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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q





(Mark One)

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

For the quarterly period ended November 1, 2009

or



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

For the transition period from              to
            .

Commission File No.: 0-33213





MAGMA DESIGN AUTOMATION, INC.

(Exact name of
registrant as specified in its charter)







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

1650 Technology Drive,

San Jose, California 95110

(Address of principal
executive offices)

Telephone: (408) 565-7500

(Registrants telephone number, including area code)





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

Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to
submit and post such files).    Yes   ̈    No   ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller
reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):



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

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

On December 8, 2009, 50,533,938 shares of the registrants Common Stock, $.0001 par value were outstanding.









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##### Table of Contents

MAGMA DESIGN AUTOMATION, INC.

FORM 10-Q

QUARTERLY PERIOD ENDED NOVEMBER 1, 2009

INDEX



|                              |  |                                                                                                                           |  |     
|----------------------------- |  | ------------------------------------------------------------------------------------------------------------------------- |  | ----
|                              |  |                                                                                                                           |  | Page
|Part I: Financial Information |  | 2                                                                                                                        
|                              |  |                                                                                                                          
|Item 1:                       |  | Financial Statements (unaudited)                                                                                          |  | 2   
|                              |  | Condensed Consolidated Balance Sheets at November 1, 2009 and May 3, 2009                                                 |  | 2   
|                              |  | Condensed Consolidated Statements of Operations for the Three and Six Months Ended November 
1, 2009 and November 2, 2008 |  | 3   
|                              |  | Condensed Consolidated Statements of Cash Flows for the Six Months Ended November 
1, 2009 and November 2, 2008           |  | 4   
|                              |  | Notes to Condensed Consolidated Financial Statements                                                                      |  | 5   
|Item 2:                       |  | Managements Discussion and Analysis of Financial Condition and Results of
Operations                                     |  | 25  
|Item 3:                       |  | Quantitative and Qualitative Disclosures About Market Risk                                                                |  | 46  
|Item 4:                       |  | Controls and Procedures                                                                                                   |  | 47  
|                              | 
|Part II: Other Information    |  | 48                                                                                                                       
|                              |  |                                                                                                                          
|Item 1:                       |  | Legal Proceedings                                                                                                         |  | 48  
|Item 1A:                      |  | Risk Factors                                                                                                              |  | 48  
|Item 2:                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                               |  | 66  
|Item 6:                       |  | Exhibits                                                                                                                  |  | 67  
|                              | 
|Signatures                    |  | 68                                                                                                                       
|                              | 
|Exhibit Index                 |  | 69                                                                                                                       



1



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##### Table of Contents

PART 1: FINANCIAL INFORMATION



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

MAGMA DESIGN AUTOMATION, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)



|                                                                                                                           |  |                  |          |   |                           |   |          |  
|-------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | -------- | - | ------------------------- | - | -------- | -
|                                                                                                                           |  | November 1, 2009 |          |   | May 3, 2009(as adjusted)1 |  
|ASSETS                                                                                                                     |  |                  |          |   |                           |   |          |  
|Current assets:                                                                                                            |  |                  |          |   |                           |   |          |  
|Cash and cash equivalents                                                                                                  |  | $                | 47,035   |   |                           | $ | 32,888   |  
|Restricted cash                                                                                                            |  |                  | 376      |   |                           |   | 9,215    |  
|Short-term investments, pledged as collateral for secured credit line                                                      |  |                  | 16,909   |   |                           |   |         |  
|Accounts receivable, net                                                                                                   |  |                  | 13,394   |   |                           |   | 26,635   |  
|Prepaid expenses and other current assets                                                                                  |  |                  | 5,591    |   |                           |   | 5,443    |  
|                                                                                                                           |  |                  |          |   |                           |   |          |  
|Total current assets                                                                                                       |  |                  | 83,305   |   |                           |   | 74,181   |  
|Property and equipment, net                                                                                                |  |                  | 7,531    |   |                           |   | 10,443   |  
|Intangible assets, net                                                                                                     |  |                  | 9,370    |   |                           |   | 12,170   |  
|Goodwill                                                                                                                   |  |                  | 6,731    |   |                           |   | 6,666    |  
|Long-term investments, pledged as collateral for secured credit line                                                       |  |                  |         |   |                           |   | 17,908   |  
|Other assets                                                                                                               |  |                  | 6,086    |   |                           |   | 5,665    |  
|                                                                                                                           |  |                  |          |   |                           |   |          |  
|Total assets                                                                                                               |  | $                | 113,023  |   |                           | $ | 127,033  |  
|                                                                                                                           |  |                  |          |   |                           |   |          |  
|LIABILITIES AND STOCKHOLDERS DEFICIT                                                                                       |  |                  |          |   |                           |   |          |  
|Current liabilities:                                                                                                       |  |                  |          |   |                           |   |          |  
|Accounts payable                                                                                                           |  | $                | 2,384    |   |                           | $ | 1,212    |  
|Accrued expenses                                                                                                           |  |                  | 10,216   |   |                           |   | 15,353   |  
|Secured credit line                                                                                                        |  |                  | 11,373   |   |                           |   | 12,451   |  
|Revolving note                                                                                                             |  |                  | 12,200   |   |                           |   | 12,181   |  
|Current portion of other long-term liabilities                                                                             |  |                  | 2,206    |   |                           |   | 2,679    |  
|Deferred revenue                                                                                                           |  |                  | 28,201   |   |                           |   | 35,779   |  
|Convertible notes, net of debt discount of $573 at November 1, 2009                                                        |  |                  | 22,677   |   |                           |   |         |  
|                                                                                                                           |  |                  |          |   |                           |   |          |  
|Total current liabilities                                                                                                  |  |                  | 89,257   |   |                           |   | 79,655   |  
|Convertible notes, net of debt (premium)/discount of ($1,764) and $2,340 at November 1, 2009 and May 3, 2009,
respectively |  |                  | 28,453   |   |                           |   | 47,600   |  
|Long-term tax liabilities, less current portion                                                                            |  |                  | 1,947    |   |                           |   | 9,729    |  
|Other long-term liabilities                                                                                                |  |                  | 1,767    |   |                           |   | 3,160    |  
|                                                                                                                           |  |                  |          |   |                           |   |          |  
|Total liabilities                                                                                                          |  |                  | 121,424  |   |                           |   | 140,144  |  
|                                                                                                                           |  |                  |          |   |                           |   |          |  
|Commitments and contingencies (Note 14)                                                                                    |  |                  |          |   |                           |   |          |  
|Stockholders deficit:                                                                                                      |  |                  |          |   |                           |   |          |  
|Common stock                                                                                                               |  |                  | 5        |   |                           |   | 5        |  
|Additional paid-in capital                                                                                                 |  |                  | 409,697  |   |                           |   | 405,342  |  
|Accumulated deficit                                                                                                        |  |                  | (380,458 | ) |                           |   | (380,490 | )
|Treasury stock at cost                                                                                                     |  |                  | (32,615  | ) |                           |   | (32,615  | )
|Accumulated other comprehensive loss                                                                                       |  |                  | (5,030   | ) |                           |   | (5,353   | )
|                                                                                                                           |  |                  |          |   |                           |   |          |  
|Total stockholders deficit                                                                                                 |  |                  | (8,401   | ) |                           |   | (13,111  | )
|                                                                                                                           |  |                  |          |   |                           |   |          |  
|Total liabilities and stockholders deficit                                                                                 |  | $                | 113,023  |   |                           | $ | 127,033  |  
|                                                                                                                           |  |                  |          |   |                           |   |          |  



|1 | May 3, 2009 adjusted for adoption of ASC 470-50. See Note 1.
|- | ------------------------------------------------------------

See accompanying notes to unaudited condensed consolidated financial statements.



2



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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              |  
|                                                   |  | November 1,2009    |        |   | November 2,2008(as adjusted)1 |   |         | November 1,2009 |  |   | November 2,2008(as adjusted)1 |  
|Revenue:                                           |  |                    |        |   |                               |   |         |                 |  |   |                               |   |  |   |         |  
|Licenses                                           |  | $                  | 13,237 |   |                               | $ | 19,742  |                 |  | $ | 27,016                        |   |  | $ | 45,838  |  
|Bundled licenses and services                      |  |                    | 8,192  |   |                               |   | 7,486   |                 |  |   | 15,769                        |   |  |   | 17,416  |  
|Services                                           |  |                    | 8,233  |   |                               |   | 9,230   |                 |  |   | 15,718                        |   |  |   | 18,946  |  
|                                                   |  |                    |        |   |                               |   |         |                 |  |   |                               |   |  |   |         |  
|Total revenue                                      |  |                    | 29,662 |   |                               |   | 36,458  |                 |  |   | 58,503                        |   |  |   | 82,200  |  
|                                                   |  |                    |        |   |                               |   |         |                 |  |   |                               |   |  |   |         |  
|Cost of revenue:                                   |  |                    |        |   |                               |   |         |                 |  |   |                               |   |  |   |         |  
|Licenses                                           |  |                    | 782    |   |                               |   | 4,958   |                 |  |   | 1,483                         |   |  |   | 9,767   |  
|Bundled licenses and services                      |  |                    | 1,077  |   |                               |   | 2,346   |                 |  |   | 2,053                         |   |  |   | 4,865   |  
|Services                                           |  |                    | 3,322  |   |                               |   | 5,048   |                 |  |   | 6,482                         |   |  |   | 10,050  |  
|                                                   |  |                    |        |   |                               |   |         |                 |  |   |                               |   |  |   |         |  
|Total cost of revenue                              |  |                    | 5,181  |   |                               |   | 12,352  |                 |  |   | 10,018                        |   |  |   | 24,682  |  
|                                                   |  |                    |        |   |                               |   |         |                 |  |   |                               |   |  |   |         |  
|Gross profit                                       |  |                    | 24,481 |   |                               |   | 24,106  |                 |  |   | 48,485                        |   |  |   | 57,518  |  
|                                                   |  |                    |        |  
|Operating expenses:                                |  |                    |        |   |                               |   |         |                 |  |   |                               |   |  |   |         |  
|Research and development                           |  |                    | 11,728 |   |                               |   | 19,047  |                 |  |   | 22,925                        |   |  |   | 39,180  |  
|Sales and marketing                                |  |                    | 9,933  |   |                               |   | 15,474  |                 |  |   | 19,703                        |   |  |   | 32,277  |  
|General and administrative                         |  |                    | 4,530  |   |                               |   | 6,743   |                 |  |   | 8,913                         |   |  |   | 13,695  |  
|Amortization of intangible assets                  |  |                    | 305    |   |                               |   | 838     |                 |  |   | 610                           |   |  |   | 2,282   |  
|Restructuring charge                               |  |                    | 247    |   |                               |   | 3,307   |                 |  |   | 950                           |   |  |   | 5,327   |  
|                                                   |  |                    |        |   |                               |   |         |                 |  |   |                               |   |  |   |         |  
|Total operating expenses                           |  |                    | 26,743 |   |                               |   | 45,409  |                 |  |   | 53,101                        |   |  |   | 92,761  |  
|                                                   |  |                    |        |   |                               |   |         |                 |  |   |                               |   |  |   |         |  
|Operating loss                                     |  |                    | (2,262 | ) |                               |   | (21,303 | )               |  |   | (4,616                        | ) |  |   | (35,243 | )
|                                                   |  |                    |        |  
|Other income (expense):                            |  |                    |        |   |                               |   |         |                 |  |   |                               |   |  |   |         |  
|Interest income                                    |  |                    | 60     |   |                               |   | 193     |                 |  |   | 105                           |   |  |   | 379     |  
|Interest and amortization of debt discount expense |  |                    | (1,105 | ) |                               |   | (1,062  | )               |  |   | (2,262                        | ) |  |   | (2,046  | )
|Valuation gain (loss), net                         |  |                    | 174    |   |                               |   | (1,679  | )               |  |   | 326                           |   |  |   | (1,679  | )
|Other expense, net                                 |  |                    | (185   | ) |                               |   | 705     |                 |  |   | (787                          | ) |  |   | 609     |  
|                                                   |  |                    |        |   |                               |   |         |                 |  |   |                               |   |  |   |         |  
|Other income (expense), net                        |  |                    | (1,056 | ) |                               |   | (1,843  | )               |  |   | (2,618                        | ) |  |   | (2,737  | )
|                                                   |  |                    |        |   |                               |   |         |                 |  |   |                               |   |  |   |         |  
|Net loss before income taxes                       |  |                    | (3,318 | ) |                               |   | (23,146 | )               |  |   | (7,234                        | ) |  |   | (37,980 | )
|Benefit from (provision for) income taxes          |  |                    | 7,662  |   |                               |   | (3,130  | )               |  |   | 7,266                         |   |  |   | (3,569  | )
|                                                   |  |                    |        |   |                               |   |         |                 |  |   |                               |   |  |   |         |  
|Net income (loss)                                  |  | $                  | 4,344  |   |                               | $ | (26,276 | )               |  | $ | 32                            |   |  | $ | (41,549 | )
|                                                   |  |                    |        |   |                               |   |         |                 |  |   |                               |   |  |   |         |  
|Net income (loss) per share, basic                 |  | $                  | 0.09   |   |                               | $ | (0.60   | )               |  | $ |                              |   |  | $ | (0.95   | )
|                                                   |  |                    |        |   |                               |   |         |                 |  |   |                               |   |  |   |         |  
|Net income (loss) per share, diluted               |  | $                  | 0.08   |   |                               | $ | (0.60   | )               |  | $ |                              |   |  | $ | (0.95   | )
|                                                   |  |                    |        |   |                               |   |         |                 |  |   |                               |   |  |   |         |  
|Shares used in per share calculation, basic        |  |                    | 48,995 |   |                               |   | 43,908  |                 |  |   | 48,427                        |   |  |   | 43,647  |  
|                                                   |  |                    |        |   |                               |   |         |                 |  |   |                               |   |  |   |         |  
|Shares used in per share calculation, diluted      |  |                    | 59,239 |   |                               |   | 43,908  |                 |  |   | 49,547                        |   |  |   | 43,647  |  
|                                                   |  |                    |        |   |                               |   |         |                 |  |   |                               |   |  |   |         |  



|1 | November 2, 2008 adjusted for adoption of ASC 470-50. See Note 1.
|- | -----------------------------------------------------------------

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 |       
|                                                                                         |  | November 1,2009  |        |   | November 2,2008(as adjusted)1 |  
|Cash flows from operating activities:                                                    |  |                  |        |   |                               |   |         |  
|Net Income (loss)                                                                        |  | $                | 32     |   |                               | $ | (41,549 | )
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |  |                  |        |   |                               |   |         |  
|Depreciation                                                                             |  |                  | 3,513  |   |                               |   | 4,365   |  
|Amortization of intangible assets                                                        |  |                  | 2,819  |   |                               |   | 14,477  |  
|Provision for doubtful accounts                                                          |  |                  | 184    |   |                               |   | 514     |  
|Amortization of debt discount and debt issuance costs                                    |  |                  | 1,161  |   |                               |   | 1,265   |  
|Amortization of debt premium                                                             |  |                  | (51    | ) |                               |   |        |  
|Gain on extinguishment of convertible notes                                              |  |                  | (278   | ) |                               |   |        |  
|Loss on auction rate securities                                                          |  |                  | 834    |   |                               |   | 2,755   |  
|Gain on purchased put option                                                             |  |                  | (1,159 | ) |                               |   | (1,076  | )
|Loss on strategic equity investments                                                     |  |                  | 232    |   |                               |   | 82      |  
|Stock-based compensation                                                                 |  |                  | 6,941  |   |                               |   | 10,030  |  
|Restructuring charges                                                                    |  |                  | (950   | ) |                               |   |        |  
|Other non-cash items                                                                     |  |                  | 15     |   |                               |   | 1,283   |  
|Changes in operating assets and liabilities, net of effect of acquisitions:              |  |                  |        |   |                               |   |         |  
|Accounts receivable                                                                      |  |                  | 13,043 |   |                               |   | 1,356   |  
|Prepaid expenses and other assets                                                        |  |                  | 103    |   |                               |   | 1,775   |  
|Accounts payable                                                                         |  |                  | 1,172  |   |                               |   | (349    | )
|Accrued expenses                                                                         |  |                  | (2,674 | ) |                               |   | (2,303  | )
|Deferred revenue                                                                         |  |                  | (7,492 | ) |                               |   | (709    | )
|Other long-term liabilities                                                              |  |                  | (7,854 | ) |                               |   | 790     |  
|                                                                                         |  |                  |        |   |                               |   |         |  
|Net cash flows provided by (used in) operating activities                                |  |                  | 9,591  |   |                               |   | (7,294  | )
|                                                                                         |  |                  |        |   |                               |   |         |  
|Cash flows from investing activities:                                                    |  |                  |        |   |                               |   |         |  
|Cash paid for business and asset acquisitions, net of cash acquired                      |  |                  | (1,516 | ) |                               |   | (3,503  | )
|Purchase of property and equipment                                                       |  |                  | (689   | ) |                               |   | (257    | )
|Proceeds from maturities and sale of available-for-sale investments                      |  |                  | 1,325  |   |                               |   | 5,000   |  
|Purchase of strategic investments                                                        |  |                  |       |   |                               |   | (1,801  | )
|Restricted cash                                                                          |  |                  | 1,339  |   |                               |   | (8,844  | )
|                                                                                         |  |                  |        |   |                               |   |         |  
|Net cash flows provided by (used in) investing activities                                |  |                  | 459    |   |                               |   | (9,405  | )
|                                                                                         |  |                  |        |   |                               |   |         |  
|Cash flows from financing activities:                                                    |  |                  |        |   |                               |   |         |  
|Proceeds from issuance of common stock, net                                              |  |                  | 1,178  |   |                               |   | 1,932   |  
|Issuance costs related to the 6% 2014 Notes                                              |  |                  | (1,828 | ) |                               |   |        |  
|Retirement of restricted stock                                                           |  |                  | (704   | ) |                               |   | (987    | )
|Proceeds from revolving note                                                             |  |                  | 19     |   |                               |   | 13,000  |  
|Proceeds from secured credit line                                                        |  |                  |       |   |                               |   | 12,550  |  
|Repayment of lease obligations                                                           |  |                  | (1,422 | ) |                               |   | (1,171  | )
|Repayment of convertible notes                                                           |  |                  |       |   |                               |   | (15,216 | )
|Repayment of secured credit line                                                         |  |                  | (1,080 | ) |                               |   |        |  
|Restricted cash                                                                          |  |                  | 7,500  |   |                               |   |        |  
|                                                                                         |  |                  |        |   |                               |   |         |  
|Net cash provided by financing activities                                                |  |                  | 3,663  |   |                               |   | 10,108  |  
|                                                                                         |  |                  |        |   |                               |   |         |  
|Effect of foreign currency translation changes on cash and cash equivalents              |  |                  | 434    |   |                               |   | (285    | )
|                                                                                         |  |                  |        |   |                               |   |         |  
|Net change in cash and cash equivalents                                                  |  |                  | 14,147 |   |                               |   | (6,876  | )
|Cash and cash equivalents, beginning of period                                           |  |                  | 32,888 |   |                               |   | 39,629  |  
|                                                                                         |  |                  |        |   |                               |   |         |  
|Cash and cash equivalents, end of period                                                 |  | $                | 47,035 |   |                               | $ | 32,753  |  
|                                                                                         |  |                  |        |   |                               |   |         |  



