restrictions and
were fully transferable. In addition, the Black-Scholes option-pricing model incorporates various highly subjective assumptions including expected future stock price volatility and expected term of instruments. In developing estimates used in the
adoption of SFAS 123R, 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 prevesting terminations of options were stratified for employee groups with sufficiently distinct behavior patterns. Expected volatility under SFAS 123R was developed
based on the average of Magmas historical weekly stock price volatility and average implied volatility.



Additionally, SFAS 123R requires the rate of forfeiture to be estimated and recorded during the option term unlike previous accounting guidance which
allowed adjustments to stock compensation when forfeitures occurred. Consequently, during the first quarter of 2007, we recorded a credit of $321,000 reflecting the cumulative effect of the change in accounting principle for forfeitures primarily
related to unvested restricted stock that had previously been recognized as stock-based compensation expense without consideration of forfeitures. No income tax benefit related to the cumulative effect of the change in accounting for stock option
forfeitures was recorded as the Company has provided full valuation allowance against its net deferred tax assets.



Unbilled accounts receivable



Unbilled accounts receivable represent revenue that has been recognized in advance of being invoiced to the customer. In all cases, the revenue and
unbilled receivables are for contracts which are non-cancelable, there are no contingencies and where the customer has taken delivery of both the software and the encryption key required



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to operate the software. We typically generate invoices 45 days in advance of contractual due dates, and we invoice the entire amount of the unbilled
accounts receivable within one year from the contract inception.



Allowances for doubtful accounts



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



As of October 1, 2006, one customer accounted for more than 10% of total receivables. The allowance for doubtful accounts represents our best
estimate, but changes in circumstances relating to accounts receivable may result in a requirement for additional allowances in the future. If actual losses are significantly greater than the allowance we have established, that would increase our
general and administrative expenses and reported net loss. Conversely, if actual credit losses are significantly less than our allowance, this would decrease our general and administrative expenses and our reported net income would increase.



Accounting for asset purchases and business combinations



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



Critical estimates in valuing certain of the intangible assets include but are not limited to: future expected cash flows from license sales, maintenance agreements, consulting contracts, customer contracts, acquired
workforce and acquired developed technologies and patents; expected costs to develop the in-process research and development into commercially viable products and estimated cash flows from the projects when completed; the acquired companys
brand awareness and market position, as well as assumptions about the period of time the acquired brand will continue to be used in the combined companys product portfolio; and discount rates. Managements estimates of fair value are
based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur.



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



Goodwill impairment



Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, requires that goodwill be tested for
impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis and between annual tests in certain circumstances. Application of the goodwill impairment test requires judgment, including the
identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting unit, and determining the fair value of the reporting unit. We have determined that we have one reporting unit (see Note 9 of the
Notes to the Condensed Consolidated Financial Statements in this Form 10-Q). Significant judgments required to estimate the fair value of a reporting unit include estimating future cash flows, determining appropriate discount rates and other
assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value for the reporting unit. Any impairment losses recorded in the future could have a material adverse impact on our financial condition and
results of operations.



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Valuation of intangibles and long-lived assets



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



Income taxes



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



We assess the likelihood
that our net deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we establish a valuation allowance. We consider all available positive and negative evidence including our past
operating results, the existence of cumulative losses in the most recent fiscal years, future taxable income, and ongoing prudent and feasible tax planning strategies in assessing the amount of the valuation allowance. The Company will continue to
evaluate the realizability of the deferred tax assets on a quarterly basis. Future reversals or increases to our valuation allowance could have a significant impact on our future earnings.



Strategic investments in privately-held companies



Our strategic equity investments consist of preferred stock and convertible
notes that are convertible into preferred or common stock of several privately-held companies. As of October 1, 2006, $0.6 million of the notes has been converted into an investee companys preferred stock. The carrying value of our
portfolio of strategic equity investments in non-marketable equity securities (privately-held companies) and convertible notes totaled $2.6 million at October 1, 2006. 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. In the current equity market environment, their ability to obtain additional funding as well as to take advantage of liquidity events, such as initial public offerings, mergers and private
sales, may be significantly constrained.



Under our accounting
policy, the carrying value of a non-marketable investment is the amount paid for the investment unless it has been determined to be other than temporarily impaired, in which case we write the investment down to its estimated fair value. For equity
investments where our ownership interest is between 20% to 50%, we record our share of net equity income (loss) of the investee based on our proportionate ownership. We review all of our investments periodically for impairment; however, for
non-marketable equity securities, the fair value analysis requires significant judgment. This analysis includes assessment of each investees financial condition, the business outlook for its products and technology, its projected results and
cash flows, the likelihood of obtaining subsequent rounds of financing and the impact of any relevant contractual equity preferences held by us or others. If an investee obtains additional funding at a valuation lower than our carrying amount, we
presume that the investment is other than temporarily impaired, unless specific facts and circumstances indicate otherwise, such as when we hold contractual rights that give us a preference over the



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rights of other investors. As the equity markets have experienced volatility over the past few years, we have experienced substantial impairments in our
portfolio of non-marketable equity securities. If certain equity market conditions do not improve, as companies within our portfolio attempt to raise additional funds, the funds may not be available to them, or they may receive lower valuations,
with more onerous investment terms than in previous financings, and the investments will likely become impaired. However, we are not able to determine at the present time which specific investments are likely to be impaired in the future, or the
extent or timing of individual impairments. We recorded impairment charges and share of equity loss related to these non-marketable equity investments of $0.2 million and $0.3 million, respectively, during the three and six months ended
October 1, 2006. Similarly, we recorded impairment charges and share of equity loss related to these non-marketable equity investments of $0.1 million and $0.5 million, respectively, during the three and six months ended October 2, 2005.



Results of Operations



Revenue overview



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



| |  |  | Ratable
| | - |  | -------



| |  |  | Due & Payable
| | - |  | -------------



| |  |  | Cash Receipts
| | - |  | -------------



| |  |  | Up-Front / Perpetual or Time-Based
| | - |  | ----------------------------------



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



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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 percent data):



|                      |  |                      |  |                |        |             |     |   |                |   |             |  |     |  
|--------------------- |  | -------------------- |  | -------------- | ------ | ----------- | --- | - | -------------- | - | ----------- |  | --- | -
|                      |  |                      |  | October 1,2006 |        | % ofRevenue |     |   | October 2,2005 |   | % ofRevenue | 
|Revenue category:     |  |                      |  |                |        |             |     |   |                |   |             |  |     |  
|Three Months Ended:   |  |                      |  |                |        |             |     |   |                |   |             |  |     |  
|License revenue       |  |                      |  |                |        |             |     |   |                |   |             |  |     |  
|Ratable               |  | Bundled andUnbundled |  | $              | 4,037  |             | 10  | % |                | $ | 6,257       |  | 16  | %
|Due & Payable         |  | Unbundled            |  |                | 16,058 |             | 38  | % |                |   | 14,539      |  | 36  | %
|Cash Receipts         |  | Unbundled            |  |                | 2,114  |             | 5   | % |                |   | 2,612       |  | 7   | %
|Up-Front*             |  | Unbundled            |  |                | 12,650 |             | 30  | % |                |   | 9,296       |  | 23  | %
|                      |  |                      |  |                |        |             |     |   |                |   |             |  |     |  
|Total license revenue |  |                      |  |                | 34,859 |             | 83  | % |                |   | 32,704      |  | 82  | %
|Services revenue      |  |                      |  |                | 7,103  |             | 17  | % |                |   | 7,182       |  | 18  | %
|                      |  |                      |  |                |        |             |     |   |                |   |             |  |     |  
|Total Revenue         |  |                      |  | $              | 41,962 |             | 100 | % |                | $ | 39,886      |  | 100 | %
|                      |  |                      |  |                |        |             |     |   |                |   |             |  |     |  
|Six Months Ended:     |  |                      |  |                |        |             |     |   |                |   |             |  |     |  
|License revenue       |  |                      |  |                |        |             |     |   |                |   |             |  |     |  
|Ratable               |  | Bundled andUnbundled |  | $              | 8,942  |             | 11  | % |                | $ | 11,264      |  | 14  | %
|Due & Payable         |  | Unbundled            |  |                | 33,257 |             | 41  | % |                |   | 28,132      |  | 36  | %
|Cash Receipts         |  | Unbundled            |  |                | 4,451  |             | 5   | % |                |   | 4,488       |  | 6   | %
|Up-Front              |  | Unbundled            |  |                | 22,749 |             | 27  | % |                |   | 22,730      |  | 29  | %
|                      |  |                      |  |                |        |             |     |   |                |   |             |  |     |  
|Total license revenue |  |                      |  |                | 69,399 |             | 84  | % |                |   | 66,614      |  | 85  | %
|Services revenue      |  |                      |  |                | 13,522 |             | 16  | % |                |   | 12,104      |  | 15  | %
|                      |  |                      |  |                |        |             |     |   |                |   |             |  |     |  
|Total Revenue         |  |                      |  | $              | 82,921 |             | 100 | % |                | $ | 78,718      |  | 100 | %
|                      |  |                      |  |                |        |             |     |   |                |   |             |  |     |  

---

|* | Included $9,644 of revenue from new contracts for the quarter ended October 1, 2006.
|- | ------------------------------------------------------------------------------------



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



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



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



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Unbundled Licenses: Cash Receipts.We recognize revenue from customers who have not met our
predetermined credit criteria on a cash receipts basis to the extent that revenue has otherwise been earned. Such customers generally order short-term time based licenses or separate annual maintenance. We recognize license revenue as we receive
cash payments from these customers. Maintenance is recognized ratably over the maintenance term after the customer has remitted payment. For management reporting and analysis purposes, we refer to this type of license revenue as Cash
Receipts.



Unbundled Licenses: 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 as long as the payment terms require the customer to pay 100% of the license fee and the initial
period of PCS within one year from the agreement date and payments are generally linear. We recognize maintenance revenue ratably over the maintenance term. In all of these cases, the contracts are non-cancelable, and the customer has taken delivery
of both the software and the encryption key required to operate the software. For management reporting and analysis purposes, we refer to this type of license generally as 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 the risk factors below.



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Revenue, cost of revenue and gross profit



The table below sets forth the fluctuations in revenue, cost of revenue and
gross profit data for the three and six months ended October 1, 2006 and October 2, 2005 (in thousands, except for percent data):



|                      |  |                 |        |              |     |   |                 |   |              |  |     |               |  |   |          |   |  |    |   
|--------------------- |  | --------------- | ------ | ------------ | --- | - | --------------- | - | ------------ |  | --- | ------------- |  | - | -------- | - |  | -- | --
|                      |  | October 1, 2006 |        | % of Revenue |     |   | October 2, 2005 |   | % of Revenue |  |     | Dollar Change |  |   | % Change |  
|Three Months Ended:   |  |                 |        |              |     |   |                 |   |              |  |     |               |  |   |          |   |  |    |   
|Revenue:              |  |                 |        |              |     |   |                 |   |              |  |     |               |  |   |          |   |  |    |   
|Licenses              |  | $               | 34,859 |              | 83  | % |                 | $ | 32,704       |  | 82  | %             |  | $ | 2,155    |   |  | 7  | % 
|Services              |  |                 | 7,103  |              | 17  | % |                 |   | 7,182        |  | 18  | %             |  |   | (79      | ) |  | (1 | )%
|                      |  |                 |        |              |     |   |                 |   |              |  |     |               |  |   |          |   |  |    |   
|Total revenue         |  |                 | 41,962 |              | 100 | % |                 |   | 39,886       |  | 100 | %             |  |   | 2,076    |   |  | 5  | % 
|                      |  |                 |        |              |     |   |                 |   |              |  |     |               |  |   |          |   |  |    |   
|Cost of revenue:      |  |                 |        |              |     |   |                 |   |              |  |     |               |  |   |          |   |  |    |   
|Licenses              |  |                 | 7,678  |              | 18  | % |                 |   | 6,483        |  | 16  | %             |  |   | 1,195    |   |  | 18 | % 
|Services              |  |                 | 5,533  |              | 13  | % |                 |   | 4,525        |  | 11  | %             |  |   | 1,008    |   |  | 22 | % 
|                      |  |                 |        |              |     |   |                 |   |              |  |     |               |  |   |          |   |  |    |   
|Total cost of revenue |  |                 | 13,211 |              | 31  | % |                 |   | 11,008       |  | 27  | %             |  |   | 2,203    |   |  | 20 | % 
|                      |  |                 |        |              |     |   |                 |   |              |  |     |               |  |   |          |   |  |    |   
|Gross profit          |  | $               | 28,751 |              | 69  | % |                 | $ | 28,878       |  | 73  | %             |  | $ | (127     | ) |  | 0  | % 
|                      |  |                 |        |              |     |   |                 |   |              |  |     |               |  |   |          |   |  |    |   
|Six Months Ended:     |  |                 |        |              |     |   |                 |   |              |  |     |               |  |   |          |   |  |    |   
|Revenue:              |  |                 |        |              |     |   |                 |   |              |  |     |               |  |   |          |   |  |    |   
|Licenses              |  | $               | 69,399 |              | 84  | % |                 | $ | 66,614       |  | 85  | %             |  | $ | 2,785    |   |  | 4  | % 
|Services              |  |                 | 13,522 |              | 16  | % |                 |   | 12,104       |  | 15  | %             |  |   | 1,418    |   |  | 12 | % 
|                      |  |                 |        |              |     |   |                 |   |              |  |     |               |  |   |          |   |  |    |   
|Total revenue         |  |                 | 82,921 |              | 100 | % |                 |   | 78,718       |  | 100 | %             |  |   | 4,203    |   |  | 5  | % 
|                      |  |                 |        |              |     |   |                 |   |              |  |     |               |  |   |          |   |  |    |   
|Cost of revenue:      |  |                 |        |              |     |   |                 |   |              |  |     |               |  |   |          |   |  |    |   
|Licenses              |  |                 | 15,086 |              | 18  | % |                 |   | 10,897       |  | 14  | %             |  |   | 4,189    |   |  | 38 | % 
|Services              |  |                 | 10,691 |              | 13  | % |                 |   | 8,382        |  | 11  | %             |  |   | 2,309    |   |  | 28 | % 
|                      |  |                 |        |              |     |   |                 |   |              |  |     |               |  |   |          |   |  |    |   
|Total cost of revenue |  |                 | 25,777 |              | 31  | % |                 |   | 19,279       |  | 25  | %             |  |   | 6,498    |   |  | 34 | % 
|                      |  |                 |        |              |     |   |                 |   |              |  |     |               |  |   |          |   |  |    |   
|Gross profit          |  | $               | 57,144 |              | 69  | % |                 | $ | 59,439       |  | 75  | %             |  | $ | (2,295   | ) |  | (4 | )%
|                      |  |                 |        |              |     |   |                 |   |              |  |     |               |  |   |          |   |  |    |   



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We market our products and related services to customers in four geographic regions: North America,
Europe (Europe, the Middle East and Africa), Japan, and Asia-Pacific. Internationally, we market our products and services primarily through our subsidiaries and various distributors. Revenue is attributed to geographic areas based on the country in
which the customer is domiciled. The table below sets forth geographic distribution of revenue data for the three and six months ended October 1, 2006 and October 2, 2005 (in thousands, except for percent data):



|                               |  |                 |        |              |     |   |                 |   |              |  |     |               |  |   |         |   |  |     |   
|------------------------------ |  | --------------- | ------ | ------------ | --- | - | --------------- | - | ------------ |  | --- | ------------- |  | - | ------- | - |  | --- | --
|                               |  | October 1, 2006 |        | % of Revenue |     |   | October 2, 2005 |   | % of Revenue |  |     | Dollar Change |  |   | %Change |  
|Three Months Ended:            |  |                 |        |              |     |   |                 |   |              |  |     |               |  |   |         |   |  |     |   
|Domestic                       |  | $               | 24,241 |              | 58  | % |                 | $ | 29,344       |  | 74  | %             |  | $ | (5,103  | ) |  | (17 | )%
|                               |  |                 |        |              |     |   |                 |   |              |  |     |               |  |   |         |   |  |     |   
|International:                 |  |                 |        |              |     |   |                 |   |              |  |     |               |  |   |         |   |  |     |   
|Europe                         |  |                 | 5,848  |              | 14  | % |                 |   | 4,495        |  | 11  | %             |  |   | 1,353   |   |  | 30  | % 
|Japan                          |  |                 | 9,542  |              | 23  | % |                 |   | 3,739        |  | 9   | %             |  |   | 5,803   |   |  | 155 | % 
|Asia-Pacific (excluding Japan) |  |                 | 2,331  |              | 5   | % |                 |   | 2,308        |  | 6   | %             |  |   | 23      |   |  | 1   | % 
|                               |  |                 |        |              |     |   |                 |   |              |  |     |               |  |   |         |   |  |     |   
|Total International            |  |                 | 17,721 |              | 42  | % |                 |   | 10,542       |  | 26  | %             |  |   | 7,179   |   |  | 68  | % 
|                               |  |                 |        |              |     |   |                 |   |              |  |     |               |  |   |         |   |  |     |   
|Total revenue                  |  | $               | 41,962 |              | 100 | % |                 | $ | 39,886       |  | 100 | %             |  | $ | 2,076   |   |  | 5   | % 
|                               |  |                 |        |              |     |   |                 |   |              |  |     |               |  |   |         |   |  |     |   
|Six Months Ended:              |  |                 |        |              |     |   |                 |   |              |  |     |               |  |   |         |   |  |     |   
|Domestic                       |  | $               | 52,601 |              | 63  | % |                 | $ | 57,505       |  | 73  | %             |  | $ | (4,904  | ) |  | (9  | )%
|                               |  |                 |        |              |     |   |                 |   |              |  |     |               |  |   |         |   |  |     |   
|International:                 |  |                 |        |              |     |   |                 |   |              |  |     |               |  |   |         |   |  |     |   
|Europe                         |  |                 | 10,386 |              | 13  | % |                 |   | 8,696        |  | 11  | %             |  |   | 1,690   |   |  | 19  | % 
|Japan                          |  |                 | 12,798 |              | 15  | % |                 |   | 7,975        |  | 10  | %             |  |   | 4,823   |   |  | 60  | % 
|Asia-Pacific (excluding Japan) |  |                 | 7,136  |              | 9   | % |                 |   | 4,542        |  | 6   | %             |  |   | 2,594   |   |  | 57  | % 
|                               |  |                 |        |              |     |   |                 |   |              |  |     |               |  |   |         |   |  |     |   
|Total International            |  |                 | 30,320 |              | 37  | % |                 |   | 21,213       |  | 27  | %             |  |   | 9,107   |   |  | 43  | % 
|                               |  |                 |        |              |     |   |                 |   |              |  |     |               |  |   |         |   |  |     |   
|Total revenue                  |  | $               | 82,921 |              | 100 | % |                 | $ | 78,718       |  | 100 | %             |  | $ | 4,203   |   |  | 5   | % 
|                               |  |                 |        |              |     |   |                 |   |              |  |     |               |  |   |         |   |  |     |   



Revenue



| |  |  | Revenue for the three and six months ended October 1, 2006 was $42.0 million and $82.9 million, respectively, both up 5% from the same periods in the prior year.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | License revenue increased by 7% and 4%, respectively, in the three and six months ended October 1, 2006 compared to the same periods in the prior year primarily due to
large orders executed during fiscal 2007 in Europe, Japan and Asia-Pacific (excluding Japan). These orders came from existing customers who extended license periods and added license capacity due to the continued proliferation of existing and new
Magma products, amongst their design group designers. The increase in international revenue was partially offset by a decrease in domestic revenue for both the three and six months ended October 1, 2006 compared to the same periods in fiscal
2006. Two customers each accounted for greater than 10% of the revenue for the quarter ended October 1, 2006 and one customer accounted for greater than 10% of the revenue for the six months ended October 1, 2006. License revenue as a
percentage of revenue was fairly consistent in the three and six months ended October 1, 2006 as compared to the same periods in fiscal 2006.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Service revenue decreased slightly in the second quarter of fiscal 2007 as compared to the same quarter in fiscal 2006. Service revenue increased by 12% in the six months
ended October 1, 2006 as compared to the same period in the prior year. The increase in service revenue during the six months ended October 1, 2006 as compared to the same period in fiscal 2006 was primarily due to our growth in customer
base.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Domestic revenuedecreased by 17% and 9%, respectively, in the three and six months ended October 1, 2006 compared to the same periods in the prior year
primarily due to the revenue recognized from a one time, non recurring payment for the termination of an existing customers license agreement in the second quarter of fiscal 2006. Domestic revenue as a percentage of total revenue decreased by
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | 16% and 10%, respectively, in the three and six months ended October 1, 2006 compared to the same periods in the prior year.
| | ----------------------------------------------------------------------------------------------------------------------------



| |  |  | International revenue increased by 68% and 43%, respectively, in the three and six months ended October 1, 2006 compared to the same periods in the prior year primarily
due to an increase in purchasing of new technology products and additional license capacity by our existing customers in Japan, and to a lesser extent, Europe and Asia Pacific (excluding Japan).
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Cost of Revenue



| |  |  | Cost of license revenue primarily consists of amortization of acquired developed technology and other intangible assets, software maintenance costs, royalties and allocated
outside sale representative expenses. Cost of license revenue increased by $1.2 million and $4.2 million, respectively, in the three and six months ended October 1, 2006 as compared to the same periods in the prior year. The increase was due to
amortization charges related to new acquired intangible assets and to several existing acquired technology licenses, as the Company began recognizing revenue from such products that were based on these acquired technologies during the quarter.
Amortization expenses on these existing technology assets were included in the operating expense for prior periods.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Cost of service revenue primarily consists of personnel and related costs to provide product support, consulting services and training. Cost of service revenue also includes
asset depreciation, allocated outside sale representative expenses and stock-based compensation expenses. Cost of service revenue increased by $1.0 million and $2.3 million, respectively, in the three and six months ended October 1, 2006
compared to the same periods in the prior year primarily due to an increase of personnel and related costs for application engineers that corresponded to higher consulting and maintenance activities in the fiscal 2007 periods. Additionally,
stock-based compensation expense accounted for a $0.3 million and $0.6 million, respectively, increase in cost of service revenue for the three and six months ended October 1, 2006 compared to the same periods in the prior year.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Operating expenses