|1 | November 2, 2008 adjusted for adoption of ASC 470-50. See Note 1.
|- | -----------------------------------------------------------------

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 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 May 2, 2010. The accompanying unaudited condensed consolidated financial
statements should be read in conjunction with the Companys Form 10-K for the year ended May 3, 2009, as filed with the SEC on July 20, 2009. The accompanying unaudited condensed consolidated balance sheet at May 3, 2009 is
derived from audited consolidated financial statements at that date.

Preparation of condensed 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 condensed 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 condensed 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 prior period amounts have been reclassified to conform to current
classifications. A new caption, current portion of other long-term liabilities, has been added to the condensed consolidated balance sheets, and certain prior period amounts have been reclassified from accrued expenses into current portion of
other long-term liabilities. These reclassifications did not change the previously reported net loss, net change in cash and cash equivalents or stockholders deficit.

Adoption of New Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (FASB) issued SFAS No. 168, The FASB Accounting Standards Codification (the Codification or
ASC) and the Hierarchy of Generally Accepted Accounting PrinciplesA Replacement of FASB Statement No. 162, codified as ASC 105, Generally Accepted Accounting Principles, which established the Codification as the
official single source of authoritative GAAP to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. This
Codification is effective for financial statements issued for interim and annual periods ending after September 15, 2009. On the effective date of the Codification, all existing non-SEC accounting and reporting standards were superseded by the
Codification and any accounting literature not included in the Codification is no longer authoritative. Following the



5



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##### Table of Contents

MAGMA DESIGN AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



Codification, the FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issue Task Force abstracts. Instead, it will issue accounting standard updates
which will serve to update the Codification, provide background information about guidance and provide the basis for conclusion on the changes to the Codification. Therefore, beginning with this quarterly report for the quarter ended
November 1, 2009, all references made to GAAP in the Companys notes to condensed consolidated financial statements use the new Codification numbering system. The Codification does not change or alter existing GAAP and, therefore, did not
have an impact on our financial statements.

On May 4, 2009, the Company adopted ASC 470-20, Debt with Conversion and
Other Options (ASC 470-20),which clarifies the accounting for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement). ASC 470-20 specifies that issuers of such instruments
should separately account for the liability and equity components in a manner that reflects the entitys nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. ASC 470-20 requires retrospective application of
its provisions. The Company has determined this new guidance affects its 2% Convertible Senior Notes issued in March 2007 and due March 2010 (2010 Notes). Upon adoption of ASC 470-20, with the assistance of a third party valuation firm,
the Company estimated the fair value of the 2010 Notes as of the date of issuance to be $43.1 million, assuming a 7.5% non-convertible borrowing rate. The non-convertible borrowing rate was determined utilizing debt yields of publicly traded debt of
comparable companies. The difference between the fair value and the net proceeds of the notes was $4.8 million. This amount was retrospectively recorded as additional debt discount and as an increase to additional paid-in capital as of the issuance
date. The discount is being accreted to interest expense over the three-year period to the due date of the notes in 2010 resulting in an increase in non-cash interest expense in prior and future periods.

As further described in Note 10, Convertible Notes, Current and Long-Term on September 11, 2009 the Company completed an
exchange offer pursuant to which an aggregate principal amount of $26.7 million of its 2010 Notes were exchanged for $26.7 million principal amount of newly issued 6% Convertible Senior Notes due 2014 (2014 Notes). The exchange offer was
treated as an extinguishment of the $26.7 million principal amount of the 2010 Notes. In conjunction with this exchange, the Company recognized a net gain of $0.3 million on the extinguishment of the 2010 Notes. The net gain is comprised of a $1.2
million gain on extinguishment of the 2010 Notes; offset by the write off of approximately $0.8 million and $0.1 million debt discount and issuance costs, respectively, related to the 2010 Notes exchanged. As of November 1, 2009, the remaining
balance of the debt discount and unamortized debt issuance costs related to the 2010 Notes were $0.6 million and $0.1 million, respectively.

The carrying amounts of the 2010 Notes are as follows (in thousands):



|                                                                                                          |  |                 |        |   |             |   |        |             |  |   |        |  
|--------------------------------------------------------------------------------------------------------- |  | --------------- | ------ | - | ----------- | - | ------ | ----------- |  | - | ------ | -
|                                                                                                          |  | Balance at      |       
|                                                                                                          |  | November 1,2009 |        |   | May 3, 2009 |  
|                                                                                                          |  |                 |        |   | As Reported |   |        | As Adjusted | 
|Equity component of 2% Convertible Senior Notes net of issuance costs of $45 (additional paid-in capital) |  | $               | 1,568  |   |             | $ |       |             |  | $ | 4,628  |  
|                                                                                                          |  |                 |        |   |             |   |        |             |  |   |        |  
|Principal amount of 2% Convertible Senior Notes                                                           |  | $               | 23,250 |   |             | $ | 49,939 |             |  | $ | 49,939 |  
|Unamortized discount of 2% Convertible Senior Notes                                                       |  |                 | (573   | ) |             |   | (718   | )           |  |   | (2,339 | )
|                                                                                                          |  |                 |        |   |             |   |        |             |  |   |        |  
|Liability component of 2% Convertible Senior Notes                                                        |  | $               | 22,677 |   |             | $ | 49,221 |             |  | $ | 47,600 |  
|                                                                                                          |  |                 |        |   |             |   |        |             |  |   |        |  



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##### Table of Contents

MAGMA DESIGN AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



The unamortized discount and issuance costs will be amortized through May 2010. Interest
and amortization expense of the 2010 Notes, net of the 2010 Note exchange and write-off of the debt discount and issuance costs, recognized in the Consolidated Statements of Income are as follows (in thousands):



|                                             |  |                    |     |   |                  |   |     |                 |  |   |                 |   |  |   |       |  
|-------------------------------------------- |  | ------------------ | --- | - | ---------------- | - | --- | --------------- |  | - | --------------- | - |  | - | ----- | -
|                                             |  | Three Months Ended |     |   | Six Months Ended |  
|                                             |  | November 1,2009    |     |   | November 2,2008  |   |     | November 1,2009 |  |   | November 2,2008 |  
|Cash interest expense recognized (2% coupon) |  | $                  | 179 |   |                  | $ | 247 |                 |  | $ | 425             |   |  | $ | 493   |  
|Non-cash interest expense recognized         |  |                    |     |   |                  |   |     |                 |  |   |                 |   |  |   |       |  
|Amortization of discount                     |  |                    | 402 |   |                  |   | 542 |                 |  |   | 944             |   |  |   | 1,077 |  
|Amortization of issuance costs               |  |                    | 70  |   |                  |   | 94  |                 |  |   | 165             |   |  |   | 188   |  
|                                             |  |                    |     |   |                  |   |     |                 |  |   |                 |   |  |   |       |  
|                                             |  | $                  | 651 |   |                  | $ | 883 |                 |  | $ | 1,534           |   |  | $ | 1,758 |  
|                                             |  |                    |     |   |                  |   |     |                 |  |   |                 |   |  |   |       |  
|Effective interest rate                      |  |                    | 7.4 | % |                  |   | 7.1 | %               |  |   | 7.2             | % |  |   | 7.0   | %
|                                             |  |                    |     |   |                  |   |     |                 |  |   |                 |   |  |   |       |  

The following table presents the effect of the retrospective application of ASC
470-20 made to the Companys previously reported Consolidated Statements of Income for the three and six months ended November 2, 2008 (in thousands):



|                                                   |  |                                    |         |   |                                  |   |         |             |  |   |             |   |  |   |         |  
|-------------------------------------------------- |  | ---------------------------------- | ------- | - | -------------------------------- | - | ------- | ----------- |  | - | ----------- | - |  | - | ------- | -
|                                                   |  | Three Months EndedNovember 2, 2008 |         |   | Six Months EndedNovember 2, 2008 |  
|                                                   |  | As Reported                        |         |   | As Adjusted                      |   |         | As Reported |  |   | As Adjusted |  
|Operating loss                                     |  | $                                  | (21,303 | ) |                                  | $ | (21,303 | )           |  | $ | (35,243     | ) |  | $ | (35,243 | )
|Other income (expense):                            |  |                                    |         |   |                                  |   |         |             |  |   |             |   |  |   |         |  
|Interest income                                    |  |                                    | 193     |   |                                  |   | 193     |             |  |   | 379         |   |  |   | 379     |  
|Interest and amortization of debt discount expense |  |                                    | (692    | ) |                                  |   | (1,062  | )           |  |   | (1,313      | ) |  |   | (2,046  | )
|Valuation gain (loss), net                         |  |                                    | (1,679  | ) |                                  |   | (1,679  | )           |  |   | (1,679      | ) |  |   | (1,679  | )
|Other income (expense), net                        |  |                                    | 705     |   |                                  |   | 705     |             |  |   | 609         |   |  |   | 609     |  
|                                                   |  |                                    |         |   |                                  |   |         |             |  |   |             |   |  |   |         |  
|Other income (expense), net                        |  |                                    | (1,473  | ) |                                  |   | (1,843  | )           |  |   | (2,004      | ) |  |   | (2,737  | )
|                                                   |  |                                    |         |   |                                  |   |         |             |  |   |             |   |  |   |         |  
|Net loss before income taxes                       |  |                                    | (22,776 | ) |                                  |   | (23,146 | )           |  |   | (37,247     | ) |  |   | (37,980 | )
|Provision for income taxes                         |  |                                    | (3,130  | ) |                                  |   | (3,130  | )           |  |   | (3,569      | ) |  |   | (3,569  | )
|                                                   |  |                                    |         |   |                                  |   |         |             |  |   |             |   |  |   |         |  
|Net loss                                           |  | $                                  | (25,906 | ) |                                  | $ | (26,276 | )           |  | $ | (40,816     | ) |  | $ | (41,549 | )
|                                                   |  |                                    |         |   |                                  |   |         |             |  |   |             |   |  |   |         |  
|Net loss per share basic and diluted               |  | $                                  | (0.59   | ) |                                  | $ | (0.60   | )           |  | $ | (0.94       | ) |  | $ | (0.95   | )
|                                                   |  |                                    |         |   |                                  |   |         |             |  |   |             |   |  |   |         |  

The following table presents the effect of the retrospective application of ASC
470-20 made to the Companys previously reported Consolidated Balance Sheet as of May 3, 2009 (in thousands):



|                                           |  |             |          |   |             |   |          |  
|------------------------------------------ |  | ----------- | -------- | - | ----------- | - | -------- | -
|                                           |  | May 3, 2009 |         
|                                           |  | As Reported |          |   | As Adjusted |  
|Other assets                               |  | $           | 5,707    |   |             | $ | 5,665    |  
|Total Assets                               |  | $           | 127,075  |   |             | $ | 127,033  |  
|Convertible notes                          |  | $           | 49,221   |   |             | $ | 47,600   |  
|Additional paid-in capital                 |  | $           | 400,713  |   |             | $ | 405,342  |  
|Accumulated deficit                        |  | $           | (377,440 | ) |             | $ | (380,490 | )
|Total stockholders deficit                 |  | $           | (14,690  | ) |             | $ | (13,111  | )
|Total liabilities and stockholders deficit |  | $           | 127,075  |   |             | $ | 127,033  |  



7



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##### Table of Contents

MAGMA DESIGN AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



The following table presents the effect of the retrospective application of ASC 470-20
and related tax effects made to the Companys previously reported Consolidated Statement of Cash Flows for the six months ended November 2, 2008 (in thousands):



|                                                      |  |                                  |         |   |             |   |         |  
|----------------------------------------------------- |  | -------------------------------- | ------- | - | ----------- | - | ------- | -
|                                                      |  | Six Months EndedNovember 2, 2008 |        
|                                                      |  | As Reported                      |         |   | As Adjusted |  
|Net Loss                                              |  | $                                | (40,816 | ) |             | $ | (41,549 | )
|Amortization of debt discount and debt issuance costs |  | $                                | 528     |   |             | $ | 1,265   |  
|Net cash flows used in operating activities           |  | $                                | (7,294  | ) |             | $ | (7,294  | )

As of November 1, 2009, the if-converted value of the 2010 Notes did not exceed
their principal amount.

Recently issued accounting pronouncements

In January 2009, the Securities and Exchange Commission issued Release No. 33-9002, Interactive Data to Improve Financial
Reporting. The final rule requires companies to provide their financial statements and financial statement schedules to the Securities and Exchange Commission and on their corporate websites in interactive data format using the eXtensible
Business Reporting Language (XBRL). The rule was adopted by the Securities and Exchange Commission to improve the ability of financial statement users to access and analyze financial data. The Securities and Exchange Commission adopted a
phase-in schedule indicating when registrants must furnish interactive data. Under this schedule, the Company will be required to submit filings with financial statement information using XBRL commencing with its July 31, 2011 quarterly report
on Form 10-Q. The Company is currently evaluating the impact of XBRL reporting on its financial reporting process.

In June
2009, the FASB issued an update to ASC 810, Consolidation,which modifies how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The
modification clarifies that the determination of whether a company is required to consolidate an entity is based on, among other things, an entitys purpose and design and a companys ability to direct the activities of the entity that
most significantly impact the entitys economic performance. This modification to ASC 810 requires an ongoing reassessment of whether a company is the primary beneficiary of a variable interest entity. It also requires additional disclosures
about a companys involvement in variable interest entities and any significant changes in risk exposure due to that involvement. This modification to ASC 810 is effective for fiscal years beginning after November 15, 2009 and is effective
for the Company on May 3, 2010. The Company expects this modification may have an impact on the Companys financial position and results of operations in future periods, but the nature and magnitude of the specific effects will depend upon
the nature, terms and size of the transactions the Company consummates in the future.

In October 2009, the FASB issued an
amendment to ASC 605-25, Multiple Element Arrangements, which modifies how a company separates consideration in multiple-delivery arrangements. The amendment establishes a selling price hierarchy for determining the selling price of a
deliverable. The amendment also clarifies the allocation of revenue is based on entity-specific assumptions rather than assumptions of a marketplace participant. The amendment also eliminates the residual method of allocating revenue and requires
the use the relative selling price method. This amendment to ASC 605-25 is effective for new revenue arrangements entered into or modified in fiscal years beginning after June 15, 2010. Early adoption is permitted. The adoption of this
amendment is not expected to have a material impact on the Companys consolidated financial statements.

In October 2009,
the FASB issued an amendment to ASC 985-605, Software-Revenue Recognition, which modifies the accounting model for revenue arrangements that include both tangible products and software



8



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##### Table of Contents

MAGMA DESIGN AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



elements. This amendment to ASC 985-605 is effective for new revenue arrangements entered into or modified in fiscal years beginning after June 15, 2010. Early adoption is permitted. The
Company does not sell products that include both tangible products and software elements. Therefore this amendment will not impact the Companys consolidated financial statements.

Note 2.    Liquidity

Cash and cash equivalents
available for use aggregated a total of $47.0 million at November 1, 2009. For the six months ended November 1, 2009, net cash flow provided by operations was $9.6 million.

As of the Companys 2009 fiscal year end, the Companys auditors issued an opinion raising substantial doubt about the
Companys ability to continue as a going concern. Since fiscal 2004 the Company has not achieved profitability for any fiscal year. Since inception, the Company has incurred aggregate consolidated net losses of approximately $380.0 million, and
may continue to incur net losses for the foreseeable future. In addition, the Company has experienced a significant decline in revenues during fiscal 2009 and the first two quarters of fiscal 2010. As of the end of fiscal 2009, the Company did not
have the financing in place to pay the $49.9 million 2010 Notes maturing May 15, 2010.

In September 2009, the Company
completed an exchange offer pursuant to which 2010 Notes in the aggregate principal amount of $26.7 million were exchanged for the 2014 Notes (see Note 10, Convertible Notes, Current and Long-Term). As a result of the exchange,
approximately $23.2 million principal amount of the 2010 Notes remains outstanding.

Given the current adverse economic
conditions generally, and in the semiconductor industry in particular, the credit market crisis and the Companys liquidity position, the Company has increased its focus on cash management and taken actions to sustain and enhance its liquidity
position. These actions include operational expense reduction initiatives and re-timing or eliminating certain capital spending or research and development projects. As a result of these efforts and other factors, the Company generated positive cash
flow from operations of $9.6 million and was profitable for the six months ended November 1, 2009.

The Companys
ability to fund its cash needs over the short and long term will also depend on its ability to continue to generate cash from operations, which is subject to general economic and financial market conditions, competitive and other factors, and to
maintain its existing credit facility. It could be difficult to obtain additional financing on favorable terms, or at all, due to the Companys financial condition, and current credit market conditions may also make external financing difficult
to obtain. Any external credit financing the Company is able to obtain will likely contain terms that are not as favorable to the Company as historical financings. The Company may try to obtain additional financing by means which could dilute the
Companys existing stockholders. The Company believes it will have sufficient capital resources to fund its working capital requirements and operations, capital investments, and debt service during the next twelve months, and to retire the
remaining $23.2 million outstanding 2010 Notes at maturity. However any of these factors could have a materially adverse impact on the Companys financial position and results of operations.

Historically, the Company has funded its operations primarily through operating cash flows and through the issuance of convertible debt and
equity securities. In the first quarter of fiscal 2009, the Company began implementing cost reduction measures which continued through the end of the second quarter of fiscal 2010. Additionally, the Company has taken action to obtain liquidity from
the $18.3 million in auction rate securities (ARS), which have been illiquid since February 2008. The Company entered into a settlement agreement with



9



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##### Table of Contents

MAGMA DESIGN AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



UBS Financial Services, Inc. (UBS) which allows the Company to recover the par value of the ARS on or about June 30, 2010 (see Note 3 Fair Value Option).
Concurrently, the Company entered into a no net cost secured line of credit with UBS offered as part of the total settlement agreement (see Note 12 Secured Credit Line). This secured line of credit provided the Company with
cash of $12.5 million until the ARS can be sold back to UBS at par value in 2010.

Note 3.    Fair Value Option

The Company elected fair value accounting for the purchased put option recorded in connection with the ARS settlement
agreement signed with UBS (see Note 4). This election was made in order to mitigate volatility in earnings caused by accounting for the purchased put option and underlying ARS under different methods. The election of fair value led to a gain of $0.2
million and $0.3 million for the three and six months ended November 1, 2009, respectively, included in Valuation gain (loss), net with the purchased put option asset recorded in long-term investments pledged as collateral for the
secured credit line.

Note 4.    Fair Value of Financial Instruments

The Company measures fair value in accordance with ASC 820,Fair Value Measurements and Disclosures(ASC 820). ASC 820
establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than
quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

The Companys assets measured at fair value on a recurring basis subject to the disclosure requirements of ASC 820 at
November 1, 2009, were as follows (in thousands):



|                                                                       |  |                           |        |   |                                           |   |     |                                      |  |   |       
|---------------------------------------------------------------------- |  | ------------------------- | ------ | - | ----------------------------------------- | - | --- | ------------------------------------ |  | - | ------
|                                                                       |  | Balance atNovember 1,2009 |        |   | SignificantOtherObservableInputs(Level 2) |   |     | SignificantUnobservedInputs(Level 3)
|Short-term investments, pledged as collateral for secured credit line: |  |                           |        |   |                                           |   |     |                                      |  |   |       
|Auction rate securities                                                |  | $                         | 16,011 |   |                                           | $ |    |                                      |  | $ | 16,011
|Purchased put option                                                   |  |                           | 898    |   |                                           |   |    |                                      |  |   | 898   
|                                                                       |  |                           |        |   |                                           |   |     |                                      |  |   |       
|Total short-term investments, pledged                                  |  |                           | 16,909 |   |                                           |   |    |                                      |  |   | 16,909
|                                                                       |  |                           |        |   |                                           |   |     |                                      |  |   |       
|Total assets measured at fair value                                    |  | $                         | 16,909 |   |                                           | $ |    |                                      |  | $ | 16,909
|                                                                       |  |                           |        |   |                                           |   |     |                                      |  |   |       
|Accrued expenses:                                                      |  |                           |        |   |                                           |   |     |                                      |  |   |       
|Foreign currency forward contract                                      |  |                           | (59    | ) |                                           |   | (59 | )                                    |  |   |      
|                                                                       |  |                           |        |   |                                           |   |     |                                      |  |   |       
|Total liabilities measured at fair value                               |  | $                         | (59    | ) |                                           | $ | (59 | )                                    |  | $ |      
|                                                                       |  |                           |        |   |                                           |   |     |                                      |  |   |       



10



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##### Table of Contents

MAGMA DESIGN AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



The following table is a reconciliation of financial assets measured at fair value using
significant unobservable inputs (Level 3) during the three and six months ended November 1, 2009 (in thousands):



|                                |  |                                    |        |   |                                  |   |        |  
|------------------------------- |  | ---------------------------------- | ------ | - | -------------------------------- | - | ------ | -
|                                |  | Three Months EndedNovember 1, 2009 |        |   | Six Months EndedNovember 1, 2009 |  
|Beginning balance               |  | $                                  | 18,010 |   |                                  | $ | 17,908 |  
|Net sales and settlements       |  |                                    | (1,275 | ) |                                  |   | (1,325 | )
|Gain on auction rate securities |  |                                    | 361    |   |                                  |   | 1,159  |  
|Losses on put option            |  |                                    | (187   | ) |                                  |   | (834   | )
|                                |  |                                    |        |   |                                  |   |        |  
|Balance at November 1, 2009     |  | $                                  | 16,909 |   |                                  | $ | 16,909 |  
|                                |  |                                    |        |   |                                  |   |        |  

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



|                                                           |  |      |        |                      |   |                       |  |                     |     |  |   |       
|---------------------------------------------------------- |  | ---- | ------ | -------------------- | - | --------------------- |  | ------------------- | --- |  | - | ------
|                                                           |  | Cost |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | EstimatedFair Value
|November 1, 2009                                           |  |      |        |                      |   |                       |  |                     |     |  |   |       
|Cash and Cash Equivalents                                  |  |      |        |                      |   |                       |  |                     |     |  |   |       
|Cash (U.S. and international)                              |  | $    | 47,035 |                      | $ |                      |  | $                   |    |  | $ | 47,035
|                                                           |  |      |        |                      |   |                       |  |                     |     |  |   |       
|Total cash and cash equivalents                            |  |      | 47,035 |                      |   |                      |  |                     |    |  |   | 47,035
|                                                           |  |      |        |                      |   |                       |  |                     |     |  |   |       
|Short-term investments:                                    |  |      |        |                      |   |                       |  |                     |     |  |   |       
|Auction rate certificates                                  |  | $    | 17,025 |                      |   |                      |  |                     | 116 |  |   | 16,909
|                                                           |  |      |        |                      |   |                       |  |                     |     |  |   |       
|Total cash and cash equivalents and short-term investments |  | $    | 64,060 |                      | $ |                      |  | $                   | 116 |  | $ | 63,944
|                                                           |  |      |        |                      |   |                       |  |                     |     |  |   |       
|May 3, 2009                                                |  |      |        |                      |   |                       |  |                     |     |  |   |       
|Cash and Cash Equivalents                                  |  |      |        |                      |   |                       |  |                     |     |  |   |       
|Cash (U.S. and international)                              |  | $    | 32,888 |                      | $ |                      |  | $                   |    |  | $ | 32,888
|                                                           |  |      |        |                      |   |                       |  |                     |     |  |   |       
|Total cash and cash equivalents                            |  |      | 32,888 |                      |   |                      |  |                     |    |  |   | 32,888
|                                                           |  |      |        |                      |   |                       |  |                     |     |  |   |       
|Long-term investments:                                     |  |      |        |                      |   |                       |  |                     |     |  |   |       
|Auction rate certificates                                  |  |      | 18,350 |                      |   |                      |  | $                   | 442 |  | $ | 17,908
|                                                           |  |      |        |                      |   |                       |  |                     |     |  |   |       
|Total cash and cash equivalents and long-term investments  |  | $    | 51,238 |                      | $ |                      |  | $                   | 442 |  | $ | 50,796
|                                                           |  |      |        |                      |   |                       |  |                     |     |  |   |       

As of November 1, 2009, the stated maturities within one year of the
Companys current investments classified as cash and cash equivalents and short term investments were $63.9 million.

The
unrealized losses for the six months ended November 1, 2009 were primarily associated with failed auction rate securities as discussed above. Gross realized losses from the sales of marketable securities were immaterial for all periods
presented.

The notional fair value of outstanding forward exchange contracts was approximately $0.4 million and $5.5 million
as of November 1, 2009 and May 3, 2009, respectively. The Company had realized losses on foreign currency forward exchange contracts of $0.2 million and $0.4 million for the three and six months ended



11



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##### Table of Contents

MAGMA DESIGN AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



November 1, 2009, respectively, and a $0.5 million realized gain and $0.8 million realized loss for the three and six months ended November 2, 2008, respectively. As of November 1,
2009, the Company recorded an unrealized loss of $0.1 million in other current liabilities. As of May 3, 2009, the Company recorded an unrealized gain of $0.1 million in other current assets.

Short-term investments as of November 1, 2009 and long-term investments as of May 3, 2009 on the condensed consolidated balance
sheets consist of (i) ARS that are AAA rated and are secured by pools of student loans guaranteed by state regulated higher education agencies and reinsured by the U.S. Department of Education, and (ii) the UBS purchased put option.
Historically, liquidity for investors in ARS was provided via an auction process that reset the applicable interest rate generally every 28 days, allowing investors to either roll over their investments or sell them at par. Beginning in the fourth
quarter of fiscal 2008, there was insufficient demand for these types of investments during the auctions and, as a result, these securities are not currently liquid.

In October 2008, the Company entered into an agreement with UBS which provides the Company with Auction Rate Securities Rights (Rights) to sell its ARS at par value to UBS at any time during
the period June 30, 2010 through July 2, 2012. These Rights are a separate freestanding instrument accounted for separately from the ARS, and are registered, nontransferable securities accounted for as a purchased put option initially
recorded at fair value (see Note 3 Fair Value Option). Under the Rights agreement, UBS may, at its discretion, sell the ARS at any time through July 2, 2012 without prior notice to the Company and must pay the Company par value for
the ARS within one day of the sale transaction settlement. Additionally, UBS offered a no net cost loan to the Company up to 75% of the market value of the ARS as determined by UBS until June 30, 2010 (see Note 12 Secured
Credit Line) and the Company agreed to release UBS from certain potential claims related to the collateralized ARS in certain specified circumstances. Due to the Company entering into this agreement with UBS and enabling UBS to sell the ARS at
any time, the ARS previously reported as available-for-sale have been transferred to trading securities and are classified as short-term investments pledged as collateral for the secured credit line as of November 1, 2009, and long-term
investments pledged as collateral for the secured credit line as of May 3, 2009.

As of November 1, 2009, there was
insufficient observable market information available to determine the fair value of the Companys ARS. Prior to November 2, 2008, the Company estimated Level 3 fair values for these securities based on the investment banks
valuations. The investment bank valued student loan ARS as floating rate notes with three pricing inputs: the coupon, the current discount margin or spread, and the maturity. The coupon was generally assumed to equal the maximum rate allowed under
the terms of the instrument, the current discount margin was based on an assessment of observable yields on instruments bearing comparable risks, and the maturity was based on an assessment of the terms of the underlying instrument and the potential
for restructuring the ARS. The primary unobservable input to the valuation was the maturity assumption which was set at five years for the majority of ARS instruments. Through January 6, 2008, the ARS were valued at par value due to the
frequent resets that historically occurred through the auction process.

As of November 1, 2009, the Company engaged a
third party valuation service to model Level 3 fair value using an income approach. The Company reviewed the methodologies employed by the third party models. This included a review of all relevant data inputs and the appropriateness of key model
assumptions.

The pricing assumptions for the ARS included the coupon rate, the estimated time to liquidity, current market
rates for publicly traded corporate debt of similar credit rating and an adjustment for lack of liquidity. The coupon rate was assumed to equal the stated maximum auction rate being received, which is determined based on the applicable 91-day U.S.
Treasury rate plus 1.20% premium according to provisions outlined in each securitys



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##### Table of Contents

MAGMA DESIGN AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



agreement. The current estimated time to liquidity was 5.0 years based on (i) expectations from industry brokers for liquidity in the market and (ii) the period over which UBS and other
broker-dealers that had issued ARS have agreed to redeem certain ARS at par value.

The Rights are a form of purchased put
option that gives the Company the right to sell the ARS to UBS for a price equal to par value during the period June 30, 2010 to July 2, 2012, providing liquidity for the ARS sooner than the currently estimated 5.0 years. As the Company
plans to exercise the Rights on or around June 30, 2010, the value of the Rights lies in (i) the ability to sell the securities thereby creating liquidity approximately 0.7 years before the ARS market is expected to become liquid and
(ii) the avoidance of receiving below-market coupon rate while the security is illiquid and auctions are failing. The fair value of the Rights represents the difference between the ARS with an estimated time to liquidity of 5.0 years and the
ARS with an estimated time to liquidity of 0.7 years as the Rights allow for the acceleration of liquidity and the avoidance of a below-market coupon rate over the two year time period.

Based on the Level 3 valuation and the transfer of the ARS from the available-for-sale category to the trading category, the Company has
recorded an unrealized gain of $0.4 million and an unrealized loss of $1.9 million for the quarter ended November 1, 2009 and November 2, 2008, respectively, including the transfer of accumulated temporary losses of $0 million and $0.9
million, respectively, from other comprehensive loss previously recorded as a component of stockholders equity. For the quarter ended November 1, 2009, total other-than-temporary impairment gain on ARS of $0.4 million was reported in the
Valuation gain (loss), net in the consolidated statement of operations. This gain was offset by losses related to the purchased put option of $0.2 million. For the six months ended November 1, 2009, the Company recorded an ARS gain
of $1.2 million offset by losses related to the purchased put option of $0.8 million.

Note 5.    Basic and Diluted Net
Income (Loss) Per Share

The Company computes net income (loss) per share in accordance with ASC 260,Earnings per
Share. Basic net income (loss) per share is computed by dividing net income attributable to common stockholders (numerator) by the weighted average number of common shares outstanding (denominator) during the period. Diluted net income per share
gives effect to all dilutive potential common shares outstanding during the period including stock options and redeemable convertible subordinated notes.