The table below sets forth operating expense data for the three and six
months ended October 1, 2006 and October 2, 2005 (in thousands, except for percent data):



|                                  |  |                 |        |              |     |   |                 |   |              |  |    |               |  |   |         |   |  |     |   
|--------------------------------- |  | --------------- | ------ | ------------ | --- | - | --------------- | - | ------------ |  | -- | ------------- |  | - | ------- | - |  | --- | --
|                                  |  | October 1, 2006 |        | % of Revenue |     |   | October 2, 2005 |   | % of Revenue |  |    | Dollar Change |  |   | %Change |  
|Three Months Ended:               |  |                 |        |              |     |   |                 |   |              |  |    |               |  |   |         |   |  |     |   
|Operating expenses:               |  |                 |        |              |     |   |                 |   |              |  |    |               |  |   |         |   |  |     |   
|Research and development          |  | $               | 15,608 |              | 37  | % |                 | $ | 12,543       |  | 31 | %             |  | $ | 3,065   |   |  | 24  | % 
|Sales and marketing               |  |                 | 14,567 |              | 35  | % |                 |   | 10,726       |  | 27 | %             |  |   | 3,841   |   |  | 36  | % 
|General and administrative        |  |                 | 8,211  |              | 19  | % |                 |   | 9,885        |  | 25 | %             |  |   | (1,674  | ) |  | (17 | )%
|Amortization of intangible assets |  |                 | 2,922  |              | 7   | % |                 |   | 2,882        |  | 7  | %             |  |   | 40      |   |  | 1   | % 
|                                  |  |                 |        |              |     |   |                 |   |              |  |    |               |  |   |         |   |  |     |   
|Total operating expenses          |  | $               | 41,308 |              | 98  | % |                 | $ | 36,036       |  | 90 | %             |  | $ | 5,272   |   |  | 15  | % 
|                                  |  |                 |        |              |     |   |                 |   |              |  |    |               |  |   |         |   |  |     |   
|                                  |  |                 |        |              |     |  
|                                  |  | October 1, 2006 |        | % of Revenue |     |   | October 2, 2005 |   | % of Revenue |  |    | Dollar Change |  |   | %Change |  
|Six Months Ended:                 |  |                 |        |              |     |   |                 |   |              |  |    |               |  |   |         |   |  |     |   
|Operating expenses:               |  |                 |        |              |     |   |                 |   |              |  |    |               |  |   |         |   |  |     |   
|Research and development          |  | $               | 31,057 |              | 38  | % |                 | $ | 25,152       |  | 32 | %             |  | $ | 5,905   |   |  | 23  | % 
|Sales and marketing               |  |                 | 28,414 |              | 34  | % |                 |   | 21,936       |  | 28 | %             |  |   | 6,478   |   |  | 30  | % 
|General and administrative        |  |                 | 20,006 |              | 24  | % |                 |   | 18,528       |  | 24 | %             |  |   | 1,478   |   |  | 8   | % 
|Amortization of intangible assets |  |                 | 5,812  |              | 7   | % |                 |   | 6,470        |  | 8  | %             |  |   | (658    | ) |  | (10 | )%
|                                  |  |                 |        |              |     |   |                 |   |              |  |    |               |  |   |         |   |  |     |   
|Total operating expenses          |  | $               | 85,289 |              | 103 | % |                 | $ | 72,086       |  | 92 | %             |  | $ | 13,203  |   |  | 18  | % 
|                                  |  |                 |        |              |     |   |                 |   |              |  |    |               |  |   |         |   |  |     |   



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| |  |  | Research and development expense increased by 24% and 23%, respectively, in the three and six months ended October 1, 2006 compared to the same periods in the prior year
primarily due to an increase in payroll-related expenses of $2.2 million and $4.6 million, respectively, an increase in stock-based compensation charges of $0.4 million and $0.8 million, respectively, and increases in other individually
insignificant items. The increases in payroll related expenses in the three and six months ended October 1, 2006 was principally attributable to an increase in bonus expense of $0.7 million and $0.4 million, respectively, and an increase in
salaries and related expenses of $2.0 million and $3.3 million, respectively, due to headcount increases and performance-based annual wage increases. Stock-based compensation expense for fiscal 2007 periods was based on accounting guidance
prescribed by SFAS 123R, while stock-based compensation expense for fiscal 2006 periods was based on the intrinsic value method. We expect our quarterly research and development expense in each of the remaining two quarters of fiscal 2007 to
increase moderately and will remain at approximately the same percentage of sales as the second quarter of fiscal 2007. Growth of our research and development headcount will be the primary factor driving up both fixed and variable compensation
levels.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Sales and marketing expense increased by 36% and 30%, respectively, in the three and six months ended October 1, 2006 compared to the same periods in the prior year due
principally to an increase in payroll related expenses of $1.9 million and $3.2 million, respectively, an increase in stock-based compensation charges of $0.9 million and $2.2 million, respectively, and increases in other individually insignificant
items such as marketing and travel expenses. The increases in payroll related charges were primarily due to headcount and merit increments. Sales and marketing headcount increased by 15% over the comparable period primarily due to application
engineer headcount growth. Stock-based compensation expense for fiscal 2007 periods was based on accounting guidance prescribed by SFAS 123R, while stock-based compensation expense for fiscal 2006 periods was based on the intrinsic value method.
There were no material changes in our other sales and marketing activities in fiscal 2007 compared to the same periods in the prior year. We expect that our quarterly sales and marketing expenses in each of the remaining two quarters of fiscal 2007
to increase moderately compared with the amount in the second quarter of fiscal 2007, primarily as a function of increased variable compensation cost driven by headcount, bookings and revenue growth.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | General and administrative expense decreased by 17% in the second quarter of fiscal 2007 compared to the same quarter in the prior year. This was due primarily to a decrease
of $4.3 million in legal expenses related to patent litigation with Synopsys, Inc. and other legal expenses. The decrease was partially offset by increases in stock-based compensation charges of $1.2 million, payroll related expenses of $0.9
million, other professional fees of $0.4 million, asset depreciation of $0.2 million. General and administrative expense increased by 8% in the six months ended October 1, 2006 compared to the same period in the prior year. This was primarily
due to increases in stock-based compensation charges of $2.4 million, payroll-related expenses of $1.5 million, other professional fees of $1.3 million and asset depreciation of $0.5 million. The increases were partially offset by a decrease of $3.8
million in legal expenses related to patent litigation with Synopsys, Inc. and other legal expenses. Stock-based compensation expense for fiscal 2007 periods was based on accounting guidance prescribed by SFAS 123R, while stock-based compensation
expense for fiscal 2006 periods 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 that our quarterly general and
administrative expenses in each of the remaining two quarters of fiscal 2007 will increase moderately compared with the amount in the second quarter of fiscal 2007 as our general and administrative head count growth will be minimal, legal expenses
and professional services related to litigation may increase moderately, variable compensation will grow moderately in line with headcount increases and professional fees related to compliance with the requirements of the Sarbanes-Oxley Act of 2002
will decline moderately from the second quarter level. However, litigation expense has the potential to vary significantly from quarter to quarter dependent upon the level of activity incurred in the respective cases during the quarter.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Amortization of intangible assets was fairly consistent in the second quarter of fiscal 2007 compared to the same quarter in fiscal 2006. Amortization of intangible assets
decreased by 10% in the six months
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ended October 1, 2006 compared to the same period in the prior year primarily due to the change in classification of
amortization charges relating to developed technology from operating expenses to cost of license revenue as the Company began recognizing revenues from products based on the developed technology during fiscal 2007.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Other items



The table below sets forth other data for the three and six months ended
October 1, 2006 and October 2, 2005 (in thousands, except for percent data):



|                             |  |                 |       |   |              |    |    |                 |   |       |              |  |    |              |  |   |          |   |  |     |   
|---------------------------- |  | --------------- | ----- | - | ------------ | -- | -- | --------------- | - | ----- | ------------ |  | -- | ------------ |  | - | -------- | - |  | --- | --
|                             |  | October 1, 2006 |       |   | % of Revenue |    |    | October 2, 2005 |   |       | % of Revenue |  |    | DollarChange |  |   | % Change |  
|Three Months Ended:          |  |                 |       |   |              |    |    |                 |   |       |              |  |    |              |  |   |          |   |  |     |   
|Other income (expense), net: |  |                 |       |   |              |    |    |                 |   |       |              |  |    |              |  |   |          |   |  |     |   
|Interest income              |  | $               | 671   |   |              | 2  | %  |                 | $ | 586   |              |  | 1  | %            |  | $ | 85       |   |  | 15  | % 
|Interest expense             |  |                 | (133  | ) |              | (0 | )% |                 |   | (224  | )            |  | (1 | )%           |  |   | 91       |   |  | (41 | )%
|Other expense, net           |  |                 | (493  | ) |              | (1 | )% |                 |   | (352  | )            |  | (1 | )%           |  |   | (141     | ) |  | 40  | % 
|                             |  |                 |       |   |              |    |    |                 |   |       |              |  |    |              |  |   |          |   |  |     |   
|Total other income, net      |  | $               | 45    |   |              | 0  | %  |                 | $ | 10    |              |  | 0  | %            |  | $ | 35       |   |  | 350 | % 
|                             |  |                 |       |   |              |    |    |                 |   |       |              |  |    |              |  |   |          |   |  |     |   
|Benefit from income taxes    |  | $               | (91   | ) |              | 0  | %  |                 | $ | (528  | )            |  | 1  | %            |  | $ | 437      |   |  | (83 | )%
|                             |  |                 |       |   |              |    |    |                 |   |       |              |  |    |              |  |   |          |   |  |     |   
|Six Months Ended:            |  |                 |       |   |              |    |    |                 |   |       |              |  |    |              |  |   |          |   |  |     |   
|Other income (expense), net: |  |                 |       |   |              |    |    |                 |   |       |              |  |    |              |  |   |          |   |  |     |   
|Interest income              |  | $               | 1,558 |   |              | 2  | %  |                 | $ | 1,246 |              |  | 2  | %            |  | $ | 312      |   |  | 25  | % 
|Interest expense             |  |                 | (308  | ) |              | (0 | )% |                 |   | (432  | )            |  | (1 | )%           |  |   | 124      |   |  | (29 | )%
|Other income, net            |  |                 | 4,210 |   |              | 5  | %  |                 |   | 7,098 |              |  | 9  | %            |  |   | (2,888   | ) |  | (41 | )%
|                             |  |                 |       |   |              |    |    |                 |   |       |              |  |    |              |  |   |          |   |  |     |   
|Total other income, net      |  | $               | 5,460 |   |              | 7  | %  |                 | $ | 7,912 |              |  | 10 | %            |  | $ | (2,452   | ) |  | (31 | )%
|                             |  |                 |       |   |              |    |    |                 |   |       |              |  |    |              |  |   |          |   |  |     |   
|Provision for income taxes   |  | $               | 770   |   |              | (1 | )% |                 | $ | 1,908 |              |  | (2 | )%           |  | $ | (1,138   | ) |  | (60 | )%
|                             |  |                 |       |   |              |    |    |                 |   |       |              |  |    |              |  |   |          |   |  |     |   



| |  |  | Interest income increased in the three and six months ended October 1, 2006 compared to the same periods in the prior year primarily due to higher interest rates on our
cash and investments balance during the period, despite the use of cash to repurchase a portion of outstanding convertible subordinated notes.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Interest expense primarily represents amortization of debt discount and issuance costs, which were recorded in connection with our convertible subordinated debt offering
completed in May 2003. We wrote off $0.5 million of the unamortized debt issuance costs in connection with the portion of the convertible subordinated notes repurchased in May 2006, resulting in less amortization on debt issuance costs for fiscal
2007 periods.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Other income (expense), net in the six months ended October 1, 2006 and October 2, 2005 consisted primarily of a gain of $4.8 million and $8.8 million,
respectively, on repurchases of convertible subordinated notes during the periods. The remaining fluctuation in other income, net relates primarily to our share of equity loss on strategic investments and fluctuation in currency exchange rates.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Provision for (benefit from) income taxes. The Company recorded an income tax benefit of $91,000 for the three months ended October 1, 2006, and an
income tax expense of $770,000 for the six months ended October 1, 2006, compared to an income tax benefit of $528,000 for the three months ended October 2, 2005, and an income tax expense of $1.9 million for the six months ended
October 2, 2005. The tax benefits recorded in the second quarter of fiscal year 2007 and 2006 respectively, reflect the adjustment to the federal and state taxes provided in the prior quarter for certain discrete items, such as gain on the
repurchase of the convertible bonds, impairment of certain equity investments, and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | cumulative effect of the change in accounting principle due to the change in Companys forecasts and other estimates. The Companys effective tax
rates vary from the U.S. statutory rate primarily due to changes in its valuation allowance, state taxes, foreign income taxed at other than U.S. rates, stock compensation expense, in-process research and development, research and development
credits, and foreign withholding taxes.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



Liquidity and Capital Resources



The table below sets forth certain cash flow data as of October 1, 2006
and April 2, 2006, and for the six months ended October 1, 2006 and October 2, 2005 (in thousands):



|                                                  |  |                 |        |               |   |       
|------------------------------------------------- |  | --------------- | ------ | ------------- | - | ------
|                                                  |  | October 1, 2006 |        | April 2, 2006
|Cash, cash equivalents and short-term investments |  | $               | 62,461 |               | $ | 97,158



|                                          |  |                 |         |   |                 |   |         |  
|----------------------------------------- |  | --------------- | ------- | - | --------------- | - | ------- | -
|For the six months ended:                 |  | October 1, 2006 |         |   | October 2, 2005 |  
|Net cash provided by operating activities |  | $               | 7,169   |   |                 | $ | 23,426  |  
|Net cash provided by investing activities |  | $               | 15,521  |   |                 | $ | 56,872  |  
|Net cash used in financing activities     |  | $               | (32,351 | ) |                 | $ | (47,375 | )



Our cash, cash
equivalents and short-term investments, excluding restricted cash, were approximately $62.5 million on October 1, 2006, a decrease of $34.7 million or 36% from April 2, 2006. The decrease primarily reflected the use of cash to repurchase a
portion of outstanding convertible subordinated notes, the purchases of intangible assets, capital investments and equity investments, partially offset by cash generated from operations and proceeds from common stock issuances. Our investment
portfolio consists of high-grade fixed-income securities diversified among corporate, U.S. agency and municipal issuers with maturities of two years or less. A portion of the portfolio is allocated to auction rate securities which provide liquidity
at par every 28 days with underlying longer-term maturities.