For the three and six months ended November 1, 2009, all potential common shares outstanding during the period were included in the computation of diluted net earnings per share. For the three and
six months ended November 2, 2008 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 Months Ended |       | Six Months Ended
|                                                                            |  | November 1,2009    |       | November 2,2008  |   | November 1,2009 |  | November 2,2008
|Shares of common stock issuable upon conversion of convertible notes        |  |                    | 2,313 |                  |   | 3,329           |  |                 | 7,057 |  |   | 3,369 
|Shares of common stock issuable under stock option plans outstanding        |  |                    | 5,534 |                  |   | 11,890          |  |                 | 5,414 |  |   | 11,890
|Weighted average exercise price of shares issuable under stock option plans |  | $                  | 10.33 |                  | $ | 10.50           |  | $               | 10.54 |  | $ | 10.50 



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##### Table of Contents

MAGMA DESIGN AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



Note 6.    Balance Sheet Components

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



|                                   |  |                 |        |   |            |   |        |  
|---------------------------------- |  | --------------- | ------ | - | ---------- | - | ------ | -
|                                   |  | November 1,2009 |        |   | May 3,2009 |  
|Accounts receivable, net:          |  |                 |        |   |            |   |        |  
|Trade accounts receivable          |  | $               | 12,830 |   |            | $ | 23,946 |  
|Unbilled receivable                |  |                 | 862    |   |            |   | 2,880  |  
|                                   |  |                 |        |   |            |   |        |  
|Gross accounts receivable          |  |                 | 13,692 |   |            |   | 26,826 |  
|                                   |  |                 |        |   |            |   |        |  
|Allowance for doubtful accounts    |  |                 | (298   | ) |            |   | (191   | )
|                                   |  |                 |        |   |            |   |        |  
|Total accounts receivable          |  | $               | 13,394 |   |            | $ | 26,635 |  
|                                   |  |                 |        |   |            |   |        |  
|Accrued expenses:                  |  |                 |        |   |            |   |        |  
|Accrued sales commissions          |  | $               | 676    |   |            | $ | 1,548  |  
|Accrued bonuses                    |  |                 | 1,072  |   |            |   | 2,693  |  
|Other payroll and related accruals |  |                 | 5,909  |   |            |   | 5,244  |  
|Acquisition accrual                |  |                 | 348    |   |            |   | 1,780  |  
|Income taxes payable               |  |                 | (912   | ) |            |   | (452   | )
|Restructuring accrual              |  |                 | 854    |   |            |   | 1,426  |  
|Other                              |  |                 | 2,269  |   |            |   | 3,114  |  
|                                   |  |                 |        |   |            |   |        |  
|Total accrued expenses             |  | $               | 10,216 |   |            | $ | 15,353 |  
|                                   |  |                 |        |   |            |   |        |  

Note 7.    Comprehensive Loss

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



|                                                  |  |                 |        |   |            |   |        |  
|------------------------------------------------- |  | --------------- | ------ | - | ---------- | - | ------ | -
|                                                  |  | November 1,2009 |        |   | May 3,2009 |  
|Unrealized loss on available-for-sale investments |  | $               |       |   |            | $ | (2     | )
|Foreign currency translation adjustments          |  |                 | (5,030 | ) |            |   | (5,351 | )
|                                                  |  |                 |        |   |            |   |        |  
|Accumulated other comprehensive loss              |  | $               | (5,030 | ) |            | $ | (5,353 | )
|                                                  |  |                 |        |   |            |   |        |  



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##### Table of Contents

MAGMA DESIGN AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



Note 8.    Acquisitions

The Company did not make any acquisitions during the six months ended November 1, 2009.

Acquisition-related earnouts

For a number of Magmas previously completed acquisitions, the Company agreed to pay contingent consideration in cash and/or stock to former stockholders of the acquired companies based on the
acquired businesses achievement of certain technology or financial milestones. The following table summarizes the amounts of goodwill and intangible assets recorded by the Company for contingent consideration paid or payable to former
stockholders of the acquired companies (in thousands):



|                            |  |                                   |    |                                   |   |      |  |                   |       |  |   |    
|--------------------------- |  | --------------------------------- | -- | --------------------------------- | - | ---- |  | ----------------- | ----- |  | - | ---
|                            |  | Six Months Ended November 1, 2009 |    | Six Months Ended November 2, 2008
|                            |  | Cash                              |    | CommonStock Value                 |   | Cash |  | CommonStock Value
|Goodwill:                   |  |                                   |    |                                   |   |      |  |                   |       |  |   |    
|Sabio Labs, Inc             |  | $                                 | 65 |                                   | $ |     |  | $                 | 2,172 |  | $ |   
|                            |  |                                   |    |                                   |   |      |  |                   |       |  |   |    
|Total goodwill              |  |                                   | 65 |                                   |   |     |  |                   | 2,172 |  |   |   
|                            |  |                                   |    |                                   |   |      |  |                   |       |  |   |    
|Intangible assets:          |  |                                   |    |                                   |   |      |  |                   |       |  |   |    
|Mojave                      |  |                                   |   |                                   |   |     |  |                   | 626   |  |   | 619
|Other                       |  |                                   | 19 |                                   |   |     |  |                   | 2     |  |   |   
|                            |  |                                   |    |                                   |   |      |  |                   |       |  |   |    
|Total intangible assets     |  |                                   | 19 |                                   |   |     |  |                   | 628   |  |   | 619
|                            |  |                                   |    |                                   |   |      |  |                   |       |  |   |    
|Total earnout consideration |  | $                                 | 84 |                                   | $ |     |  | $                 | 2,800 |  | $ | 619
|                            |  |                                   |    |                                   |   |      |  |                   |       |  |   |    

Note 9.    Goodwill and Intangible Assets

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



|                              |  |                             |                     |                  |                    |             |   |                         |   |  |                   |          |                     |  |                    |       |  |                         |         |  |                   |         |   |  |   |          |   |  |   |       
|----------------------------- |  | --------------------------- | ------------------- | ---------------- | ------------------ | ----------- | - | ----------------------- | - |  | ----------------- | -------- | ------------------- |  | ------------------ | ----- |  | ----------------------- | ------- |  | ----------------- | ------- | - |  | - | -------- | - |  | - | ------
|                              |  | WeightedAverageLife(months) |                     | November 1, 2009 |                    | May 3, 2009
|                              |  |                             | GrossCarryingAmount |                  | GoodwillImpairment |             |   | AccumulatedAmortization |   |  | NetCarryingAmount |          | GrossCarryingAmount |  | GoodwillImpairment |       |  | AccumulatedAmortization |         |  | NetCarryingAmount
|Goodwill                      |  |                             |                     | $                | 66,820             |             | $ | (60,089                 | ) |  | $                 |         |                     |  | $                  | 6,731 |  | $                       | 66,755  |  | $                 | (60,089 | ) |  | $ |         |   |  | $ | 6,666 
|                              |  |                             |                     |                  |                    |             |   |                         |   |  |                   |          |                     |  |                    |       |  |                         |         |  |                   |         |   |  |   |          |   |  |   |       
|Other intangible assets:      |  |                             |                     |                  |                    |             |   |                         |   |  |                   |          |                     |  |                    |       |  |                         |         |  |                   |         |   |  |   |          |   |  |   |       
|Developed technology          |  | 43                          |                     | $                | 115,436            |             |   |                         |   |  | $                 | (112,091 | )                   |  | $                  | 3,345 |  | $                       | 115,436 |  |                   |         |   |  | $ | (110,794 | ) |  | $ | 4,642 
|Licensed technology           |  | 40                          |                     |                  | 41,718             |             |   |                         |   |  |                   | (38,270  | )                   |  | $                  | 3,448 |  |                         | 41,699  |  |                   |         |   |  |   | (37,291  | ) |  |   | 4,408 
|Customer relationship or base |  | 70                          |                     |                  | 5,575              |             |   |                         |   |  |                   | (3,709   | )                   |  | $                  | 1,866 |  |                         | 5,575   |  |                   |         |   |  |   | (3,376   | ) |  |   | 2,199 
|Patents                       |  | 57                          |                     |                  | 13,015             |             |   |                         |   |  |                   | (12,951  | )                   |  | $                  | 64    |  |                         | 13,015  |  |                   |         |   |  |   | (12,836  | ) |  |   | 179   
|Acquired customer contracts   |  | 33                          |                     |                  | 1,390              |             |   |                         |   |  |                   | (1,091   | )                   |  | $                  | 299   |  |                         | 1,390   |  |                   |         |   |  |   | (1,090   | ) |  |   | 300   
|Assembled workforce           |  | 45                          |                     |                  | 1,252              |             |   |                         |   |  |                   | (1,246   | )                   |  | $                  | 6     |  |                         | 1,252   |  |                   |         |   |  |   | (1,244   | ) |  |   | 8     
|No shop right                 |  | 24                          |                     |                  | 100                |             |   |                         |   |  |                   | (100     | )                   |  | $                  |      |  |                         | 100     |  |                   |         |   |  |   | (100     | ) |  |   |      
|Non-competition agreements    |  | 36                          |                     |                  | 600                |             |   |                         |   |  |                   | (550     | )                   |  | $                  | 50    |  |                         | 600     |  |                   |         |   |  |   | (500     | ) |  |   | 100   
|Trademark                     |  | 67                          |                     |                  | 900                |             |   |                         |   |  |                   | (608     | )                   |  | $                  | 292   |  |                         | 900     |  |                   |         |   |  |   | (566     | ) |  |   | 334   
|                              |  |                             |                     |                  |                    |             |   |                         |   |  |                   |          |                     |  |                    |       |  |                         |         |  |                   |         |   |  |   |          |   |  |   |       
|Total                         |  |                             |                     | $                | 179,986            |             | $ |                        |   |  | $                 | (170,616 | )                   |  | $                  | 9,370 |  | $                       | 179,967 |  | $                 |        |   |  | $ | (167,797 | ) |  | $ | 12,170
|                              |  |                             |                     |                  |                    |             |   |                         |   |  |                   |          |                     |  |                    |       |  |                         |         |  |                   |         |   |  |   |          |   |  |   |       



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##### Table of Contents

MAGMA DESIGN AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



During the six months ended November 1, 2009, the Company increased its goodwill by
$0.1 million, reflecting purchase price adjustments related to acquired net tangible assets.

The Company has included the
amortization expense on intangible assets that relate to products sold in cost of revenue, while the remaining amortization is shown as a separate line item on the Companys condensed consolidated statement of operations. The amortization
expense related to intangible assets was as follows (in thousands):



|                                               |  |                    |       |                  |   |                 |  |                 |       |  |   |       
|---------------------------------------------- |  | ------------------ | ----- | ---------------- | - | --------------- |  | --------------- | ----- |  | - | ------
|                                               |  | Three Months Ended |       | Six Months Ended
|                                               |  | November 1,2009    |       | November 2,2008  |   | November 1,2009 |  | November 2,2008
|Amortization of intangible assets included in: |  |                    |       |                  |   |                 |  |                 |       |  |   |       
|Cost of revenuelicenses                       |  | $                  | 737   |                  | $ | 4,709           |  | $               | 1,512 |  | $ | 9,380 
|Cost of revenuebundled licenses and services  |  |                    | 361   |                  |   | 1,533           |  |                 | 697   |  |   | 2,815 
|Operating expenses                             |  |                    | 305   |                  |   | 838             |  |                 | 610   |  |   | 2,282 
|                                               |  |                    |       |                  |   |                 |  |                 |       |  |   |       
|Total                                          |  | $                  | 1,403 |                  | $ | 7,080           |  | $               | 2,819 |  | $ | 14,477
|                                               |  |                    |       |                  |   |                 |  |                 |       |  |   |       

As of November 1, 2009, the estimated future amortization expense of intangible
assets in the table above was as follows (in thousands):



|                                   |  |                              |      
|---------------------------------- |  | ---------------------------- | -----
|Fiscal Year                        |  | EstimatedAmortizationExpense
|2010 (remaining six months)        |  | $                            | 2,175
|2011                               |  |                              | 3,942
|2012                               |  |                              | 1,889
|2013                               |  |                              | 957  
|2014 and thereafter                |  |                              | 407  
|                                   |  |                              |      
|Total expected future amortization |  | $                            | 9,370
|                                   |  |                              |      

Note 10.    Convertible Notes, Current and Long-Term

The Companys 2010 Notes mature on May 15, 2010 and bear interest at 2% per annum, with interest payable on May 15 and
November 15 of each year, commencing May 15, 2007. As of November 1, 2009, after the note exchange described below, the principal balance outstanding on the 2010 Notes was approximately $23.2 million. This amount is included in
current liabilities. The 2010 Notes are convertible into shares of the Companys common stock at an initial conversion price of $15.00 per share, for an aggregate of approximately 1.55 million shares. The 2010 Notes are unsecured senior
indebtedness of Magma, which rank equally in right of payment to Magmas Wells Fargo credit facility and the 2014 Notes. The 2010 Notes are effectively subordinated in right of payment to the Wells Fargo credit facility to the extent of the
security interest held by Wells Fargo Bank in the assets of the Company. The Company has the option to redeem the 2010 Notes for cash in an amount equal to 100% of the aggregate outstanding principal amount at the time of such redemption. The 2010
Notes also contain a net share settlement provision that requires the Company to deliver to a holder upon conversion of the holders 2010 Notes cash equal to the lesser of $1,000 and the conversion value of the 2010 Notes, and in the event that
the conversion value is in excess of $1,000 upon conversion of the 2010 Notes, cash or common stock at the Companys election.



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##### Table of Contents

MAGMA DESIGN AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



As more fully described in Note 1, Basis of Presentation Adoption of New
Accounting Pronouncements, in May 2008, the FASB issued ASC 470-20, which clarifies the accounting for convertible debt instruments that may be settled in cash upon conversion. The Company has determined this new guidance affects its 2010 Notes.
Retrospective adoption requires the Company to adjust its accounting for the 2010 Notes in its Consolidated Financial Statements for all prior periods presented. As adjusted, the Company initially recorded the 2010 Notes at fair value of $43.1
million, net of the debt discount of $6.9 million. The debt discount is being amortized to interest expense over the term of the 2010 Notes. The $1.3 million of underwriting and legal fees related to the 2010 Notes offering was capitalized upon
issuance and is being amortized over the term of the 2010 Notes using the effective interest method.

The shares issuable upon
conversion of the 2010 Notes are included in diluted shares outstanding under the if-converted method of accounting for purposes of calculating diluted earnings per share unless they are determined to be anti-dilutive. For the three and
six months ended November 1, 2009 and November 2, 2008 the shares were excluded from the computation of diluted net earnings (loss) per share as their effect was anti-dilutive.

On September 11, 2009, the Company completed an exchange offer pursuant to which an aggregate principal amount of $26.7 million of its
2010 Notes were exchanged for $26.7 million principal amount of newly issued 2014 Notes. Because the terms of the 2014 notes were substantially different from the 2010 notes, the exchange offer was treated as an extinguishment of the $26.7 million
principal amount of the 2010 Notes.

In accordance with ASC 470-20, the fair value of the 2014 Notes when issued is allocated
between the fair market value of the 2010 Notes extinguished and a reacquisition of the equity component recognized upon issuance of the 2010 Notes. The Company initially recorded the 2014 Notes at fair value of $28.5 million, including a debt
premium of $1.8 million. The debt premium is being amortized to interest expense over the term of the 2014 Notes. $1.8 million of underwriting and legal fees related to the 2014 Notes offering was capitalized upon issuance and is being amortized
over the term of the 2014 Notes using the effective interest method. As a result, $3.0 million was allocated as a reduction to additional paid-in-capital.

The Company recognized a net gain of $0.3 million on the extinguishment of the 2010 Notes. The net gain is comprised of a $1.2 million gain on the difference between the fair market value of the 2014
Notes and the $26.7 million principal amount extinguished of the 2010 Notes, which is offset by the reacquisition of the equity component and the write-off of approximately $0.8 million and $0.1 million debt discount and issuance costs,
respectively, related to the 2010 Notes exchanged.

As of November 1, 2009, the remaining balance of the debt discount
and unamortized debt issuance costs related to the remaining 2010 Notes were $0.6 million and $0.1 million, respectively.

The
Companys 2014 Notes mature on May 15, 2014 and bear interest at 6% per annum, with interest payable on May 15 and November 15 of each year, commencing November 15, 2009. The 2014 Notes are convertible into shares of
the Companys common stock at an initial conversion price of $1.80 per share, for an aggregate of approximately 14.83 million shares. Upon conversion, the holders of the 2014 Notes will receive shares of the Company. Except in limited
specific circumstances related to a change in control that are excluded from ASC 470-20, holders will not receive a cash settlement, therefore, the 2014 Notes are not subject to the provision ASC 470-20. The 2014 Notes are unsecured senior
indebtedness of Magma, which rank equally in right of payment to Magmas Wells Fargo credit facility and the 2010 Notes. The 2014 Notes are effectively subordinated in right of payment to the Wells Fargo credit facility to the extent of the
security interest held by



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##### Table of Contents

MAGMA DESIGN AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



Wells Fargo Bank in the assets of the Company. After May 15, 2013, the Company has the option to redeem the 2014 Notes for cash in an amount equal to 100% of the aggregate outstanding
principal amount at the time of such redemption.

The shares issuable upon conversion of the 2014 Notes are included in
diluted shares outstanding under the if-converted method of accounting for purposes of calculating diluted earnings per share unless they are determined to be anti-dilutive. For the three and six months ended November 1, 2009, an
aggregate of 8,472,698 and 0 shares were included in the computation of diluted net earnings per share, respectively.

Note
11.    Revolving note

Effective as of October 31, 2008, the Company entered into a secured
revolving line of credit facility with Wells Fargo Bank, N.A. (the Credit Facility). As amended by the First Amendment dated March 11, 2009, the Second Amendment dated May 21, 2009, and the Third Amendment dated October 9,
2009, the Credit Facility provides for (i) a single revolving line of credit note of up to $15 million replacing the two previous $7.5 million revolving line of credit notes, (ii) eliminates the requirement that Magma maintain a minimum
accounts receivable borrowing base and cash collateral, and (iii) extends the term of the line of credit to September 30, 2010. The Amendment also, among other things, requires that we provide certain financial statements to Wells Fargo,
amends or removes certain financial covenants and amends the definition of Event of Default. The note bears an annual interest rate equal to a fluctuating rate of 3.5% above the one month LIBOR rate on outstanding borrowings.

The Credit Facility restricts the Companys ability to pay dividends or make other distributions on its stock and requires that the
Company maintain certain financial conditions. As of November 1, 2009, the Company was in compliance with the financial conditions.

As of November 1, 2009, the Company had aggregate outstanding borrowings of $12.2 million and two letters of credit totaling $1.7 million under the Credit Facility. In connection with the Third
Amendment to the Credit Facility, the Company released a $7.5 million collateralized certificate of deposit earlier classified as restricted cash.

Note 12.    Secured Credit Line

In October 2008, the Company obtained a line of credit
with UBS in conjunction with the ARS settlement agreement (see Note 3). The line of credit is due on demand and allows for borrowings of up to 75% of the market value of the ARS, as determined by UBS, pledged as collateral for the line of
credit. As of November 1, 2009, UBS determined the ARS market value to be $15.2 million. Prior to January 22, 2009, advances under this agreement bore interest at LIBOR plus 1.0% with interest payments payable monthly. All interest,
dividends, distributions, premiums, other income and payments received into the ARS investment account at UBS will be automatically transferred to UBS as payments on the line of credit. Additionally, proceeds from any liquidation, redemption, sale
or other disposition of all or part of the ARS will be automatically transferred to UBS as payments. If these payments are insufficient to pay all accrued interest by the monthly due date, then UBS will either require the Company to make additional
interest payments or, at UBS discretion, capitalize unpaid interest as an additional advance. UBS intent is to cause the interest rate payable by the Company to be equal to the weighted average interest or dividend rate payable to the
Company on the ARS pledged as collateral. Upon cancellation of the line of credit, the Company will be reimbursed for any amount paid in interest on the line of credit that exceeds the income on the ARS.



18



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##### Table of Contents

MAGMA DESIGN AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



Effective January 22, 2009, the line of credit converted to a 100% Loan-to-Par
Value No Net Cost loan program. Under this program the interest rate will be based on the lesser of either the weighted average ARS coupon rate or the published UBS Bank rate. This new rate applies to existing outstanding balances and new advances.

Advances on this line of credit may be used to fund working capital requirements, capital expenditures or other general
corporate purposes, except that they may not be used to purchase, trade or carry any securities or to repay debt incurred to purchase, trade or carry any securities.

There was $11.4 million outstanding on this line of credit at November 1, 2009, and the maximum amount available for borrowing was $12.6 million.

Note 13.    Restructuring charges

In fiscal 2009, the Company initiated an additional restructuring plan (FY 2009 Restructuring Plan) designed to improve its cost structure and to align better its resources and improve
operating efficiencies. During the first quarter of fiscal 2009, the Company announced the termination of 71 employees. During the second quarter of fiscal 2009, the Company announced additional restructuring actions under the FY 2009 Restructuring
Plan. These additional actions included the termination of 76 employees and the closing of certain offices. In the third quarter of fiscal 2009 the Company announced further actions including the termination of 164 employees and the closing of two
sales and support offices in North America and one in Europe, consolidation of its Beijing, China operations into a single facility, and consolidation of its Shanghai, China operations into a single facility. During the fourth quarter of fiscal
2009, the Company incurred additional restructuring costs mainly due to the consolidation of part of its San Jose, California facility.

In total, the Company recorded restructuring charges of $10.7 million during fiscal 2009 in connection with the FY 2009 Restructuring Plan. These costs related to severance, expatriate relocation,
facilities consolidation and termination, and other costs related to the restructuring.

During the quarter ended
November 1, 2009, the Company recorded an additional restructuring charge of $0.5 million of cost related to severance, offset by $0.3 million benefit related to better than anticipated settlement of facilities reserves.

The cash payments associated with the net restructuring liability are expected to be paid through fiscal 2010. The restructuring liability
activity was as follows (in thousands):



|                            |  |           |      |   |            |   |                     |  |   |              |   |  |   |        |  
|--------------------------- |  | --------- | ---- | - | ---------- | - | ------------------- |  | - | ------------ | - |  | - | ------ | -
|                            |  | Severance |      |   | Relocation |   | Facilities andOther |  |   | NetLiability |  
|Balance at May 3, 2009      |  | $         | 374  |   |            | $ | 9                   |  | $ | 1,799        |   |  | $ | 2,182  |  
|Restructuring provision     |  |           | 655  |   |            |   |                    |  |   | 48           |   |  |   | 703    |  
|Cash payments               |  |           | (663 | ) |            |   |                    |  |   | (379         | ) |  |   | (1,042 | )
|                            |  |           |      |   |            |   |                     |  |   |              |   |  |   |        |  
|Balance at August 2, 2009   |  |           | 366  |   |            |   | 9                   |  |   | 1,468        |   |  |   | 1,843  |  
|Restructuring provision     |  |           | 511  |   |            |   |                    |  |   | (264         | ) |  |   | 247    |  
|Cash payments               |  |           | (574 | ) |            |   |                    |  |   | (277         | ) |  |   | (851   | )
|                            |  |           |      |   |            |   |                     |  |   |              |   |  |   |        |  
|Balance at November 1, 2009 |  | $         | 303  |   |            | $ | 9                   |  | $ | 927          |   |  | $ | 1,239  |  
|                            |  |           |      |   |            |   |                     |  |   |              |   |  |   |        |  



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##### Table of Contents

MAGMA DESIGN AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



Note 14.    Contingencies

The Company is subject to various legal proceedings and disputes that arise in the ordinary course of business from time to time. The number
and significance of these legal proceedings and disputes may increase as the Companys size changes. 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 legal proceedings and disputes could harm the Companys business and have an adverse effect on its consolidated financial statements.
However, the results of any litigation or dispute are inherently uncertain and, at this time, no estimate could be made of the loss or range of loss, if any, from such litigation matters and disputes unless they are or are close to being settled.
Liabilities are recorded when a loss is probable and the amount can be reasonably estimated. No accrued legal settlement liabilities are recorded on the condensed consolidated balance sheet as of November 1, 2009 or May 3, 2009. Litigation
settlement and legal fees are expensed in the period in which they are incurred.

Indemnification Obligations

The Company enters into standard license agreements in the ordinary course of business. Pursuant to these agreements, the Company agrees to
indemnify its customers for losses suffered or incurred by them as a result of any patent, copyright, or other intellectual property infringement claim by any third party with respect to the Companys products. These indemnification obligations
have perpetual terms. The Companys normal business practice is to limit the maximum amount of indemnification to the amount received from the customer. On occasion, the maximum amount of indemnification the Company may be required to provide
may exceed the amount received from the customer. The Company estimates the fair value of its indemnification obligations to be insignificant, based upon its historical experience concerning product and patent infringement claims. Accordingly, the
Company has no liabilities recorded for indemnification under these agreements as of November 1, 2009.

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
November 1, 2009.

In connection with certain of the Companys business acquisitions, it has also agreed to assume,
or cause Company subsidiaries to assume, the indemnification obligations of those companies to their respective officers and directors. No liabilities have been recorded for these agreements as of November 1, 2009.

Warranties

The Company
offers certain customers a warranty that its products will conform to the documentation provided with the products. To date, there have been no payments or material costs incurred related to fulfilling these warranty obligations. Accordingly, the
Company has no liabilities recorded for these warranties as of November 1, 2009. 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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##### Table of Contents

MAGMA DESIGN AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



Note 15.    Stock-Based Compensation

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



|                                       |  |                    |       |                  |   |                 |  |                 |       |  |   |       
|-------------------------------------- |  | ------------------ | ----- | ---------------- | - | --------------- |  | --------------- | ----- |  | - | ------
|                                       |  | Three Months Ended |       | Six Months Ended
|                                       |  | November 1,2009    |       | November 2,2008  |   | November 1,2009 |  | November 2,2008
|Cost of revenue                        |  | $                  | 504   |                  | $ | 365             |  | $               | 804   |  | $ | 777   
|Research and development expense       |  |                    | 1,017 |                  |   | 1,871           |  |                 | 2,150 |  |   | 3,941 
|Sales and marketing expense            |  |                    | 1,142 |                  |   | 1,247           |  |                 | 2,077 |  |   | 2,886 
|General and administrative expense     |  |                    | 1,097 |                  |   | 1,173           |  |                 | 1,910 |  |   | 2,426 
|                                       |  |                    |       |                  |   |                 |  |                 |       |  |   |       
|Total stock-based compensation expense |  | $                  | 3,760 |                  | $ | 4,656           |  | $               | 6,941 |  | $ | 10,030
|                                       |  |                    |       |                  |   |                 |  |                 |       |  |   |       

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 (ESPP), which enables employees to purchase shares of the
Companys common stock. Stock-based compensation expense by type of award was as follows (in thousands):



|                                            |  |                    |       |                  |   |                 |  |                 |       |  |   |       
|------------------------------------------- |  | ------------------ | ----- | ---------------- | - | --------------- |  | --------------- | ----- |  | - | ------
|                                            |  | Three Months Ended |       | Six Months Ended
|                                            |  | November 1,2009    |       | November 2,2008  |   | November 1,2009 |  | November 2,2008
|Stock options                               |  | $                  | 487   |                  | $ | 1,487           |  | $               | 1,218 |  | $ | 3,610 
|Restricted stock and restricted stock units |  |                    | 2,389 |                  |   | 2,326           |  |                 | 3,988 |  |   | 4,742 
|Employee stock purchase plan                |  |                    | 884   |                  |   | 843             |  |                 | 1,735 |  |   | 1,678 
|                                            |  |                    |       |                  |   |                 |  |                 |       |  |   |       
|Total stock-based compensation expense      |  | $                  | 3,760 |                  | $ | 4,656           |  | $               | 6,941 |  | $ | 10,030
|                                            |  |                    |       |                  |   |                 |  |                 |       |  |   |       

Stock Options and Employee Stock Purchase Plan

The Company uses the Black-Scholes option pricing model to determine the fair value of its stock options and ESPP awards. The Black-Scholes
option pricing model incorporates various highly subjective assumptions including expected future stock price volatility and expected terms of instruments. The Company established the expected term for employee options and awards, as well as
forfeiture rates, based on the historical settlement experience, while giving consideration to vesting schedules and to options that have life cycles less than the contractual terms. Assumptions for option exercises and pre-vesting terminations of
options were stratified for employee groups with sufficiently distinct behavior patterns. Expected future stock price volatility was developed based on the average of the Companys 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. The expected dividend yield used in the calculation is zero as the Company has
not historically paid dividends.



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##### Table of Contents

MAGMA DESIGN AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



The assumptions used in the Black-Scholes model and the weighted average grant date fair
value per share were as follows:



|                                       |  |                    |             |   |                  |   |              |                 |  |   |                 |   |  |   |              |  
|-------------------------------------- |  | ------------------ | ----------- | - | ---------------- | - | ------------ | --------------- |  | - | --------------- | - |  | - | ------------ | -
|                                       |  | Three Months Ended |             |   | Six Months Ended |  
|                                       |  | November 1,2009    |             |   | November 2,2008  |   |              | November 1,2009 |  |   | November 2,2008 |  
|Stock options:                         |  |                    |             |   |                  |   |              |                 |  |   |                 |   |  |   |              |  
|Expected life (years)                  |  |                    | 3.08  3.97 |   |                  |   | 3.90  3.99  |                 |  |   | 3.08  3.97     |   |  |   | 3.90  4.02  |  
|Volatility                             |  |                    | 88          | % |                  |   | 65           | %               |  |   | 85%  88        | % |  |   | 46%  65     | %
|Risk-free interest rate                |  |                    | 1.653       | % |                  |   | 2.25%  2.85 | %               |  |   | 1.50%  2.10    | % |  |   | 2.25%  3.56 | %
|Expected dividend yield                |  |                    | 0           | % |                  |   | 0            | %               |  |   | 0               | % |  |   | 0            | %
|Weighted average grant date fair value |  | $                  | 1.20        |   |                  | $ | 2.18         |                 |  | $ | 1.19            |   |  | $ | 2.48         |  
|                                       |  |                    |             |  
|ESPP awards:                           |  |                    |             |   |                  |   |              |                 |  |   |                 |   |  |   |              |  
|Expected life (years)                  |  |                    | 1.13        |   |                  |   | 1.13         |                 |  |   | 1.13            |   |  |   | 1.13         |  
|Volatility                             |  |                    | 88          | % |                  |   | 65           | %               |  |   | 85%  88        | % |  |   | 45%  65     | %
|Risk-free interest rate                |  |                    | 0.54        | % |                  |   | 2.18         | %               |  |   | 0.40%  0.54    | % |  |   | 2.18%  2.25 | %
|Expected dividend yield                |  |                    | 0           | % |                  |   | 0            | %               |  |   | 0               | % |  |   | 0            | %
|Weighted average grant date fair value |  | $                  | 0.67        |   |                  | $ | 2.85         |                 |  | $ | 0.69            |   |  | $ | 4.44         |  

As of November 1, 2009, there was approximately $5.8 million of unrecognized
stock-based compensation expense, net of estimated forfeitures, related to stock option grants, which will be recognized over the remaining weighted average vesting period of approximately 2.13 years.

As of November 1, 2009, the Company had $4.3 million of total unrecognized compensation expense, net of estimated forfeitures,
related to the ESPP, which will be recognized over the remaining weighted average vesting period of 1.13 years. Cash received from the purchase of shares under the ESPP was $1.0 million and $1.9 million for the six months ended November 1,
2009 and November 2, 2008, respectively.

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, which is generally two to four years.

As of November 1, 2009, the Company had $0.2 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 0.2 years.

As of November 1, 2009, there was $8.5 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 1.45 years.



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MAGMA DESIGN AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



Note 16.    Income Taxes

The benefit from (provision for) income taxes was $7.7 million and $7.3 million for the three and six months ended November 1, 2009,
respectively, and $(3.1) million and $(3.6) million for the three and six months ended November 2, 2008, respectively.

During the three months ended November 1, 2009, the Company received new information related to its unrecognized tax benefit related to withholding taxes in South Korea. This information was not available to the Company in previous
financial reporting periods and is considered new information for purposes of assessing the Companys uncertain tax positions as required by ASC 740-10, Income Taxes (ASC 740-10). The Company considered this new information
collectively with all other information available at November 1, 2009 and concluded that it is more-likely-than-not the license revenue sourced in South Korea is not subject to withholding tax, and therefore, that the full amount of the tax
position will ultimately be realized. Accordingly, a $7.8 million tax benefit related to South Korean withholding tax was recognized as a Benefit from (provision for) income taxes in the Condensed Consolidated Statements of Operations,
and a corresponding decrease in Long term tax liabilities, less current portion in the Condensed Consolidated Balance Sheets was recorded at November 1, 2009. The recognition of the tax benefit is a discrete item, and therefore, is
not reflected in the estimated annual effective tax rate, nor does it have any current period or future period cash impact.

For the three months ended November 1, 2009, the Company had approximately $19.8 million of total gross unrecognized tax benefits, of which $2.1 million, if recognized, would favorably affect its effective tax rate in future periods
and $1.6 million, if recognized, would result in a credit to additional paid-in capital. The remaining $16.1 million of unrecognized tax benefits, if recognized, would result in an increase in deferred tax assets. However, the Company currently has
a full valuation allowance against its U.S. net deferred tax assets which would impact the timing of the effective tax rate benefit should any of such uncertain tax positions be favorably settled in the future.

The Companys fiscal 2010 effective tax rate differs from the combined federal and state statutory rate primarily due to changes in its
U.S. valuation allowance, state taxes, goodwill impairment, foreign income taxed at other than U.S. rates, stock compensation expense, research and development credits and foreign withholding taxes.

Note 17.    Segment Information

The Company has adopted the provisions of ASC 280, Segment Reporting, which requires the reporting of segment information using the management approach. Under this approach,
operating segments are identified in substantially the same manner as they are reported internally and used by the Companys chief operating decision maker (CODM) for purposes of evaluating performance and allocating resources.
Based on this approach, the Company has one reportable segment as the CODM reviews financial information on a basis consistent with that presented in the consolidated financial statements.