In May 2006, we repurchased, in privately negotiated transactions, $40.3 million face amount (or approximately 38.2 percent of the remaining principal) of these notes at an average discount to face value of approximately 13 percent. We
spent an aggregate of approximately $35.0 million on the repurchase. The repurchase left approximately $65.2 million aggregate principal amount of convertible subordinated notes outstanding. At the same time we terminated a portion of a related
hedging arrangement.



Net cash provided by operating activities



Net cash provided by operating activities was $7.2
million in the six months ended October 1, 2006 compared to $23.4 million in the same period in the prior year. The $16.2 million decrease was primarily due to a $9.2 million increase in costs and expenses and an $11.2 million increase in
payments associated with accounts payable and accrued liabilities. These decreases in cash flow were partially offset by a $4.8 million increase in cash from customers. The increase in cash from customers was primarily due to higher cash collection
on accounts receivable during the six months ended October 1, 2006 compared to the same period in fiscal 2006. The increase in payments associated with accrued liabilities was primarily related to a $6.2 million increase in



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accrued bonuses payment and a $5.6 million increase in legal expenses payment during the first two quarters of fiscal 2007.



Net cash provided by investing activities



Net cash provided by investing activities was $15.5 million in the six
months ended October 1, 2006. We had net proceeds of $24.7 million from sales of marketable securities as we liquidated these investments to repurchase a portion of the convertible subordinated notes. Partially offsetting the cash inflow, we
used a total of $6.8 million in cash to purchase a technology license and made earnout payments relating to prior asset purchases. In addition, we acquired property and equipment totaling $1.5 million in cash and $1.6 million through capital leases.
We expect to make capital expenditures of approximately $5.8 million for the remainder of fiscal 2007. We expect that these capital expenditures will be used primarily to support selling, marketing and product development activities. We expect to
use capital lease financing as well as our cash and cash equivalents and/or investments to fund these purchases. In addition, we may make additional strategic equity investments in the future using our cash, cash equivalents and/or investments.



Net cash provided by investing activities was $56.9 million in
the six months ended October 2, 2005. We had net proceeds of $80.1 million from sales of marketable securities as we liquidated these investments to repurchase a portion of the convertible subordinated notes. Partially offsetting the cash
inflow, we used a total of $20.4 million in cash to purchase a technology license and make earnout payments relating to prior asset purchases. We also made an investment of $0.8 million in a privately-held technology company for business and
strategic purposes. In addition, we acquired property and equipment totaling $2.0 million in cash and $2.0 million through capital leases.



Net cash used in financing activities



Net cash used in financing activities was $32.4 million in the six months ended October 1, 2006. We used $35.0 million to repurchase a portion of our
convertible subordinated notes. The primary source of cash was $3.2 million in net cash received from the exercise of stock options and shares purchased under the employee stock purchase plan during the period. The remaining uses of $0.6 million
related to payment of capital lease obligations.



Net cash used
in financing activities was $47.4 million in the six months ended October 2, 2005. We used $34.8 million to repurchase a portion of our convertible subordinated notes and received net proceeds of $140,000 from termination of the related portion
of the bond hedge and warrant. In addition, we used $16.0 million to repurchase 2,000,000 shares of common stock on the open market, as authorized by the board of directors in April 2005, and made payments of $0.3 million on our capital leases. The
primary source of cash was $3.6 million in cash received from the exercise of stock options and shares purchased under the employee stock purchase plan during the period.



Capital resources



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



Our acquisition agreements related to certain business combination and asset purchase transactions obligate us to pay certain contingent cash compensation based on continued employment and meeting certain revenue or



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project milestones. Total cash contingent compensation that could be paid under our acquisition agreements assuming all contingencies are met is $48.6
million as of October 1, 2006.



Contractual
obligations



As of October 1, 2006, our principal
commitments consisted of operating leases, with an aggregated future amount of $15.9 million through fiscal 2012 for office facilities, and repayment of the convertible subordinated notes of $65.2 million due in fiscal 2009. During the six months
ended October 1, 2006, other than the decrease of $40.3 million in the convertible subordinated notes, there were no material changes in our reported payments due under contractual obligations at April 2, 2006. Although we have no material
commitments for capital expenditures, we anticipate a substantial increase in our capital expenditures and lease commitments with our anticipated growth in operations, infrastructure, and personnel. In addition, we have other obligations for goods
and services entered into in the normal course of business. These obligations, however, either are not enforceable or legally binding or are subject to change based on our business decisions.



Off-balance Sheet Arrangements



As of October 1, 2006, we did not have any significant
off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.



Indemnification Obligations



We enter into standard license agreements in the ordinary course of business. Pursuant to these agreements, we agree to indemnify our customers for losses
suffered or incurred by them as a result of any patent, copyright, or other intellectual property infringement claim by any third party with respect to our products. These indemnification obligations have perpetual terms. Our normal business
practice is to limit the maximum amount of indemnification to the amount received from the customer. On occasion, the maximum amount of indemnification we may be required to make may exceed its normal business practices. We estimate the fair value
of its indemnification obligations as insignificant, based on our historical experience concerning product and patent infringement claims. Accordingly, we have no liabilities recorded for indemnification under these agreements as of October 1,
2006.



We have agreements whereby our officers and directors
are indemnified for certain events or occurrences while the officer or director is, or was, serving at our request in such capacity. The maximum potential amount of future payments we could be required to make under these indemnification agreements
is unlimited; however, we have a directors and officers insurance policy that reduces our exposure and enables us to recover a portion of future amounts paid. As a result of our insurance policy coverage, we believe the estimated fair value of these
indemnification agreements is minimal. Accordingly, no liabilities have been recorded for these agreements as of October 1, 2006.



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



Warranties



We offer our customers a warranty that our products
will conform to the documentation provided with the products. To date, there have been no payments or material costs incurred related to fulfilling these warranty obligations. Accordingly, we have no liabilities recorded for these warranties as of
October 1, 2006. 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 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------



Interest Rate Risk



Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. The primary objective of our investment
activities is to preserve principal while maximizing yields without significantly increasing risk. This is accomplished by investing in widely diversified short-term and long-term investments, consisting primarily of investment grade securities. As
of October 1, 2006, a hypothetical 100 basis point increase in interest rates would result in approximately a $35,000 decline in the fair value of our available-for-sale securities.



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



Credit Risk



We completed an offering on May 22, 2003 of $150.0 million principal
amount of convertible subordinated notes due May 15, 2008. Concurrent with the issuance of the convertible notes, we entered into convertible bond hedge and warrant transactions with respect to our common stock, the exposure for which is held
by Credit Suisse First Boston International. Both the bond hedge and warrant transactions may be settled at our option either in cash or net shares and expire on May 15, 2008. The transactions are expected to reduce the potential dilution from
conversion of the notes. Subject to the movement in the share price of our common stock, we could be exposed to credit risk in the settlement of these options in our favor. Based on a review of the possible net settlements and the credit strength of
Credit Suisse First Boston International and its affiliates, we believe that we do not have a material exposure to credit risk arising from these option transactions.



In May 2006 and May 2005, the Company repurchased $40.3 million and $44.5 million, respectively, face value of its
convertible notes for $35.0 million and $34.8 million, respectively. In doing so, the Company liquidated investments that generated a realized loss of approximately $3,000 and $0.7 million, respectively, related to the repurchases. Certain portions
of the hedge and warrant transactions entered into by Magma in 2003 were terminated in connection with the repurchases. The Company believes that it was in the best interests of the stockholders to reduce the balance sheet debt despite the one-time
loss resulting from the liquidation of marketable securities.



Foreign
Currency Exchange Rate Risk



A majority of our revenue,
expense, and capital purchasing activities are transacted in U.S. dollars. However, we transact some portions of our business in various foreign currencies, primarily related to a portion of revenue in Japan and operating expenses in Europe, Japan
and Asia-Pacific. Accordingly, we are subject to exposure from adverse movements in foreign currency exchange rates. As of October 1, 2006, we had no currency hedging contracts outstanding. We do not currently use financial instruments to hedge
revenue and operating expenses denominated in foreign currencies. We assess the need to utilize financial instruments to hedge currency exposures on an ongoing basis.



|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------



Evaluation of Disclosure Controls and Procedures



We maintain disclosure controls and procedures, as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the
Exchange Act), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized,



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and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures,
management 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. Additionally, in
designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. 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 management believes that they meet, reasonable assurance standards.



Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures were effective to ensure that material information relating to us, including our consolidated subsidiaries, is made known to them by others within those entities, particularly during
the period in which this Quarterly Report on Form 10-Q was being prepared. Although our principal executive officer and principal accounting officer concluded that our disclosure controls and procedures were effective as of the end of the period
covered by this report, we continue to enhance our controls by hiring qualified personnel in key functional areas, implementing a new computerized system to automate a number of procedures related to quarterly and year-end close processes, and
creating procedures to address the impact of acquisitions on a timely basis.



Changes in Internal Control over Financial Reporting



There were no changes in 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.



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PART II. OTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS
|------- | -----------------



Synopsys, Inc. v. Magma Design Automation, Inc., Civil Action No. C04-03923, United States District Court, Northern District of California. In this
action, filed September 17, 2004, Synopsys has sued the Company for alleged infringement of U.S. Patent Nos. 6,378,114 (the 114 Patent), 6,453,446 (the 446 Patent), and 6,725,438 (the 438
Patent). The patents-in-suit relate to methods for designing integrated circuits. The Complaint seeks unspecified monetary damages, injunctive relief, trebling of damages, fees and costs, and the imposition of a constructive trust for the
benefit of Synopsys over any profits, revenues or other benefits allegedly obtained by the Company as a result of its alleged infringement of the patents-in-suit. In addition to the below discussion, this case was also discussed in our Annual Report
on Form 10-K for the fiscal year ended April 2, 2006.



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



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



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



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



On July 1, 2005, the Court
granted Synopsyss motion for partial summary judgment regarding assignor estoppel, dismissing Magmas affirmative defenses and counterclaim alleging the invalidity of the 114 Patent.



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On July 14, 2005, the Court vacated the hearings on Magmas motion for summary judgment on the
second through sixth causes of action in the Second Amended Complaint and Synopsyss motion for partial summary judgment establishing unfair competition. The Court stated that it would reset the motions for hearing, if necessary, after the
claims construction hearing scheduled for August 15, 2005.



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



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



On August 30, 2005, the Court issued a temporary restraining order against the Company restraining and enjoining the Company from taking any steps in
the United States Patent and Trademark Office (USPTO) to abandon, suspend or disclaim the 446 and 438 Patents, failing or refusing to pay the maintenance fees for the 446 and 438 Patents, or seeking reexamination
of the 446 and 438 Patents. The temporary restraining order was scheduled to remain in effect until the hearing on Synopsyss motion for a preliminary injunction that was scheduled for December 2, 2005. On December 1,
2005, the Court, vacated the hearing and granted Synopsyss motion for preliminary injunction. The Court entered the preliminary injunction enjoining the Company from abandoning, dedicating to the public or seeking reexamination in the USPTO of
the 446 Patent or the 438 Patent.



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



On October 14, 2005, the Court granted Synopsyss request for
permission to file an amended opposition to Magmas motion for summary judgment on the second through sixth causes of action in the Second Amended Complaint. Synopsys filed its amended opposition on December 20, 2005, and the Company filed
its reply on January 13, 2006. The motion was set for hearing on January 27, 2006, but the Court vacated the hearing date and took the matter under submission.



On October 19, 2005, the Court granted in part and denied in part Synopsyss motion to strike certain affirmative
defenses and to dismiss certain counterclaims in the Companys Answer and Counterclaims to Synopsyss Third Amended Complaint. The Court dismissed without leave to amend the Companys counterclaims seeking correction of inventorship
of the 446 and 438 Patents. The Court also struck without leave to amend the Companys affirmative defenses of (1) invalidity of the 446 and 438 Patents based on failure to name all inventors,
(2) unenforceability of the 446 and 438 patents due to inequitable conduct, and (3) unclean hands. The Court struck with leave to amend the Companys affirmative defenses of invalidity of the 446 and 438
Patents based on 35 U.S.C. §§ 102, 103 and 112, as well as the Companys affirmative defense that Synopsys is not the owner of any invention defined by the claims of the 446 and 438 Patents. On October 24, 2005, the
Company filed a motion for summary judgment as to the first cause of action (for patent infringement) in Synopsyss Third Amended Complaint on the grounds that IBM is an owner of all the



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patents-in-suit. Also on October 24, 2005, Synopsys filed (1) a motion for partial summary judgment to dismiss the Companys joint ownership
defenses and counterclaims, and (2) a motion for partial summary judgment to dismiss allegations of co-ownership based on judicial and quasi-estoppel.



On November 2, 2005, the Company filed a motion for leave to file an amended answer and counterclaims to Synopsyss Third Amended Complaint,
requesting leave to amend the Companys answer to add affirmative defenses of invalidity of the 446 and 438 Patents based on 35 U.S.C. §§ 102, 103 and 112. The Companys motion was set for hearing on December 16,
2005, but the Court vacated the hearing date and took the matter under submission.



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



On November 8, 2005, the Company filed a motion seeking leave to file a motion for reconsideration of the Courts October 19, 2005 Order
striking certain of the Companys defenses without leave to amend. The Court granted the Companys request on November 21, 2005. On December 9, 2005, the Company filed a motion for reconsideration of the Courts
October 19, 2005 Order striking the Companys affirmative defense of unclean hands and for leave to amend the Companys answer to assert an unclean hands defense. The motion was set for hearing on January 13, 2006, but the Court
vacated the hearing and took the matter under submission.



On
December 23, 2005, Synopsys filed a motion for partial summary judgment regarding the Companys statute of limitations defense. The Company opposed the motion, which was set for hearing on January 27, 2006. The hearing was vacated and
the motion taken under submission by the Court.



On
December 29, 2005, the Company filed a notice of interlocutory appeal to the Court of Appeals for the Federal Circuit of the Courts December 1, 2005, preliminary injunction against the Company. By agreement of the parties, Magma has
dismissed the appeal.



On January 20, 2006, the Company
filed a motion to bifurcate the trial into issues of patent ownership and all other issues. The parties subsequently stipulated to bifurcate the case with patent ownership to be tried first.



Fact and expert discovery relating to patent ownership have closed. By
stipulation so-ordered on March 13, 2006, the parties have agreed to schedule any remaining discovery after the patent ownership trial is resolved.



By order dated March 30, 2006, the Court denied Magmas motion for summary judgment regarding patent ownership, as well Synopsyss motions
(1) for partial summary judgment based on estoppel by contract, (2) for partial summary judgment to dismiss the Companys joint ownership defenses and counterclaims, and (3) for partial summary judgment to dismiss allegations of
co-ownership based on judicial and quasi-estoppel. The parties subsequently stipulated (a) that Magma would withdraw its claim to ownership of the 446 and 438 Patents on the basis that the buckets claims (i.e., Claims
17, 18, 31, and 32 of the 446 Patent and Claims 17 and 18 of the 438 Patent) were conceived by Magma engineers after Lukas van Ginneken left Synopsys and (b) that Synopsys would withdraw its assertion that Magma would be foreclosed
from arguing that the inventions in the 446 and 438 Patents were reduced to practice after van Ginneken left Synopsys.



The ownership case was tried to the Court, without a jury, from April 24, 2006 through May 10, 2006. The parties opening post-trial briefs
and findings of fact and conclusions of law were filed June 9, 2006. The parties reply post-trial briefs were filed June 30, 2006. The parties are currently awaiting the Courts ruling.



On August 8, 2005, the Company filed a request for ex parte
reexamination of the 114 Patent. On September 22, 2005, the USPTO instituted a reexamination proceeding, indicating that a substantial new question



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of patentability was raised by the request. On August 5, 2006, the USPTO rejected all pending claims (1-15) of the 114 Patent.



On August 18, 2006, a third party submitted requests for ex parte
reexamination of the 446 and 438 Patents to the USPTO. The USPTO received those requests on August 23, 2006.



On September 1, 2006, Synopsys filed a motion for preliminary injunction that sought to require the Company (1) to seek a stay of reexamination
of the 446 and 438 Patents or transfer ownership of the 446 and 438 Patents to Synopsys so that Synopsys may participate in the reexamination proceedings, and (2) to refrain from filing a patent owners statement in
any reexamination proceedings for the 446 and 438 Patents. On September 14, 2006, the Company filed an opposition to Synopsyss motion. On September 29, 2006, the Court issued an order denying the motion, without prejudice
to Synopsyss refiling the motion if and when the USPTO issues an order for reexamination of the 446 or 438 Patent.



On September 7, 2006, the USPTO issued a Notice of Failure to Comply with Ex Parte Reexamination Request Filing Requirements (37 C.F.R. 1.510(c)) in
connection with the reexamination request for the 438 Patent. The third-party requester responded on September 21, 2006. On October 20, 2006, the USPTO issued a Notice of Failure to Comply with Ex Parte Reexamination Request Filing
Requirements (37 C.F.R. 1.510(c)) in connection with the reexamination request for the 446 Patent. The USPTO has not yet ruled on the merits of the requests for reexamination of the 446 and 438 Patents.



On April 18, 2005, Synopsys, Inc. filed an action against the Company in
Germany at the Landgericht München I (District Court in Munich) seeking to obtain ownership of the European patent application corresponding to the Companys 446 Patent. The action has been stayed pending the outcome of the
above-referenced Synopsys action filed in the United States. This action was also discussed in our Annual Report on Form 10-K for the fiscal year ended April 2, 2006.



On July 29, 2005, Synopsys, Inc. filed an action against the Company in Japan in Civil Department No. 40 of the
Tokyo District Court seeking to obtain ownership of the Japanese patent application corresponding to the Companys 446 Patent. The court has entered a defacto stay pending the outcome of the above-referenced Synopsys action filed in the
United States. The Japanese Court held hearings on January 18, 2006, March 6, 2006, July 11, 2006, and October 23, 2006, and set a further hearing for December 26, 2006. This action was also discussed in our Annual
Report on Form 10-K for the fiscal year ended April 2, 2006.



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 several of the defendants. The case is now proceeding on the remaining claims.
This lawsuit was also discussed in our Annual Report on Form 10-K for the fiscal year ended April 2, 2006.



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



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referenced above. This lawsuit was also discussed in our Annual Report on Form 10-K for the fiscal year ended April 2, 2006.



On September 26, 2005, Synopsys, Inc. filed an action against the
Company in the Superior Court of the State of California in and for the County of Santa Clara, entitled Synopsys, Inc. v. Magma Design Automation, Inc., et al., Case Number 105 CV 049638. Synopsys alleges that Magma committed unfair business
practices by asserting defenses of non-infringement and invalidity to patent infringement allegations brought by Synopsys in the patent infringement action already pending against Magma in the Northern District of California. The Complaint seeks
unspecified monetary damages, an unspecified restitutionary/disgorgement award, injunctive relief, fees and costs, and an accounting of all revenues and profits derived from licensing the technology at issue. On October 19, 2005, the Company
removed the action to the United States District Court for the Northern District of California. On October 26, 2005, the Company moved to strike and dismiss the complaint. On October 27, 2005, the Court granted the Companys motion to
relate the removed action with the preexisting patent infringement action, and both actions are now assigned to Judge Maxine M. Chesney. The Court vacated the hearing on the Companys motion to strike and dismiss the complaint and has taken the
matter under submission. This action was also discussed in our Annual Report on Form 10-K for the fiscal year ended April 2, 2006.



On September 26, 2005, Synopsys, Inc. filed an action against the Company in Delaware federal court, Synopsys, Inc. v. Magma Design Automation,
Inc., Civil Action No. 05-701. The Complaint alleges infringement of U.S. Patent Nos. 6,434,733 (the 733 Patent), 6,766,501 (the 501 Patent), and 6,192,508 (the 508 Patent). The
patents-in-suit relate to methods for designing integrated circuits. The Complaint seeks unspecified monetary damages, injunctive relief, trebling of damages, fees and costs, and the imposition of a constructive trust for the benefit of Synopsys
over any profits, revenues or other benefits allegedly obtained by the Company as a result of its alleged infringement of the patents-in-suit. In addition to the below discussion, this case was also discussed in our Annual Report on Form 10-K for
the fiscal year ended April 2, 2006.



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



On
October 25, 2005, the Company filed an Amended Answer, adding a counterclaim for infringement of U.S. Patent No. 6,505,328 (the 328 Patent). The 328 Patent relates to methods for designing integrated circuits. The
Company seeks treble damages and an injunction against Synopsys for the sale and manufacture of products the Company alleges infringe the 328 Patent.



On November 22, 2005, Synopsys filed a motion to dismiss the Companys antitrust and other commercial counterclaims. The Company opposed that
motion on December 7, 2005. Synopsys filed its reply brief on December 14, 2005. The Court denied Synopsyss motion on May 25, 2006.



On January 9, 2006, Synopsys filed a request for the United States Patent and Trademark Office to reexamine its 733 and 501 Patents in
light of two prior art references that it had not previously disclosed to the Patent Office. On January 23, 2006, Synopsys filed a motion with the Delaware federal court to bifurcate and stay its claims for infringement of its 733 and
501 Patents and the Companys counterclaims except for its claim for infringement of the 328 Patent, based in part on Synopsyss having filed the request for patent reexamination. The Companys opposition to that motion
was filed on February 6, 2006. The Court denied Synopsyss motion on May 25, 2006.



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



On June 13, 2006, the parties held a conference with the Court at which, among other things, Synopsys requested that the trial be delayed until late
2007. The Court denied Synopsyss request. Fact discovery is ongoing and is currently scheduled to close on January 12, 2007, and trial remains scheduled for June 11, 2007.