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MAGMA DESIGN AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



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



|                               |  |                    |        |   |                  |   |        |                 |  |   |                 |   |  |   |        |  
|------------------------------ |  | ------------------ | ------ | - | ---------------- | - | ------ | --------------- |  | - | --------------- | - |  | - | ------ | -
|                               |  | Three Months Ended |        |   | Six Months Ended |  
|                               |  | November 1,2009    |        |   | November 2,2008  |   |        | November 1,2009 |  |   | November 2,2008 |  
|North America*                 |  | $                  | 16,937 |   |                  | $ | 20,043 |                 |  | $ | 31,935          |   |  | $ | 44,375 |  
|Europe                         |  |                    | 2,387  |   |                  |   | 5,833  |                 |  |   | 4,956           |   |  |   | 18,598 |  
|Japan                          |  |                    | 6,290  |   |                  |   | 7,621  |                 |  |   | 9,923           |   |  |   | 11,733 |  
|Asia-Pacific (excluding Japan) |  |                    | 4,048  |   |                  |   | 2,961  |                 |  |   | 11,689          |   |  |   | 7,494  |  
|                               |  |                    |        |   |                  |   |        |                 |  |   |                 |   |  |   |        |  
|                               |  | $                  | 29,662 |   |                  | $ | 36,458 |                 |  | $ | 58,503          |   |  | $ | 82,200 |  
|                               |  |                    |        |   |                  |   |        |                 |  |   |                 |   |  |   |        |  
|North America*                 |  |                    | 57     | % |                  |   | 55     | %               |  |   | 55              | % |  |   | 54     | %
|Europe                         |  |                    | 8      | % |                  |   | 16     | %               |  |   | 8               | % |  |   | 23     | %
|Japan                          |  |                    | 21     | % |                  |   | 21     | %               |  |   | 17              | % |  |   | 14     | %
|Asia-Pacific (excluding Japan) |  |                    | 14     | % |                  |   | 8      | %               |  |   | 20              | % |  |   | 9      | %
|                               |  |                    |        |   |                  |   |        |                 |  |   |                 |   |  |   |        |  
|                               |  |                    | 100    | % |                  |   | 100    | %               |  |   | 100             | % |  |   | 100    | %
|                               |  |                    |        |   |                  |   |        |                 |  |   |                 |   |  |   |        |  



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

For the three and six months ended November 1, 2009, the Company had one (11% of total revenue) and no customer, respectively,
representing 10% or more of total revenue. For the three and six months ended November 2, 2008, the Company had two (each 10% of total revenue) and one customers (13% of total revenue), respectively, representing 10% or more of total revenue.

Note 18.    Related Party Transactions

In fiscal 2004, the Company began leasing a building for its corporate headquarters from one of its customers under a seven-year lease
agreement, as amended in February 2007, which expires in 2010. Under the lease amendment, the Company vacated most of the building and is not obligated to make rent payments effective January 31, 2007. During the three and six months ended
November 1, 2009, the Company recorded $0.2 million and $0.4 million, respectively, of rent expense related to this lease and recognized $1.8 million, and $3.5 million, respectively, in revenue from the sale of software licenses to this
customer. During the three and six months ended November 2, 2008, the Company recorded $0.1 million and $0.3 million of rent expense related to this lease and recognized $3.2 million, and $3.8 million, respectively, in revenue from the
sale of software licenses to this customer.

Note 19.    Subsequent Events

The Company has evaluated subsequent events that have occurred through December 10, 2009, the date of financial statement issuance.

On December 1, 2009, Bruce Eastman, Magmas Corporate Vice President, Worldwide Sales announced his intention to
resign from Magma, effective as of December 2, 2009. On December 1, 2009, Magmas Board of Directors approved the material terms of a severance arrangement for Mr. Eastman. In connection with his resignation, Mr. Eastman
will enter into a separation agreement and mutual release with Magma and will receive a lump sum amount equal to three months of his base salary plus three months of COBRA coverage, and three months of accelerated vesting of his unvested stock
options and restricted stock units.



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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
our condensed consolidated financial statements and results appearing elsewhere in this Quarterly Report on Form 10-Q and with Managements Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report
on Form 10-K for the fiscal year ended May 3, 2009. Throughout this section, we make forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act
of 1934, as amended. 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. These forward-looking statements are made in reliance upon the safe harbor provision of The Private Securities Litigation Reform Act of 1995. Our actual results of operations and financial performance could differ
significantly from those expressed in or implied by our forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to the risks discussed herein under the caption Risk Factors or
included elsewhere in the Quarterly Report on Form 10-Q, and in our Annual Report on Form 10-K for the fiscal year May 3, 2009. We do not intend to, and we do not undertake any additional obligation to update these forward-looking statements
after the date of this report to reflect actual results or future events or circumstances.

Overview

We provide EDA software products and related services. Our software enables chip designers to reduce the time it takes to design and produce
complex integrated circuits used in the communications, computing, consumer electronics, networking and semiconductor industries. Our products are used in all major phases of the chip development cycle, from initial design through physical
implementation. Our focus is on software used to design the most technologically advanced integrated circuits, specifically those with minimum feature sizes of 0.13 micron and smaller.

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

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

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

During the second quarter of fiscal 2010,
we recognized quarterly revenue of $29.7 million, which increased 3% from the preceding quarter and decreased 19% from the second quarter of fiscal 2009. License sales for the second quarter of fiscal 2010 accounted for approximately 66% of
total revenue, compared to 70% in the preceding quarter and 70% in the second quarter of the prior fiscal year.



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Global Markets

Recent market and economic conditions have been unprecedented and challenging with tighter credit conditions and slower growth through fiscal 2009 and the first six months of fiscal 2010. Continued
concerns about the global financial and banking system, systemic impact of inflation (or deflation), energy costs, geopolitical issues, the availability and cost of credit, the U.S. mortgage market and a declining real estate market in the U.S. have
contributed to increased market volatility and diminished expectations for the global economy generally. These concerns, combined with volatile oil prices, declining business and consumer confidence and increased unemployment have recently
contributed to volatility of unprecedented levels. In particular, the semiconductor industry continues to be materially adversely affected by the macroeconomic environment.

As a result of these market conditions, the availability and cost of credit has been and may continue to be adversely affected by illiquid
credit markets and wider credit spreads. Concern about the stability of the financial markets has led many lenders and institutional investors to reduce, and in some cases, cease to provide funding to borrowers. Continued turbulence in the U.S. and
global markets and economies has adversely affected our liquidity and financial condition, and the liquidity and financial condition of our customers. If these market conditions continue, they may continue to limit our ability to access the capital
markets to meet liquidity needs, resulting in an adverse effect on our financial condition and results of operations.

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 to be our most critical policies due to the
estimation processes involved in each.

Revenue recognition

We recognize revenue in accordance with ASC 985-605, SoftwareRevenue Recognition, which generally requires revenue earned on
software arrangements involving multiple elements (such as software products, upgrades, enhancements, maintenance, installation and training) to be allocated to each element based on the relative fair values of the elements. The fair value of an
element must be based on evidence that is specific to us. If evidence of fair value does not exist for each element of a license arrangement and maintenance is the only undelivered element, then all revenue for the license arrangement is recognized
over the term of the agreement. If evidence of fair value does exist for the elements that have not been delivered, but does not exist for one or more delivered elements, then revenue is recognized using the residual method, under which recognition
of revenue for the undelivered elements is deferred and the residual license fee is recognized as revenue immediately.

Our
revenue recognition policy is detailed in Note 1 to the Consolidated Financial Statements on Form 10-K for the year ended May 3, 2009. 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 collectability 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 is recognized when customer installments are due and payable.

In order for
an arrangement to be considered to have fixed or determinable fees, 100% of the license, services and initial post contract support fee is to be paid within one year or less from the order date. We have a history of collecting fees on such
arrangements according to contractual terms. Arrangements with payment terms extending beyond twelve months are considered not to be fixed or determinable.



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Collectability is probable.    In order to recognize revenue, we
must make a judgment about the collectability of the arrangement fee. Our judgment of the collectability 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 collectability is not probable
based upon our credit review process, revenue is recognized on a cash receipts basis (as each payment is collected).

Licenses revenue and
bundled licenses and services revenue

We derive license revenue primarily from licenses of our design and implementation
software and, to a lesser extent, from licenses of our analysis and verification products. We license our products under time-based and perpetual licenses whereby license revenue is recognized after the execution of a license agreement and the
delivery of the product to the customer, provided that there are no uncertainties surrounding the product acceptance, fees are fixed or determinable, collection is probable and there are no remaining obligations other than maintenance.

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

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

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

Services revenue

We derive
services revenue primarily from consulting and training for our software products and from maintenance fees for our products. Most of our license agreements include maintenance, generally for a one-year period, renewable annually. Services revenue
from maintenance arrangements is recognized on a straight-line basis over the maintenance term. Because we have VSOE of fair value for consulting and training services, 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

We account for stock-based compensation in accordance with ASC 718, CompensationStock Compensation(ASC 718), using the modified prospective transition method. Under ASC 718, stock-based compensation expense is
measured at the grant date, based on the fair value of the award, and is recognized as expense, net of estimated forfeitures, over the vesting period of the award.



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Determining the fair value of stock-based awards at the grant date requires the input of
various highly subjective assumptions, including expected future stock price volatility, expected term of instruments and expected forfeiture rates. We established the expected term for employee options and awards, as well as forfeiture rates, based
on the historical settlement experience, while giving consideration to vesting schedules and to options that have estimated life cycles less than the contractual terms. Assumptions for option exercises and pre-vesting terminations of options were
stratified for employee groups with sufficiently distinct behavior patterns. Expected future stock price volatility was developed based on the average of our historical weekly stock price volatility and average implied volatility. These input
factors are subjective and are determined using managements judgment. If actual results differ significantly from these estimates, stock-based compensation expense and our results of operations could be materially affected.

Unbilled accounts receivable

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

Allowances for doubtful accounts

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

As of November 1, 2009, three of our customers each accounted for more than 10% of total receivables. The allowance for doubtful
accounts represents our best estimate, but changes in circumstances relating to accounts receivable may result in a requirement for additional allowances in the future. If actual losses are significantly greater than the allowance we have
established, that would increase our sales and marketing expenses and reported net loss. Conversely, if actual credit losses are significantly less than our allowance, this would decrease our sales and marketing expenses and our reported net income
would increase.

Fair value option

We account for financial instruments in accordance with ASC 825-10, Financial Instruments Overall Recognition (ASC 825-10). ASC 825-10 permits entities to choose to measure many
financial instruments and certain other items at fair value, with changes in fair value recognized in earnings each reporting period. The election, called the fair value option, enables entities to achieve an offset accounting effect for changes in
fair value of certain related assets and liabilities without having to apply complex hedge accounting provisions.

We adopted
ASC 825-10 in the first quarter of fiscal 2009. Our adoption of ASC 825-10 permits us to elect to carry certain financial instruments at fair value with corresponding changes in fair value reported in the results of operations. The election to carry
an instrument at fair value is made at the individual contract level and can be made only at origination or inception of the instrument, or upon the occurrence of an event that results in a new basis of accounting. Our election is on a prospective
basis and is irrevocable.

During the second quarter of fiscal 2009, we elected fair value accounting for the purchased put
option recorded in connection with the settlement agreement signed with UBS Financial Services, Inc. (UBS). This election was made in order to mitigate volatility in earnings caused by accounting for the purchased put option and
underlying auction rate securities (ARS) under different methods.



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Total net gain on the put option and the ARS of $0.2 million and $0.3 million was reported
in valuation gain (loss) in the condensed consolidated statement of operations for the three and six months ended November 1, 2009, respectively.

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

We account for our investments in
accordance with ASC 320-10, Investments in Debt and Equity Securities (ASC 320-10). These investments are typically classified as available-for-sale, and are recorded on the balance sheet at fair market value as of the balance
sheet date, with gains or losses considered to be temporary in nature reported as a component of other comprehensive income (loss) within the stockholders equity on our condensed consolidated balance sheets. As of November 1, 2009,
investments in ARS have been classified as trading, and are recorded on the balance sheet at fair market value as of the balance sheet date, with gains or losses recorded as other income or expense on our condensed consolidated statements of
operations.

The Company measures fair value in accordance with the provisions in ASC 820-10, Fair Value Measurements and
Disclosures(ASC 820-10). ASC 820-10 defines fair value and establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs
such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data
exists, therefore requiring an entity to develop its own assumptions.

Long-term investments on the condensed consolidated
balance sheets consist of ARS that are AAA rated and are secured by pools of student loans guaranteed by state regulated higher education agencies and reinsured by the U.S. Department of Education and the UBS purchased put option. Historically,
liquidity for investors in ARS was provided via an auction process that reset the applicable interest rate generally every 28 days, allowing investors to either roll over their investments or sell them at par. Beginning in the fourth quarter of
fiscal 2008, there was insufficient demand for these types of investments during the auctions and, as a result, these securities are not currently liquid.

In October 2008, we entered into an agreement with UBS which provides us with Auction Rate Securities Rights (Rights) to sell our ARS at par value to UBS at any time during the period
June 30, 2010 through July 2, 2012. These Rights are a separate freestanding instrument accounted for separately from the ARS, and are registered, nontransferable securities accounted for as a purchased put option initially recorded at
fair value. Under the Rights agreement, UBS may, at its discretion, sell the ARS at any time through July 2, 2012 without prior notice to us and must pay us par value for the ARS within one day of the sale transaction settlement. Additionally,
UBS offered a no net cost loan to us up to 75% of the market value of the ARS as determined by UBS until June 30, 2010. Due to our entering into this agreement with UBS and enabling UBS to sell the ARS at any time, the ARS
previously reported as available-for-sale have been transferred to trading securities.

As of November 1, 2009, there was
insufficient observable market information available to determine the fair value of our ARS. Prior to November 1, 2009, we estimated Level 3 fair values for these securities based on the investment banks valuations. The investment bank
valued student loan ARSs as floating rate notes with three pricing inputs: the coupon, the current discount margin or spread, and the maturity. The coupon was generally assumed to equal the maximum rate allowed under the terms of the instrument, the
current discount margin was based on an assessment of observable yields on instruments bearing comparable risks, and the maturity was based on an assessment of the terms of the underlying instrument and the potential for restructuring the ARS. The
primary unobservable input to the valuation was the maturity assumption which was set at five years for the majority of ARS instruments. Through January 6, 2008, the ARS were valued at par value due to the frequent resets that historically
occurred through the auction process.

As of November 1, 2009, we engaged a third party valuation service to model Level
3 fair value using an income approach. We reviewed the methodologies employed by the third party models. This included a review of all relevant data inputs and the appropriateness of key model assumptions.



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The pricing assumptions for the ARS included the coupon rate, the estimated time to
liquidity, current market rates for publicly traded corporate debt of similar credit rating and an adjustment for lack of liquidity. The coupon rate was assumed to equal the stated maximum auction rate being received, which is determined based on
the applicable 91-day U.S. Treasury rate plus 1.20% premium according to provisions outlined in each securitys agreement. The current estimated time to liquidity was 5.0 years based on (i) expectations from industry brokers for liquidity
in the market and (ii) the period over which UBS and other broker-dealers that had issued ARS have agreed to redeem certain ARS at par value.

The purchased put option gives us the right to sell the ARS to UBS for a price equal to par value during the period June 30, 2010 to July 2, 2012, providing liquidity for the ARS sooner than the
currently estimated 5.0 years. As we plan to exercise the purchased put option on or around June 30, 2010, the value of the purchased put option lies in (i) the ability to sell the securities thereby creating liquidity approximately 0.7
year before the ARS market is expected to become liquid and (ii) the avoidance of receiving below-market coupon rate while the security is illiquid and auctions are failing. The fair value of the purchased put option represents the difference
between the ARS with an estimated time to liquidity of 5.0 years and the ARS with an estimated time to liquidity of 0.7 year as the purchased put option allows for the acceleration of liquidity and the avoidance of a below-market coupon rate over
the two year time period.

Based on the Level 3 valuation and the transfer of the ARS from the available-for-sale category to
the trading category, we recorded an unrealized gain of $0.4 million and an unrealized loss of $1.9 million for the quarter ended November 1, 2009 and November 2, 2008, respectively, including the transfer of accumulated temporary losses
of $0 million and $0.9 million, respectively, from other comprehensive loss previously recorded as a component of stockholders equity. For the quarter ended November 1, 2009, total other-than-temporary impairment gain on ARS of $0.4
million was reported in the valuation gain (loss), net in the consolidated statement of operations. This gain was offset by losses related to the purchased put option of $0.2 million. For the six months ended November 1, 2009, we recorded an
ARS gain of $1.2 million offset by losses related to the purchased put option of $0.8 million.

Accounting for asset purchases and
business combinations

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

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

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

Goodwill impairment

ASC 350-20, Goodwill (ASC 350-20), 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



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tests in certain circumstances. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting
units, assigning goodwill to reporting units, and determining the fair value of the reporting units. We have determined that we have one reporting unit (see Note 13 to the Companys Form 10-K for the year ended May 3, 2009). Significant
judgments required to estimate the fair value of reporting units include estimating future cash flows, determining appropriate discount rates and other assumptions. Changes in these estimates and assumptions could materially affect the determination
of fair value for the reporting units. Any impairment losses recorded in the future could have a material adverse impact on our financial condition and results of operations.