On August 25, 2006, the Company dropped its allegation that Synopsys infringes the 610 Patent. On
September 15, 2006, Synopsys dropped its claims that the Company infringes the 733 and 501 Patents. On October 13, 2006, Synopsys filed a second motion to bifurcate the trial as to the antitrust claims and to stay antitrust
discovery, based in part on the fact that the 733 and 501 Patents are no longer being asserted. The Company filed its opposition to that motion on October 27, 2006.



A claim construction hearing before the Court is scheduled for November 29, 2006. The Company intends to vigorously defend
against all claims asserted by Synopsys and to fully enforce its rights against Synopsys. However, the results of any litigation are inherently uncertain and the Company can not assure that it will be able to successfully defend against the Synopsys
claims. A favorable outcome for Synopsys could have a material adverse effect on the Companys financial position, results of operations or cash flows. The Company is currently unable to assess the extent of damages and/or other relief, if any,
that could be awarded to Synopsys.



In addition to the above,
from time to time, the Company is involved in disputes that arise in the ordinary course of business. The number and significance of these disputes is increasing as the Companys business expands and it grows larger. Any claims against the
Company, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time and result in the diversion of significant operational resources. As a result, these disputes could harm the
Companys business, financial condition, results of operations or cash flows.



|ITEM 1A. | RISK FACTORS
|-------- | ------------



A restated description of the risk factors associated with our business is set forth below. This description includes any material changes to and
supersedes the description of the risk factors associated with our business previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended April 2, 2006.



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



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



We were incorporated in April 1997 and introduced our first major software product, Blast Fusion, in April 1999. We have a
limited history of generating revenue from our software products, and the revenue and income potential of our business and market is still unproven. As a result of our short operating history, we have limited financial data that can be used to
evaluate our business. We have only been profitable in fiscal 2003 and fiscal 2004. Our software products represent a new approach to the challenges presented in the electronic design



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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 $159.7 million as of October 1, 2006; if we continue to incur losses, the trading price of our stock would be likely to decline.



We had an accumulated deficit of approximately $159.7 million as of
October 1, 2006. Except for fiscal 2003 and fiscal 2004, we incurred losses in all other fiscal years. If we continue to incur losses, or if we fail to achieve profitability at levels expected by securities analysts or investors, the market
price of our common stock is likely to decline. If we incur net losses, we may not be able to maintain or increase our number of employees or our investment in capital equipment, sales, marketing, and research and development programs, and we may
not be able to continue to operate.



Our quarterly results are difficult to
predict, and if we miss 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 with Synopsys, Inc.;
| | - |  | --------------------------------------------------------------------------------



| |  |  | timing of customer license payments;
| | - |  | ------------------------------------



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



| |  |  | size and timing of revenue recognized in advance of actual customer billings and customers with graduated payment schedules which may result in higher accounts receivable balances
and days sales outstanding (DSO);
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the relative mix of our license and services revenue;
| | - |  | -----------------------------------------------------



| |  |  | our ability to win new customers and retain existing customers;
| | - |  | ---------------------------------------------------------------



| |  |  | changes in our pricing and discounting practices and licensing terms and those of our competitors;
| | - |  | --------------------------------------------------------------------------------------------------



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



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



| |  |  | changes in the interpretation of the authoritative literature under which we recognize revenue;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | the timing of product releases or upgrades by us or our competitors; and
| | - |  | ------------------------------------------------------------------------



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



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



Synopsys, Inc. has filed various
suits, including for patent infringement, against us (please see the discussion in Part II, Item 1, Legal Proceedings.) In addition, a putative shareholder class action lawsuit and a putative derivative lawsuit have been filed
against us (please see the discussion in Part II, Item 1, Legal Proceedings.) Other related litigation may follow. In the future other parties may assert intellectual property infringement claims against us or our customers. We may
have acquired or may in the future acquire software as a result of our acquisitions, and we could be subject to claims that such software infringes the intellectual property rights of third parties. In addition, we are often involved in or
threatened with commercial litigation unrelated to intellectual property infringement claims such as labor litigation and contract claims, and we may acquire companies that are actively engaged in such litigation.



Our products may be found to infringe intellectual property rights of third
parties, including third-party patents. In addition, many of our contracts contain provisions in which we agree to indemnify our customers from third-party intellectual property infringement claims that are brought against them based on their use of
our products. Also, we may be unaware of filed patent applications that relate to our software products. We believe the patent portfolios of our competitors are far larger than ours, and this may increase the risk that they may sue us for patent
infringement and may limit our ability to counterclaim for patent infringement or settle through patent cross-licenses.



The outcome of intellectual property litigation, such as the pending Synopsys litigation (discussed herein) and other types of litigation, could be, in
the case of intellectual property litigation, our loss of critical proprietary rights and, in the case of intellectual property litigation and other types of litigation, unexpected operating costs and substantial monetary damages. Intellectual
property litigation and other types of litigation are expensive and time-consuming and could divert managements attention from our business. If there is a successful claim of infringement, we may be ordered to pay substantial monetary damages
(including punitive damages), we may be prevented from distributing all or some of our products, and we may be required to develop non-infringing technology or enter into royalty or license agreements, which may not be available on acceptable terms,
if at all. Our failure to develop non-infringing technologies or license the proprietary rights on a timely basis would harm our business.



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.



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



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qualified engineering personnel with experience in integrated circuit design. Specifically, we need to continue to attract and retain field application
engineers to work with our direct sales force to technically qualify new sales opportunities and perform design work to demonstrate our products capabilities to customers during the benchmark evaluation process. Competition for qualified
engineers is intense, particularly in Silicon Valley where our headquarters is located.



Retaining our employees has become more challenging due to the decline in our stock price over the past several years. Many of the stock options held by our employees may have an exercise price that is significantly
higher than the current trading price of our stock, and these underwater options do not serve their purpose as incentives for our employees to remain with Magma. Although, as discussed below, we have attempted to address this problem in
part via a stock option exchange program that allowed eligible employees to exchange existing underwater options for options exercisable for a smaller number of shares at the price of $9.20 per share, we cannot guarantee that this program will
satisfy our employees. In addition, the increased volatility of our stock price due to the pendency of, and developments in, the Synopsys litigation and the above-referenced shareholder litigation may affect employee morale. Furthermore, in light of
our adopting SFAS 123R Share-Based Payment in the first quarter of our fiscal year 2007, we have changed our employee compensation practices, and those changes could make it harder for us to retain existing employees and attract
qualified candidates. If we lose the services of a significant number of our employees and/or if we cannot hire additional employees, we will be unable to increase our sales or implement or maintain our growth strategy.



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



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



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



A portion of our revenue backlog is variable based on volume of usage of our
products by the customers or includes specific future deliverables or is recognized in revenue on a cash receipts basis. Management has estimated variable usage based on customers forecasts, but there can be no assurance that these estimates
will be realized. In addition, it is possible that customers from whom we expect to derive revenue from backlog will default and as a result we may not be able to recognize expected revenue from backlog. If a customer defaults and fails to pay
amounts owed, or if the level of defaults increases, our bad debt expense is likely to increase. Any material payment default by our customers could have a material adverse effect on our financial condition and results of operations.



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



Customers for our software products typically commit significant resources to evaluate available software. The complexity of our products requires us to
spend substantial time and effort to assist potential customers in evaluating our software and in benchmarking it against our competition. As the complexity of the products we



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sell increases, we expect the sales cycle to lengthen. In addition, potential customers may be limited in their current spending by existing time-based
licenses with their legacy vendors. In these cases, customers delay a significant new commitment to our software until the term of the existing license has expired. Also, because our products require a significant investment of time and cost by our
customers, we must target those individuals within the customers organization who are able to make these decisions on behalf of their companies. These individuals tend to be senior management in an organization, typically at the vice president
level. We may face difficulty identifying and establishing contact with such individuals. Even after initial acceptance, the negotiation and documentation processes can be lengthy. Our sales cycle typically ranges between three and nine months, but
can be longer. Any delay in completing sales in a particular quarter could cause our operating results to fall below expectations. Furthermore, technological changes, litigation risk or other competitive factors could cause some customers to shorten
the terms of deals significantly, and such shorter terms of deals could in turn have an impact on our total results for orders for this fiscal year.



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 six months ended October 1, 2006, we had one customer that accounted for more
than 10% of our revenue, and our top three customers together accounted for approximately 29% 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 vary from 15 months to 48 months. Most of our license agreements automatically expire at the end of the term unless the customer renews the license with us or
purchases a perpetual license. If our customers do not renew their licenses, we may not be able to maintain our current revenue or may not generate additional revenue. Some of our license agreements allow customers to terminate an agreement prior to
its expiration under limited circumstancesfor example, if our products do not meet specified performance requirements or goals. If these agreements are terminated prior to expiration or we are unable to collect under these agreements, our
revenue may decline.



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



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



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



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significantly greater financial, technical and marketing resources than we do, as well as greater name recognition and larger installed customer bases. Our
competitors are better able to offer aggressive discounts on their products, a practice they often employ. 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,
full-feature custom layout editing, analog or mixed signal implementation products, which can sometimes be an impediment to our winning a particular customer order. In addition, our industry has traditionally viewed acquisitions as an effective
strategy for growth in products and market share and our competitors greater cash resources and higher market capitalization may give them a relative advantage over us in buying companies with promising new chip design products or companies
that may be too large for us to acquire without a strain on our resources and liquidity.



Competition in the EDA market has increased as customers rationalized their EDA spending by using products from fewer EDA vendors and continued consolidation in the electronic design automation market could intensify
this trend. Also, many of our competitors, including Cadence, 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. 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 and our business may fail.



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



We expect to continuously evaluate the possibility of accelerating our growth through acquisitions, as is customary in the electronic design automation industry. Achieving the anticipated benefits of past and possible
future acquisitions will depend in part upon whether we can integrate the operations, products and technology of acquired companies with our operations, products and technology in a timely and cost-effective manner. The process of integrating with
acquired companies and acquired technology is complex, expensive and time consuming, and may cause an interruption of, or loss of momentum in, the product development and sales activities and operations of both companies. In addition, the earnout
arrangements we use, and expect to continue to use, to consummate some of our acquisitions, pursuant to which we agreed to pay additional amounts of contingent consideration based on the achievement of certain revenue, bookings or product
development milestones, can sometimes complicate integration efforts. We cannot be sure that any part or all of the integration will be accomplished on a timely basis, or at all. Assimilating previously acquired companies such as Silicon Metrics
Corporation and Mojave, Inc., or any other companies we may seek to acquire in the future, involves a number of other risks, including, but not limited to:



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



| |  |  | difficulties in integrating or an inability to retain key employees of the acquired company;
| | - |  | --------------------------------------------------------------------------------------------



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| |  |  | 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 Magmas best interest as its interests may change over time;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | difficulties in integrating the technologies of the acquired company into our products;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | diversion of management attention;
| | - |  | ----------------------------------



| |  |  | potential incompatibility of business cultures;
| | - |  | -----------------------------------------------



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



| |  |  | additional expenses associated with the amortization of intangible assets.
| | - |  | --------------------------------------------------------------------------



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



Many Magma customers are currently working on 90-nanometer designs. Magma
continues to work toward developing and enhancing its product line in anticipation of increased customer demand for 65-nanometer (sub-90 nanometer) design geometries. Similarly, Magma has acquired Mojave personnel and technology to better address
customers needs for designing and verifying semiconductors that are manufacturable with higher yield and performance, which is a key design parameter when moving to 65-nanometer geometries. Notwithstanding our efforts to support 65-nanometer
geometries, customers may fail to adopt or may be slower to adopt 65-nanometer geometries and we may be unable to convince our customers to purchase our related software products. Accordingly, any revenues we receive from enhancements to our
products or acquired technologies may be less than the development or acquisition costs. If customers fail to adopt 65-nanometer design geometries or are slow to adopt 65-nanometer design geometries, our operating results may be harmed. In addition,
if customers are not able successfully to make profits as they adopt smaller geometries, demand for our products may be adversely affected, and our operating results may be harmed.



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



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



We changed our organizational structure in fiscal 2006, and if this organizational structure results in ineffective interoperability between our products or ineffective collaboration among the applicable employees, then our operating
results may be harmed.



We changed our organizational
structure in fiscal 2006 such that we now have major business units that are responsible for our various products. If this organizational structure results in ineffective interoperability between our products or ineffective collaboration among the
applicable 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, which could harm our
operating results.



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



Demand for our products is driven by new integrated circuit design projects. The demand from semiconductor and systems companies is uncertain and difficult to predict. Slower growth in the semiconductor and systems
industries, a reduced number of design starts, reduction of electronic design automation budgets or consolidation among our customers would harm our business and financial condition.



The primary customers for our products are companies in the communications, computing, consumer electronics, networking and
semiconductor industries. Any significant downturn in our customers markets or in general economic conditions that results in the cutback of research and development budgets or the delay of software purchases would likely result in lower
demand for our products and services and could harm our business. For example, the United States economy, including the semiconductor industry, experienced a slowdown starting in 2000, which negatively impacted and may continue to negatively impact
our business and operating results. While the semiconductor industry experienced a recovery in recent years, our customers have remained cautious, and it is not yet clear when increased R&D spending will occur. The continuing threat of terrorist
attacks in the United States, the ongoing events in Iraq and North Korea and other worldwide events including those in the Middle East have increased uncertainty in the United States economy. If the economy declines as a result of this economic,
political and social turmoil, existing customers may delay their implementation of our software products and prospective customers may decide not to adopt our software products, either of which could negatively impact our business and operating
results.



The electronics industry has historically been
subject to seasonal and cyclical fluctuations in demand for its products, and this trend may continue in the future. These industry downturns have been, and may continue to be, characterized by diminished product demand, excess manufacturing
capacity and subsequent erosion of average selling prices. Any such seasonal cyclical industry downturns could harm our operating results.



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



To succeed, we will need to develop innovative
new products. We may not have the financial resources necessary to fund all required future innovations. Expanding into new technologies or extending our product line into areas we have not previously addressed may be more costly or difficult than
anticipated. Also, any revenue that we receive from enhancements or new generations of our proprietary software products may be less than the costs of development. If we fail to develop and market new products in a timely manner or if new products
do not meet performance features as marketed, our reputation and our business could suffer.



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



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



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



Our products depend on complex software, both internally developed and
acquired or licensed from third parties. Our customers may use our products with other companies products, which also contain complex software. If our software does not meet our customers performance requirements or meet the performance
features as marketed, our customer relationships may suffer. Also, a limited number of our contracts include



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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, some of which 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.



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



As of October 1, 2006, we generated 37% of
our total revenue from sales outside North America thus far for fiscal 2007, compared to 33% for fiscal 2006 and 43% for fiscal 2005. While most of our international sales to date have been denominated in U.S. dollars, our international operating
expenses have been denominated in foreign currencies. As a result, a decrease in the value of the U.S. dollar relative to the foreign currencies could increase the relative costs of our overseas operations, which could reduce our operating margins.



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



| |  |  | difficulties and costs of staffing and managing international operations across different geographic areas;
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | changes in currency exchange rates and controls;
| | - |  | ------------------------------------------------



| |  |  | uncertainty regarding tax and regulatory requirements in multiple jurisdictions;
| | - |  | --------------------------------------------------------------------------------



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



| |  |  | on-going events in Iraq and the Middle East; and
| | - |  | ------------------------------------------------



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



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



Future changes in accounting standards or interpretations thereof, specifically those changes affecting software revenue recognition, could require us to change our methods of revenue recognition. These changes



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could result in deferral of revenue recognized in current periods to subsequent periods or in accelerated recognition of deferred revenue to current periods,
each of which could cause shortfalls in meeting the expectations of investors and securities analysts. Our stock price could decline as a result of any shortfall. Implementation of internal controls reporting and attestation requirements, as further
described below, will impose additional financial and administrative obligations on us and will cause us to incur substantial implementation costs from third party consultants, which could adversely affect our results.



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



Recently enacted changes in the laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002 and the listing requirements for The Nasdaq Stock Market have imposed duties on us and on our
executives, directors, attorneys and independent registered public accounting firms. In order to comply with these new rules, we have hired additional personnel and use additional outside legal, accounting and advisory services, all of which have
increased and may further increase our operating expenses over time. In particular, we have incurred and will continue to incur additional administrative expenses relating to the implementation of Section 404 of the Sarbanes-Oxley Act, which
requires that we implement and maintain an effective system of internal controls and annual certification of our compliance by our independent auditor. For example, we have incurred significant expenses and will continue to incur expenses in
connection with the implementation, documentation and continued testing of our internal control systems. Management time associated with these compliance efforts necessarily reduces time available for other operating activities, which could
adversely affect operating results. For the years ended April 2, 2006 and March 31,2005, our independent registered public accounting firm certified that we were in compliance with the provision of Section 404 relating to effective
internal control over financial reporting; however, our internal control obligations are ongoing and subject to continued review and testing. If we are unable to maintain full and timely compliance with these and other regulatory requirements, we
could be required to incur additional costs, expend additional management time on remedial efforts and make related public disclosures that could adversely affect our stock price and result in securities litigation. Further, a failure to comply with
Section 404 could cause us to delay filing our public reports, potentially resulting in de-listing by the Nasdaq Stock Market.



The effectiveness of disclosure controls is inherently limited.



We do not expect that our disclosure controls and procedures, or our internal control over financial reporting, will prevent all errors and all fraud. A
control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system objectives will be met. The design of a control system must also reflect applicable resource constraints, and the
benefits of controls must be considered relative to their costs. As a result of these inherent limitations, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Magma have been
detected. Failure of the control systems to prevent error or fraud could materially adversely impact our financial results and our business.



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;
| | - |  | -------------------------------------------------------------------------



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



| |  |  | assessment of additional taxes as a result of federal, state, or foreign tax examinations; or
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | changes in tax laws or interpretations of such tax laws.
| | - |  | --------------------------------------------------------



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



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



| |  |  | enhance our existing products and services;
| | - |  | -------------------------------------------



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



| |  |  | address the increasingly sophisticated needs of our customers; and
| | - |  | ------------------------------------------------------------------



| |  |  | acquire other companies that have complementary or innovative products.
| | - |  | -----------------------------------------------------------------------



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



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



In todays competitive technology industry,
employment decisions of highly skilled personnel are influenced by equity compensation packages, which offer incentives above traditional compensation only where there is a consistent, long-term upward trend over time of a companys stock
price. Our stock price has declined significantly over the past several years due to market conditions and has recently been negatively affected by uncertainty surrounding the outcome of our litigation with Synopsys, Inc. (discussed above under Part
II, Item 1, Legal Proceedings).



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



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



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



| |  |  | compensation charges against us, which would negatively impact our operating results.
| | - |  | -------------------------------------------------------------------------------------



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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 has been and will likely continue to be adversely
affected.



Until April 2, 2006, we accounted for the
issuance of employee stock options under principles that do not require us to record compensation expense for options granted at fair market value. In December 2004, the FASB issued SFAS 123R, Share-Based Payment, which eliminates the
ability to account for share-based compensation transactions using APB 25, and generally requires instead that such transactions be accounted for using a fair-value based method. Under SFAS 123R, companies are required to recognize an expense for
compensation cost related to share-based payment arrangements including stock options and employee stock purchase plans. We were required to and did adopt 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 affect adversely our reported results of operations and hinder our
ability to achieve profitability. We are continuing to assess the full impact of the adoption of SFAS 123R on our business practices and, as part of that assessment, have changed our employee compensation practices by, for example, issuing more
restricted stock and less stock options. These changes could make it harder for us to retain existing employees and attract qualified candidates.



If our sales force compensation arrangements are not designed effectively, we may lose sales personnel and resources.



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



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



Periods of growth followed by efforts to realign costs
when revenue growth is slower than anticipated have placed a strain on our management, administrative and financial resources. For example, in fiscal year 2005 we decreased our workforce by 23 employees. Over time we have significantly expanded our
operations in the United States and internationally, and we plan to continue to expand the geographic scope of our operations. To pace the growth of our operations with the growth in our revenue, we must continue to improve administrative, financial
and operations systems, procedures and controls. Failure to improve our internal procedures and controls could hinder our efforts to adequately manage our growth, disrupt operations, lead to deficiencies in our internal controls and financial
reporting and ultimately harm our business.



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



To implement our business strategy successfully, we must provide products
that interface with the software of other electronic design automation software companies. Our competitors may not support our or our customers efforts to integrate our products into their existing design flows. We must develop cooperative
relationships with competitors so that they will work with us to integrate our software into customers design flow. Currently, our software is designed to interface with the existing software of Cadence, Synopsys and others. If we are unable
to convince customers to adopt our software products instead of those of competitors offering a broader set of products, or if we are unable to convince other software companies to work with us to



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interface our software with theirs to meet the demands of chip designers and manufacturers, our business and operating results will suffer.



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



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



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



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



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



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



| |  |  | present and future issued patents could be successfully challenged for validity and enforceability.
| | - |  | ---------------------------------------------------------------------------------------------------



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



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



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



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



| |  |  | competitors may independently develop similar technologies and software;
| | - |  | ------------------------------------------------------------------------



| |  |  | 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



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technologies could enable third parties to benefit from our technologies without paying us for it, which would harm our competitive position and market
share.



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



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



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



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



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



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



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



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



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



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



| |  |  | limit the ability of stockholders to call special meetings of stockholders; and
| | - |  | -------------------------------------------------------------------------------



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



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



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



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



We transact some portions of our business in various
foreign currencies. Accordingly, we are subject to exposure from adverse movements in foreign currency exchange rates. This exposure is primarily related to operating expenses in the United Kingdom, Europe and Japan, which are denominated in the
respective local currencies. As of October 1, 2006, we had no currency hedging contracts outstanding. We do not currently use financial instruments to hedge operating expenses denominated in Euro, British Pounds and Japanese Yen. While we
assess the need to utilize financial instruments to hedge currency exposures on an ongoing basis, our assessments may prove incorrect.



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



In May 2003, we issued $150.0 million principal amount of zero coupon convertible notes due May 2008. In May 2005, we repurchased, in privately negotiated
transactions, $44.5 million face amount (or approximately 29.7 percent of the total) of these notes at an average discount to face value of approximately 22 percent. In addition, in May 2006, we repurchased another $40.3 million face
amount (approximately 38.2 percent of the remaining principal) of these notes at an average discount to face value of approximately 13 percent. Magma spent an aggregate of approximately $34.8 million and $35.0 million, respectively, on the
repurchases in May 2005 and May 2006. The repurchases leave approximately $65.2 million aggregate principal amount of convertible subordinated notes outstanding. We will be required to repay that principal amount in full in May 2008 unless the
holders of those notes elect to convert them into our common stock before the repayment date. The conversion price of the notes is $22.86 per share. If the price of our common stock does not rise above that level, conversion of the notes is unlikely
and we would be required to repay the principal amount of the notes in cash. There have been previous quarters in which we have experienced shortfalls in revenue and earnings from levels expected by securities analysts and investors, which have had
an immediate and significant adverse effect on the trading price of our common stock. In addition, the stock market in recent years has experienced extreme price and trading volume fluctuations that often have been unrelated or disproportionate to
the operating performance of individual companies. These broad market fluctuations may adversely affect the price of our stock, regardless of our operating performance. Because the notes are convertible into shares of our common stock, volatility or
depressed prices for our common stock could have a similar effect on the trading price of the notes.