ASC 350-20 provides for a two-step approach to determining whether and by how much goodwill has been impaired. The first step requires a
comparison of the fair value of the Company (reporting unit) to its net book value. If the fair value is greater, then no impairment is deemed to have occurred. If the fair value is less, then the second step must be performed to determine the
amount, if any, of actual impairment. To determine the fair value, the Companys review process includes the income method and is based on a discounted future cash flow approach that uses estimates including the following for the reporting
unit: revenue, based on assumed market growth rates and its assumed market share; estimated costs; and appropriate discount rates based on the particular businesss weighted average cost of capital. The Companys estimates of market
segment growth, market segment share and costs are based on historical data, various internal estimates and certain external sources, and are based on assumptions that are consistent with the plans and estimates it uses to manage the underlying
business. The Companys business consists of both established and emerging technologies and its forecasts for emerging technologies are based upon internal estimates and external sources rather than historical information. The Company also
considered its market capitalization on the dates of its impairment tests in determining the fair value of the respective business. The Company completed the first step analysis during the second fiscal quarter and determined that the fair value of
its reporting units was in excess of the net book value on that date.

The Company conducts an annual goodwill impairment test
at December 31. Accordingly, the Company conducted this test during the third quarter and concluded that events had occurred and circumstances had changed during the third fiscal quarter of 2008 which showed the existence of impairment
indicators including a significant decline in the Companys stock price and continued deterioration in the EDA software products market and the related impact on revenue forecasts of the Company. Consistent with the Companys approach in
its annual impairment testing, in assessing the fair value of the reporting unit, the Company considered both the market approach and income approach. Under the market approach, the fair value of the reporting unit is based on quoted market prices
and the number of shares outstanding of the Companys common stock. Under the income approach, the fair value of the reporting unit is based on the present value of estimated future cash flows. At December 31, 2008, the Company determined
that the fair value of its reporting units was less than the net book value of the net assets of the reporting unit and accordingly, the Company performed step two of the impairment test.

In step two of the impairment test, the Company determined the implied fair value of the goodwill and compared it to the carrying value of
the goodwill. With the assistance of a third party valuation firm, the Company allocated the fair value of the reporting unit to all of its assets and liabilities as if the reporting unit had been acquired in a business combination and the fair
value of the reporting unit was the price paid to acquire the reporting unit. The excess of the fair value of the reporting unit over the amount assigned to its assets and liabilities is the implied fair value of goodwill. The Companys step
two analysis resulted in a reduction in fair value of goodwill, and therefore, the Company recognized an impairment charge of $60.1 million in the third quarter of fiscal 2009.

We performed the step one analysis in the second quarter of fiscal 2010 and determined that the fair value of our reporting units was in
excess of the net book value as of November 1, 2009.



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Valuation of intangibles and long-lived assets

The Companys intangible assets include acquired intangibles, excluding goodwill. Acquired intangibles with definite lives are amortized
on a straight-line basis over the remaining estimated economic life of the underlying products and technologies (original lives assigned are one to six years). The Company reviews its long-lived assets for impairment in accordance with ASC 360-10,
Property, Plant and Equipment (ASC 360-10). For assets to be held and used, the Company initiates its review whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be
recoverable. Recoverability of an asset is measured by comparison of its carrying amount to the expected future undiscounted cash flows that the asset is expected to generate. If it is determined that an asset is not recoverable, an impairment loss
is recorded in the amount by which the carrying amount of the asset exceeds its fair value. Based on the Companys review, no impairment is indicated.

Income taxes

We account for income taxes in accordance with ASC
740-10, Income Taxes. Significant judgment is required in determining our provision for income taxes. In the ordinary course of business, there are many transactions and calculations where the ultimate tax outcome is uncertain. The amount of
income taxes we pay could be subject to audits by federal, state, and foreign tax authorities, which could result in proposed assessments. Although we believe that our estimates are reasonable, no assurance can be given that the final outcome of
these tax matters will not be different from what was reflected in our historical income tax provisions.

Deferred tax assets
and liabilities result primarily from temporary timing differences between book and tax valuation of assets and liabilities as well as federal and state net operating loss and credit carryforwards. We assess the likelihood that our net deferred tax
assets will be recovered from future taxable income and, to the extent we believe that the recovery is not likely, we establish a valuation allowance. We consider all available positive and negative evidence including our past operating results, the
existence of cumulative losses in the most recent fiscal years, future taxable income, and ongoing prudent and feasible tax planning strategies in assessing the amount of the valuation allowance. As of November 1, 2009, we believe a valuation
allowance against our U.S. net deferred tax assets is required. We will continue to evaluate the realizability of the deferred tax assets on a quarterly basis. Future reversals or increases to our valuation allowance could have a significant impact
on our future earnings.

Strategic investments in privately-held companies

Our strategic equity investments consist of preferred stock and convertible notes that are convertible into preferred or common stock of
several privately-held companies. The carrying value of our portfolio of strategic equity investments totaled $3.1 million at November 1, 2009. Our ability to recover our investments in private, non-marketable equity securities and convertible
notes and to earn a return on these investments is primarily dependent on how successfully these companies are able to execute on their business plans and how well their products are accepted, as well as their ability to obtain additional capital
funding to continue operations.

Under our accounting policy, the carrying value of a non-marketable investment is the
amount paid for the investment unless it has been determined to be other than temporarily impaired, in which case we write the investment down to its estimated fair value. For equity investments where our ownership interest is between 20% to 50%, or
where we can exercise significant influence on the investees operating or financial decisions, we record our share of net equity income (loss) of the investee based on our proportionate ownership.

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



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equity preferences held by us or others. If an investee obtains additional funding at a valuation lower than our carrying amount, we presume that the investment is other than temporarily
impaired, unless specific facts and circumstances indicate otherwise, such as when we hold contractual rights that give us a preference over the rights of other investors. As the equity markets have experienced volatility over the past few years, we
have experienced substantial impairments in our portfolio of non-marketable equity securities. If certain equity market conditions do not improve, as companies within our portfolio attempt to raise additional funds, the funds may not be available to
them, or they may receive lower valuations, with more onerous investment terms than in previous financings, and the investments will likely become impaired. However, we are not able to determine at the present time which specific investments are
likely to be impaired in the future, or the extent or timing of individual impairments. We recorded impairment charges related to these non-marketable equity investments of $0.1 million and $0.2 million, respectively, for the three and six months
ended November 1, 2009. Similarly, we recorded impairment charges related to non-marketable equity investments of $0.1 million and $0.3 million, respectively, for the three and six months ended November 2, 2008.

Results of Operations

Revenue

Revenue is comprised of licenses revenue, bundled licenses and services revenue, and services revenue. Licenses
revenue consists of fees for time-based or perpetual licenses of our software products. Bundled licenses and services revenue consists of fees for software licenses and post-contract customer support (PCS) where we do not have Vendor
Specific Objective Evidence (VSOE) of fair value of PCS. Services revenue consists of fees for services, such as customer training, consulting and PCS associated with licenses where we have established VSOE to account for services
separately. We recognize revenue based on the specific terms and conditions of the license contracts with our customers for our products and services as described in detail above under the caption Critical Accounting Policies and
Estimates.

In our consolidated financial statements, we classify our license arrangements as either bundled or
unbundled. Bundled license contracts include maintenance with the license fee and do not include optional maintenance periods. Unbundled license contracts have separate maintenance fees and include optional maintenance periods. We offer various
contractual terms to our customers in designing license agreements to accommodate customer preferences, which are unrelated to product performance and service requirements, order volume, or pricing. The contractual terms that result in the
recognition of bundled licenses and services revenue are subject to customer preferences and have historically been inconsistently elected by customers. Moreover, revenue from existing long-term contracts frequently shifts between revenue
categories, with no change in the aggregate revenues recognized from such contracts. In light of the foregoing, we have concluded that changes in results of the bundled licenses and services revenue category generally do not indicate a material
trend in our historical or future performance and therefore are not discussed below.

For management reporting and analysis
purposes we classify our revenue as either licenses or services. Bundled licenses and services are divided into their component parts and included with either licenses or services for management analysis.

Licenses revenue

Licenses revenue is divided into the following categories:



| |  |  | Ratable
| | - |  | -------



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



| |  |  | Up-Front
| | - |  | --------



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



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We use these classifications of 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. 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s discussion and analysis purposes, prior periods are not restated to reflect that change.

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. In our statements of operations the revenue for these bundled arrangements for both license and service is classified as bundled licenses and services. For management reporting
and analysis purposes we separate the licenses portion from the services portion. For unbundled time-based licenses, we recognize license revenue ratably over the license term. We refer to these 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.

Due & Payable.    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. For management reporting and analysis purposes, we refer to this type of license generally as Due & Payable.

Up-Front.    For unbundled time-based and perpetual licenses, we recognize license revenue upon shipment if the payment terms require the customer to pay 100% of the license fee
and the initial period of PCS within one year from the agreement date and payments are generally linear. 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.

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

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, due & 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 in Part II, Item 1A of this Form 10-Q.

Services revenue

Services revenue is 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 ratably over the maintenance term. Because we have VSOE of fair value for consulting and training services, revenue is recognized as these services are performed or completed.



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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 by category as defined for management reporting
and analysis purposes for the three and six months ended November 1, 2009 and November 2, 2008 (in thousands, except for percentage data):



|                       |  |                 |        |             |     |   |                 |   |             |  |     |              |  |   |         |   |  |     |   
|---------------------- |  | --------------- | ------ | ----------- | --- | - | --------------- | - | ----------- |  | --- | ------------ |  | - | ------- | - |  | --- | --
|Three Months Ended:    |  | November 1,2009 |        | % ofRevenue |     |   | November 2,2008 |   | % ofRevenue |  |     | DollarChange |  |   | %Change |  
|Revenue                |  |                 |        |             |     |   |                 |   |             |  |     |              |  |   |         |   |  |     |   
|Licenses revenue **    |  |                 |        |             |     |   |                 |   |             |  |     |              |  |   |         |   |  |     |   
|Ratable                |  | $               | 6,592  |             | 22  | % |                 | $ | 6,387       |  | 18  | %            |  | $ | 205     |   |  | 3   | % 
|Due & Payable          |  |                 | 10,664 |             | 36  | % |                 |   | 13,417      |  | 37  | %            |  |   | (2,753  | ) |  | (21 | )%
|Up-Front*              |  |                 | 1,432  |             | 5   | % |                 |   | 4,576       |  | 13  | %            |  |   | (3,144  | ) |  | (69 | )%
|Cash Receipts          |  |                 | 989    |             | 3   | % |                 |   | 1,151       |  | 3   | %            |  |   | (162    | ) |  | (14 | )%
|                       |  |                 |        |             |     |   |                 |   |             |  |     |              |  |   |         |   |  |     |   
|Total Licenses revenue |  |                 | 19,677 |             | 66  | % |                 |   | 25,531      |  | 70  | %            |  |   | (5,854  | ) |  | (23 | )%
|Services revenue **    |  |                 | 9,985  |             | 34  | % |                 |   | 10,927      |  | 30  | %            |  |   | (942    | ) |  | (9  | )%
|                       |  |                 |        |             |     |   |                 |   |             |  |     |              |  |   |         |   |  |     |   
|Total Revenue          |  |                 | 29,662 |             | 100 | % |                 |   | 36,458      |  | 100 | %            |  |   | (6,796  | ) |  | (19 | )%
|                       |  |                 |        |             |     |   |                 |   |             |  |     |              |  |   |         |   |  |     |   
|Cost of Revenue        |  |                 |        |             |     |   |                 |   |             |  |     |              |  |   |         |   |  |     |   
|License                |  |                 | 1,164  |             | 4   | % |                 |   | 6,444       |  | 18  | %            |  |   | (5,280  | ) |  | (82 | )%
|Services               |  |                 | 4,017  |             | 14  | % |                 |   | 5,908       |  | 16  | %            |  |   | (1,891  | ) |  | (32 | )%
|                       |  |                 |        |             |     |   |                 |   |             |  |     |              |  |   |         |   |  |     |   
|Total cost of sales    |  |                 | 5,181  |             | 17  | % |                 |   | 12,352      |  | 34  | %            |  |   | (7,171  | ) |  | (58 | )%
|                       |  |                 |        |             |     |   |                 |   |             |  |     |              |  |   |         |   |  |     |   
|Gross Profit           |  | $               | 24,481 |             | 83  | % |                 | $ | 24,106      |  | 66  | %            |  | $ | 375     |   |  | 2   | % 
|                       |  |                 |        |             |     |   |                 |   |             |  |     |              |  |   |         |   |  |     |   
|                       |  |                 |        |             |     |  
|Six Months Ended:      |  | November 1,2009 |        | % ofRevenue |     |   | November 2,2008 |   | % ofRevenue |  |     | DollarChange |  |   | %Change |  
|Revenue                |  |                 |        |             |     |   |                 |   |             |  |     |              |  |   |         |   |  |     |   
|Licenses revenue **    |  |                 |        |             |     |   |                 |   |             |  |     |              |  |   |         |   |  |     |   
|Ratable                |  | $               | 13,052 |             | 22  | % |                 | $ | 22,386      |  | 27  | %            |  | $ | (9,334  | ) |  | (42 | )%
|Due & Payable          |  |                 | 20,717 |             | 35  | % |                 |   | 25,844      |  | 31  | %            |  |   | (5,127  | ) |  | (20 | )%
|Up-Front*              |  |                 | 2,281  |             | 4   | % |                 |   | 16,250      |  | 20  | %            |  |   | (13,969 | ) |  | (86 | )%
|Cash Receipts          |  |                 | 3,264  |             | 6   | % |                 |   | 2,659       |  | 3   | %            |  |   | 605     |   |  | 23  | % 
|                       |  |                 |        |             |     |   |                 |   |             |  |     |              |  |   |         |   |  |     |   
|Total Licenses revenue |  |                 | 39,314 |             | 67  | % |                 |   | 67,139      |  | 82  | %            |  |   | (27,825 | ) |  | (41 | )%
|Services revenue **    |  |                 | 19,189 |             | 33  | % |                 |   | 15,061      |  | 18  | %            |  |   | 4,128   |   |  | 27  | % 
|                       |  |                 |        |             |     |   |                 |   |             |  |     |              |  |   |         |   |  |     |   
|Total Revenue          |  |                 | 58,503 |             | 100 | % |                 |   | 82,200      |  | 100 | %            |  |   | (23,697 | ) |  | (29 | )%
|                       |  |                 |        |             |     |   |                 |   |             |  |     |              |  |   |         |   |  |     |   
|Cost of Revenue        |  |                 |        |             |     |   |                 |   |             |  |     |              |  |   |         |   |  |     |   
|License                |  |                 | 2,170  |             | 4   | % |                 |   | 12,699      |  | 15  | %            |  |   | (10,529 | ) |  | (83 | )%
|Services               |  |                 | 7,848  |             | 13  | % |                 |   | 11,983      |  | 15  | %            |  |   | (4,135  | ) |  | (35 | )%
|                       |  |                 |        |             |     |   |                 |   |             |  |     |              |  |   |         |   |  |     |   
|Total cost of sales    |  |                 | 10,018 |             | 17  | % |                 |   | 24,682      |  | 30  | %            |  |   | (14,664 | ) |  | (59 | )%
|                       |  |                 |        |             |     |   |                 |   |             |  |     |              |  |   |         |   |  |     |   
|Gross Profit           |  | $               | 48,485 |             | 83  | % |                 | $ | 57,518      |  | 70  | %            |  | $ | (9,033  | ) |  | (16 | )%
|                       |  |                 |        |             |     |   |                 |   |             |  |     |              |  |   |         |   |  |     |   



|* | Includes $1.4 million or 5%, and 2.1 million or 4% of total revenue from new contracts for the three and six months ended November 1, 2009 respectively.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------

|** | Bundled licenses and services in the consolidated statement of operations consisted of $6,440 of license revenue and $1,752 of service revenue for the three months
ended November 1, 2009, and $12,298 of license revenue and $3,471 of service revenue for the six months ended November 1, 2009.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We market our products and related services to customers in four geographic regions: North America, Europe (including Europe, the Middle East and Africa), Japan, and Asia-Pacific (including India, South
Korea, Taiwan, Hong Kong and the Peoples Republic of China). Internationally, we market our products and services