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



We entered into hedging arrangements with Credit Suisse First Boston International at the time we issued our convertible notes, with the objective of
reducing the potential dilutive effect of issuing common stock upon conversion of the notes. At the time of our May 2005 and May 2006 repurchases of our zero coupon convertible notes, portions of the hedging arrangements were retired. These hedging
arrangements are likely to have caused Credit Suisse First Boston International and others to take positions in our common stock in secondary market transactions or to enter into derivative transactions at or after the sale of the notes. Any market
participants entering into hedging arrangements are likely to modify their hedge positions from time to time prior to conversion or maturity of the notes by purchasing and selling shares of our common stock or other securities, which may increase
the volatility and reduce the market price of our common stock.



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



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



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



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



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



Our corporate headquarters and much of our research and development
operations are located in Santa Clara, 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 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|------- | -----------------------------------------------------------



Recent Sales of Unregistered Securities



We previously reported in a Form 8-K that we filed on June 30, 2005 that we issued a warrant to International Business Machines Corporation, or IBM, in
connection with and as partial consideration for certain technology licensed to us by IBM pursuant to a technology license agreement. The warrant allowed IBM to purchase 500,000 shares of our common stock at a price of $4.73 per share. The warrant
permitted IBM to exercise by payment of the purchase price in cash or pursuant to a cashless exercise provision.



On August 11, 2006, IBM exercised the warrant on a cashless exercise basis, whereby IBM used 350,995 shares otherwise issuable upon exercise of the
warrant, which shares were valued under the warrant at $6.738 per share, in payment of the exercise price. In connection with the exercise of the warrant, on August 11, 2006 we issued 149,005 shares of our common stock to IBM. We relied on the
exemption from the registration requirements of the Securities Act provided by Section 4(2) thereof in connection with the issuance of shares of common stock upon IBMs exercise of the warrant. Among other factors, we based our reliance on the
referenced exemption upon the representations made by IBM to us in the warrant and warrant agreement, IBMs status as both an accredited investor and a sophisticated investor, and the fact that the warrant and underlying common stock were
offered only to IBM and not to any other investors.



Purchases of Equity
Securities by the Issuer



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



|                              |  |                                  |   |  |                              |       |                                                                              |   |  |                                                                                       |    
|----------------------------- |  | -------------------------------- | - |  | ---------------------------- | ----- | ---------------------------------------------------------------------------- | - |  | ------------------------------------------------------------------------------------- | ---
|Period                        |  | Total Number of Shares Purchased |   |  | Average Price Paid per Share |       | Total Number ofShares Purchased asPart of PubliclyAnnounced Plans orPrograms |   |  | Approximate Dollar Value ofShares that May Yet BePurchased Under the Plansor Programs
|July 3  July 31, 2006        |  | 4,815                            |   |  | $                            | .0001 |                                                                              | 0 |  |                                                                                       | N/A
|August 1  August 31, 2006    |  | 22,165                           |   |  | $                            | 6.20  |                                                                              | 0 |  |                                                                                       | N/A
|September 1  October 1, 2006 |  | 408                              |   |  | $                            | .0001 |                                                                              | 0 |  |                                                                                       | N/A
|                              |  |                                  |   |  |                              |       |                                                                              |   |  |                                                                                       |    
|Total                         |  | 27,388                           | * |  | $                            | 5.02  |                                                                              | 0 |  |                                                                                       | N/A

---

|* | Includes 20,697 shares repurchased at $6.64, the fair market value on the repurchase date, in order to satisfy tax withholding obligations associated with the vesting of restricted
shares. The remaining shares that were repurchased were forfeitures of restricted stock as a result of employee terminations.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



At Magmas annual meeting of stockholders, held on August 29, 2006, the following matters were considered and voted upon:



Proposal 1. To elect three Class II directors, to hold office until the 2009
annual meeting of stockholders. The votes for such nominees were as follows:



|                     |  |            |  |         |  |           |  |             |  |                
|-------------------- |  | ---------- |  | ------- |  | --------- |  | ----------- |  | ---------------
|Nominee              |  | For        |  | Against |  | Withheld  |  | Abstentions |  | BrokerNon-Votes
|Timothy J. Ng        |  | 30,496,996 |  |        |  | 931,194   |  |            |  |               
|Chester J. Silvestri |  | 30,496,996 |  |        |  | 931,194   |  |            |  |               
|Susumu Kohyama       |  | 30,299,810 |  |        |  | 1,128,380 |  |            |  |               



At the annual meeting,
Timothy J. Ng, Chester J. Silvestri, and Susumu Kohyama were elected to serve as Class II directors until the 2009 annual meeting of stockholders, or until their successors have been elected by the stockholders or appointed by the Board of Directors
pursuant to the Companys bylaws.



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The Class I directors are Roy E. Jewell and Thomas M. Rohrs, and the Class III directors are Rajeev
Madhavan and Kevin C. Eichler, and their term of office as directors continued after the meeting.



Proposal 2. To ratify the appointment of Grant Thornton LLP as our independent accountants for the fiscal year ending April 1, 2007. The votes for
such proposal were as follows:



|           |  |         |  |          |  |             |  |                
|---------- |  | ------- |  | -------- |  | ----------- |  | ---------------
|For        |  | Against |  | Withheld |  | Abstentions |  | BrokerNon-Votes
|31,415,219 |  | 12,171  |  |         |  | 800         |  |               





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|ITEM 6. | EXHIBITS
|------- | --------



The following documents are filed as Exhibits to this report:



|               |  |                                                                                                                                                                                                    |  |                           |  |                |  |             |  |                  |  |  
|-------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- |  | -------------- |  | ----------- |  | ---------------- |  | -
|Exhibit Number |  | Exhibit Description                                                                                                                                                                                |  | Incorporated by Reference |  | Filed Herewith
|               |  | Form                                                                                                                                                                                               |  | File No.                  |  | Exhibit        |  | Filing Date | 
|               |  |                                                                                                                                                                                                    |  |                           |  |               
|2.1            |  | Agreement and Plan of Reorganization, dated February 23, 2004, by and among the Registrant, Motorcar Acquisition Corp., Auto Acquisition Corp., Mojave, inc. and Vivek Raghavan, as
Representative |  | 8-K                       |  | 000-33213      |  | 2.1         |  | May 14,2004      |  |  
|               |  |                                                                                                                                                                                                    |  |                           |  |               
|3.1            |  | Amended and Restated Certificate of Incorporation                                                                                                                                                  |  | 10-K                      |  | 000-33213      |  | 3.1         |  | June 28,2002     |  |  
|               |  |                                                                                                                                                                                                    |  |                           |  |               
|3.2            |  | Certificate of Correction to the Amended and Restated Certificate of Incorporation                                                                                                                 |  | 10-K                      |  | 000-33213      |  | 3.2         |  | June 28,2002     |  |  
|               |  |                                                                                                                                                                                                    |  |                           |  |               
|3.3            |  | Amended and Restated Bylaws                                                                                                                                                                        |  | 10-K                      |  | 000-33213      |  | 3.3         |  | June 28,2002     |  |  
|               |  |                                                                                                                                                                                                    |  |                           |  |               
|4.1            |  | Amended and Restated Investors Rights Agreement dated July 31, 2001, by and among the Registrant and the parties that are signatories thereto                                                     |  | 10-K                      |  | 000-33213      |  | 4.2         |  | June 28,2002     |  |  
|               |  |                                                                                                                                                                                                    |  |                           |  |               
|4.2            |  | Form of Common Stock Certificate                                                                                                                                                                   |  | S-1/A                     |  | 333-60838      |  | 4.1         |  | November 15,2001 |  |  
|               |  |                                                                                                                                                                                                    |  |                           |  |               
|10.1#          |  | Registrants 2001 Employee Stock Purchase Plan, as amended                                                                                                                                         |  |                           |  |                |  |             |  |                  |  | X
|               |  |                                                                                                                                                                                                    |  |                           |  |               
|31.1           |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                 |  |                           |  |                |  |             |  |                  |  | X
|               |  |                                                                                                                                                                                                    |  |                           |  |               
|31.2           |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                 |  |                           |  |                |  |             |  |                  |  | 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 Quarterly Report on Form 10-Q 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.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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SIGNATURES



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



|                        |  |  |  |    |  |                               |  |                                                                                                                                                       
|----------------------- |  |  |  | -- |  | ----------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------
|                        |  |  |  |    |  | MAGMA DESIGN AUTOMATION, INC.
|                        |  |  | 
|Dated: November 9, 2006 |  |  |  | By |  | /S/    PETER S.
TESHIMA      
|                        |  |  |  |    |  |                               |  | Peter S. Teshima, Senior Vice PresidentFinance and Chief Financial Officer (Principal Financial and Accounting Officer and Duly Authorized Signatory)



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EXHIBIT INDEX



TO



MAGMA DESIGN AUTOMATION, INC.



QUARTERLY REPORT ON FORM 10-Q



FOR THE QUARTER ENDED OCTOBER 1, 2006



|               |  |                                                                                                                                                                                                    |  |                           |  |                |  |             |  |                  |  |  
|-------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- |  | -------------- |  | ----------- |  | ---------------- |  | -
|Exhibit Number |  | Exhibit Description                                                                                                                                                                                |  | Incorporated by Reference |  | Filed Herewith
|               |  | Form                                                                                                                                                                                               |  | File No.                  |  | Exhibit        |  | Filing Date | 
|               |  |                                                                                                                                                                                                    |  |                           |  |               
|2.1            |  | Agreement and Plan of Reorganization, dated February 23, 2004, by and among the Registrant, Motorcar Acquisition Corp., Auto Acquisition Corp., Mojave, inc. and Vivek Raghavan, as
Representative |  | 8-K                       |  | 000-33213      |  | 2.1         |  | May 14,2004      |  |  
|               |  |                                                                                                                                                                                                    |  |                           |  |               
|3.1            |  | Amended and Restated Certificate of Incorporation                                                                                                                                                  |  | 10-K                      |  | 000-33213      |  | 3.1         |  | June 28,2002     |  |  
|               |  |                                                                                                                                                                                                    |  |                           |  |               
|3.2            |  | Certificate of Correction to the Amended and Restated Certificate of Incorporation                                                                                                                 |  | 10-K                      |  | 000-33213      |  | 3.2         |  | June 28,2002     |  |  
|               |  |                                                                                                                                                                                                    |  |                           |  |               
|3.3            |  | Amended and Restated Bylaws                                                                                                                                                                        |  | 10-K                      |  | 000-33213      |  | 3.3         |  | June 28,2002     |  |  
|               |  |                                                                                                                                                                                                    |  |                           |  |               
|4.1            |  | Amended and Restated Investors Rights Agreement dated July 31, 2001, by and among the Registrant and the parties that are signatories thereto                                                     |  | 10-K                      |  | 000-33213      |  | 4.2         |  | June 28,2002     |  |  
|               |  |                                                                                                                                                                                                    |  |                           |  |               
|4.2            |  | Form of Common Stock Certificate                                                                                                                                                                   |  | S-1/A                     |  | 333-60838      |  | 4.1         |  | November 15,2001 |  |  
|               |  |                                                                                                                                                                                                    |  |                           |  |               
|10.1#          |  | Registrants 2001 Employee Stock Purchase Plan, as amended                                                                                                                                         |  |                           |  |                |  |             |  |                  |  | X
|               |  |                                                                                                                                                                                                    |  |                           |  |               
|31.1           |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                 |  |                           |  |                |  |             |  |                  |  | X
|               |  |                                                                                                                                                                                                    |  |                           |  |               
|31.2           |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                 |  |                           |  |                |  |             |  |                  |  | 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

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|# | Indicates management contract or compensatory plan or arrangement.
|- | ------------------------------------------------------------------



|* | As contemplated by SEC Release No. 33-8212, these exhibits are furnished with this Quarterly Report on Form 10-Q 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.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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