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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 November 1, 2009 and November 2, 2008 (in thousands, except for percentage data):



|                               |  |                 |        |             |     |   |                 |   |             |  |     |              |  |   |         |   |  |     |   
|------------------------------ |  | --------------- | ------ | ----------- | --- | - | --------------- | - | ----------- |  | --- | ------------ |  | - | ------- | - |  | --- | --
|Three Months Ended:            |  | November 1,2009 |        | % ofRevenue |     |   | November 2,2008 |   | % ofRevenue |  |     | DollarChange |  |   | %Change |  
|Domestic                       |  | $               | 16,937 |             | 57  | % |                 | $ | 20,043      |  | 55  | %            |  | $ | (3,106  | ) |  | (15 | )%
|International:                 |  |                 |        |             |     |   |                 |   |             |  |     |              |  |   |         |   |  |     |   
|Europe                         |  |                 | 2,387  |             | 8   | % |                 |   | 5,833       |  | 16  | %            |  |   | (3,446  | ) |  | (59 | )%
|Japan                          |  |                 | 6,290  |             | 21  | % |                 |   | 7,621       |  | 21  | %            |  |   | (1,331  | ) |  | (17 | )%
|Asia-Pacific (excluding Japan) |  |                 | 4,048  |             | 14  | % |                 |   | 2,961       |  | 8   | %            |  |   | 1,087   |   |  | 37  | % 
|                               |  |                 |        |             |     |   |                 |   |             |  |     |              |  |   |         |   |  |     |   
|Total international            |  |                 | 12,725 |             | 43  | % |                 |   | 16,415      |  | 45  | %            |  |   | (3,690  | ) |  | (22 | )%
|                               |  |                 |        |             |     |   |                 |   |             |  |     |              |  |   |         |   |  |     |   
|Total revenue                  |  | $               | 29,662 |             | 100 | % |                 | $ | 36,458      |  | 100 | %            |  | $ | (6,796  | ) |  | (19 | )%
|                               |  |                 |        |             |     |   |                 |   |             |  |     |              |  |   |         |   |  |     |   
|                               |  |                 |        |             |     |  
|Six Months Ended:              |  | November 1,2009 |        | % ofRevenue |     |   | November 2,2008 |   | % ofRevenue |  |     | DollarChange |  |   | %Change |  
|Domestic                       |  | $               | 31,935 |             | 55  | % |                 | $ | 44,375      |  | 54  | %            |  | $ | (12,440 | ) |  | (28 | )%
|International:                 |  |                 |        |             |     |   |                 |   |             |  |     |              |  |   |         |   |  |     |   
|Europe                         |  |                 | 4,956  |             | 8   | % |                 |   | 18,598      |  | 23  | %            |  |   | (13,642 | ) |  | (73 | )%
|Japan                          |  |                 | 9,923  |             | 17  | % |                 |   | 11,733      |  | 14  | %            |  |   | (1,810  | ) |  | (15 | )%
|Asia-Pacific (excluding Japan) |  |                 | 11,689 |             | 20  | % |                 |   | 7,494       |  | 9   | %            |  |   | 4,195   |   |  | 56  | % 
|                               |  |                 |        |             |     |   |                 |   |             |  |     |              |  |   |         |   |  |     |   
|Total international            |  |                 | 26,568 |             | 45  | % |                 |   | 37,825      |  | 46  | %            |  |   | (11,257 | ) |  | (30 | )%
|                               |  |                 |        |             |     |   |                 |   |             |  |     |              |  |   |         |   |  |     |   
|Total revenue                  |  | $               | 58,503 |             | 100 | % |                 | $ | 82,200      |  | 100 | %            |  | $ | (23,697 | ) |  | (29 | )%
|                               |  |                 |        |             |     |   |                 |   |             |  |     |              |  |   |         |   |  |     |   

Revenue

Revenue for the three and six months ended November 1, 2009 was $29.7 million and $58.5 million, respectively, a decrease of 19% and 29%, respectively, from the three and six months ended
November 2, 2008.

Licenses revenue decreased by 23% and 35%, respectively, in the three and six months ended
November 1, 2009 compared to the three and six months ended November 2, 2008. Licenses revenue as a percentage of total revenue decreased by 4% and 6% in the three and six months ended November 1, 2009, respectively, compared to the
three and six months ended November 2, 2008. We analyzed the license purchasing trends of our key customers, those that make up 70% or more of revenue, for the three and six months ended November 1, 2009. The decrease in licenses revenue
was primarily the result of a sharp downturn in the semiconductor and systems industries, a reduction of electronic design automation budgets and customers experiencing continued end market softness in demand and reduced visibility in forecasting
their business, which caused customers to reduce spending.



| |  |  | Ratable revenue increased $0.2 million for the three months ended November 1, 2009 and decreased $3.3 million for the six months ended
November 1, 2009 compared to the three and six months ended November 2, 2008. Although ratable revenue decreased due to the overall decrease in revenue, ratable revenue increased as a percentage of total revenue by 4% and 2% respectively,
in the three and six months ended November 1, 2009. The increase in ratable revenue as a percent of total revenue was a result of our efforts to increase the portion of revenue based on backlog to 90% or more of total revenue to reduce
volatility and increase the predictability of our revenues, and thereby reduce due & payable and up-front revenues to 10% or less of total revenue.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Due & Payable revenue decreased $2.8 million and $5.1 million for the three and six months ended November 1, 2009, respectively,
compared to the three and six months ended November 2, 2008, a decrease of 21% and 20%, respectively.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Up-Front revenue decreased $3.1 million and $13.0 million in the three and six months ended November 1, 2009, respectively, compared to the
three and six months ended November 2, 2008, a decrease of 69% and 85%, respectively. These decreases were also attributable to our efforts to reduce due and payable revenue and increase ratable revenue.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Cash Receipts revenue decreased by $0.2 million during the three months ended November 1, 2009 and increased by $0.6 million during the six
months ended November 1, 2009 compared to the three and six months ended November 2, 2008, primarily because additional customers were classified as cash receipts customers. This increase is the result of the impact of a deterioration of
economic conditions in the industry and with respect to some of our customers.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Services revenue, as
a percent of total revenue, increased by 4% and 6% in the three and six months ended November 1, 2009, respectively, compared to the three and six months ended November 2, 2008. We believe the increases were primarily the result of timing
of customers purchases of services, as customers delayed licenses purchases in response to the end market softness in the demand, while continuing to purchase maintenance contracts and other services to support their ongoing activities.

Domestic revenuedecreased 15% and 28% in the three and six months ended November 1, 2009, respectively, compared
to the three and six months ended November 2, 2008. The decreases in domestic revenues were generally proportionate to the decreases in total revenues during the period and were primarily due to decreased customer orders. Domestic revenue as a
percentage of total revenue increased by 2% and 1% in the three and six months ended November 1, 2009, respectively, compared to the three and six months ended November 2, 2008.

International revenue decreased by 22% and 30% for the three and six months ended November 1, 2009, respectively, compared to
the three and six months ended November 2, 2008. The decreases in international revenues were generally proportionate to the decreases in total revenues during the periods and were primarily due to decreased customer orders. International
revenue as a percentage of total revenue decreased 2% and 1% for the three and six months ended November 1, 2009, respectively, compared to the three and six months ended November 2, 2008.

One customer accounted for 10% or more of total revenue during the three months ended November 1, 2009. No customer accounted for 10%
or more of total revenue during the six months ended November 1, 2009.

Cost of Revenue

Cost of licenses revenue primarily consists of amortization of acquired developed technology and other intangible assets which are
fixed in nature and variable expenses such as royalties and allocated outside sales representative expenses.

Cost of licenses
revenue decreased by $5.3 million and $10.5 million or 82% and 83%, during the three and six months ended November 1, 2009, respectively, compared to the three and six months ended November 2, 2008. Amortization charges related to acquired
developed technology and intangible assets decreased during the three and six months ended November 1, 2009 by $5.1 million and $10.0 million, respectively, compared to the three and six months ended November 2, 2008 primarily due to the
full amortization of significant intangible assets from acquisitions, a decrease in contingent acquisition earn-outs and a decrease in the expensed equipment costs of $0.2 million and $0.2 million during the three and six months ended
November 1, 2009, respectively, as compared to the three and six months ended November 2, 2008.

Cost of services
revenue primarily consists of personnel and related costs to provide product support, training and consulting services. Cost of services revenue also includes stock-based compensation expenses and asset depreciation.



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Cost of services revenue decreased by $1.9 million and $4.1 million for the three and six
months ended November 1, 2009, respectively, compared to the three and six months ended November 2, 2008. The change was primarily due to a net decrease of $2.0 million and $4.0 million, respectively, in the allocation of pre-sale costs
(primarily application engineering costs) from sales and marketing costs that were a result of staff reductions under the fiscal 2009 restructuring plan.

Operating expenses

The table below sets forth operating expense
data for the three and six months ended November 1, 2009 and November 2, 2008 (in thousands, except for percentage data):



|                                  |  |                 |        |             |    |   |                 |   |             |  |     |              |  |   |         |   |  |     |   
|--------------------------------- |  | --------------- | ------ | ----------- | -- | - | --------------- | - | ----------- |  | --- | ------------ |  | - | ------- | - |  | --- | --
|Three Months Ended:               |  | November 1,2009 |        | % ofRevenue |    |   | November 2,2008 |   | % ofRevenue |  |     | DollarChange |  |   | %Change |  
|Operating Expenses                |  |                 |        |             |    |   |                 |   |             |  |     |              |  |   |         |   |  |     |   
|Research and development          |  | $               | 11,728 |             | 40 | % |                 | $ | 19,047      |  | 52  | %            |  | $ | (7,319  | ) |  | (38 | )%
|Sales and marketing               |  |                 | 9,933  |             | 33 | % |                 |   | 15,474      |  | 42  | %            |  |   | (5,541  | ) |  | (36 | )%
|General and administrative        |  |                 | 4,530  |             | 15 | % |                 |   | 6,743       |  | 18  | %            |  |   | (2,213  | ) |  | (33 | )%
|Amortization of intangible assets |  |                 | 305    |             | 1  | % |                 |   | 838         |  | 2   | %            |  |   | (533    | ) |  | (64 | )%
|Restructuring charge              |  |                 | 247    |             | 1  | % |                 |   | 3,307       |  | 10  | %            |  |   | (3,060  | ) |  | (93 | )%
|                                  |  |                 |        |             |    |   |                 |   |             |  |     |              |  |   |         |   |  |     |   
|Total operating expenses          |  | $               | 26,743 |             | 90 | % |                 | $ | 45,409      |  | 124 | %            |  | $ | (18,666 | ) |  | (41 | )%
|                                  |  |                 |        |             |    |   |                 |   |             |  |     |              |  |   |         |   |  |     |   
|                                  |  |                 |        |             |    |  
|Six Months Ended:                 |  | November 1,2009 |        | % ofRevenue |    |   | November 2,2008 |   | % ofRevenue |  |     | DollarChange |  |   | %Change |  
|Operating Expenses                |  |                 |        |             |    |   |                 |   |             |  |     |              |  |   |         |   |  |     |   
|Research and development          |  | $               | 22,925 |             | 39 | % |                 | $ | 39,180      |  | 48  | %            |  | $ | (16,255 | ) |  | (41 | )%
|Sales and marketing               |  |                 | 19,703 |             | 34 | % |                 |   | 32,277      |  | 39  | %            |  |   | (12,574 | ) |  | (39 | )%
|General and administrative        |  |                 | 8,913  |             | 15 | % |                 |   | 13,695      |  | 17  | %            |  |   | (4,782  | ) |  | (35 | )%
|Amortization of intangible assets |  |                 | 610    |             | 1  | % |                 |   | 2,282       |  | 3   | %            |  |   | (1,672  | ) |  | (73 | )%
|Restructuring charge              |  |                 | 950    |             | 2  | % |                 |   | 5,327       |  | 7   | %            |  |   | (4,377  | ) |  | (82 | )%
|                                  |  |                 |        |             |    |   |                 |   |             |  |     |              |  |   |         |   |  |     |   
|Total operating expenses          |  | $               | 53,101 |             | 91 | % |                 | $ | 92,761      |  | 114 | %            |  | $ | (39,660 | ) |  | (43 | )%
|                                  |  |                 |        |             |    |   |                 |   |             |  |     |              |  |   |         |   |  |     |   

Research and development expense decreased by $7.3 million in the three months
ended November 1, 2009 compared to the three months ended November 2, 2008. The decrease was primarily due to a decrease in compensation expense of $3.9 million as a result of lower headcount and employee salary reductions implemented
mid-year in fiscal 2009 and a decrease in related employee taxes of $0.3 million as a result of lower salaries and headcount. The decrease was also attributable to decreases in consulting expenses of $0.4 million, bonus expense of $0.4 million,
travel related costs of $0.3 million due to cost cutting, deferred stock compensation expense of $0.9 million and the allocation of common expenses, such as information technology and facility related expenses, of $1.1 million.

Research and development expense decreased by $16.3 million, in the six months ended November 1, 2009 compared to the six months ended
November 2, 2008. The decrease was primarily due to a decrease in compensation expense of $8.6 million as a result of lower headcount and employee salary reductions implemented mid-year in fiscal 2009 and a decrease in related employee benefits
of $1.3 million as a result of lower salaries and headcount. The decrease was also attributable to decreases in consulting expenses of $1.0 million, bonus expense of $0.6 million, software maintenance costs of $0.2 million due to the costs being
fully amortized, travel related costs of $0.5 million due to cost cutting, and deferred stock compensation expense of $1.8 million and the allocation of common expenses, such as information technology and facility related expenses, of $2.0 million.

Sales and marketing expense decreased by $5.5 million in the three months ended November 1, 2009 as compared to
the three months ended November 2, 2008. The decrease was primarily due to a decrease in



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compensation expense of $3.6 million as a result of lower headcount and employee salary reductions implemented mid-year in fiscal 2009 and a decrease in related employee benefits of $0.4 million
as a result of lower salaries and headcount. The decrease was also attributable to decreases in marketing related expense of $0.2 million, bonus expense of $0.1 million, commission expense of $1.3 million due to decreased bookings, travel and
entertainment costs of $0.5 million due to lower spending on reduced sales, and the allocation of common expenses, such as information technology and facility related expenses of $0.9 million. The decrease was offset by a decrease in the allocation
of pre-sale costs (primarily application engineering costs) to cost of services revenue of $1.9 million.

Sales and marketing
expense decreased by $12.6 million in the six months ended November 1, 2009 as compared to the six months ended November 2, 2008. The decrease was primarily due to a decrease in compensation expense of $7.8 million as a result of lower
headcount and employee salary reductions implemented mid-year in fiscal 2009, and a decrease in related employee benefits of $1.5 million as a result of lower salaries and headcount. The decrease was also attributable to decreases in marketing
related expense of $0.7 million, bonus expense of $0.3 million, commission expense of $1.9 million due to decreased bookings, travel and entertainment costs of $1.5 million due to lower spending on reduced sales, deferred stock compensation expense
of $0.8 million and the allocation of common expenses, such as information technology and facility related expenses, of $1.6 million. The decrease was offset by a decrease in the allocation of pre-sale costs (primarily application engineering costs)
to cost of services revenue of $4.0 million.

General and administrative expense decreased by $2.2 million in the three
months ended November 1, 2009 compared to the three months ended November 2, 2008. The decrease was primarily due to a decrease in compensation expense of $0.9 million as a result of lower headcount and employee salary reductions
implemented mid-year in fiscal 2009 and a decrease in related employee benefits of $0.2 million as a result of lower salaries and headcount. The decrease was also the result of decreases of $0.3 million in legal fees due to settlement of the patent
litigation with Synopsys in the first quarter of fiscal 2009, $0.1 million in stock-based compensation expense due to our option exchange program, and $0.6 million in consulting expenses.

General and administrative expense decreased by $4.8 million in the six months ended November 1, 2009 compared to the six months ended
November 2, 2008. The decrease was primarily due to a decrease in compensation expense of $1.9 million as a result of lower headcount and employee salary reductions implemented mid-year in fiscal 2009, related employee benefits of $0.3 million
as a result of lower salaries and headcount, and bonus expense of $0.2 million. The decrease was also attributed to decreases of $0.7 million in legal fees due to settlement of the patent litigation with Synopsys in the first quarter of fiscal 2009,
$0.5 million in stock-based compensation expense due to our option exchange program, $0.9 million in consulting expenses, and $0.2 million in our travel and entertainment costs.

Amortization of intangible assets decreased by 64% and 73% in the three and six months ended November 1, 2009, respectively,
compared to the three and six months ended November 2, 2008 primarily due to several existing developed technologies and patents having been fully amortized prior to or during the six months ended November 1, 2009.

The intangible assets amortized include licensed technology, customer relationship or base, patents, customer contracts and trademarks that
were identified in the purchase price allocation for each business combination and asset purchase transaction.

Restructuring charges of $0.2 million and $1.0 million in the three and six months ended November 1, 2009, respectively, represented employee termination and facility consolidation and closure charges resulting from our
realignment to current business objectives.



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Other items

The table below sets forth other data for the three and six months ended November 1, 2009 and November 2, 2008 (in thousands, except for percentage data):



|                                                   |  |                 |        |   |             |     |    |                               |   |        |             |  |    |               |  |   |          |   |  |      |   
|-------------------------------------------------- |  | --------------- | ------ | - | ----------- | --- | -- | ----------------------------- | - | ------ | ----------- |  | -- | ------------- |  | - | -------- | - |  | ---- | --
|Three Months Ended:                                |  | November 1,2009 |        |   | % ofRevenue |     |    | November 2,2008(as adjusted)1 |   |        | % ofRevenue |  |    | Dollar Change |  |   | % Change |  
|Operating income, net                              |  |                 |        |   |             |     |    |                               |   |        |             |  |    |               |  |   |          |   |  |      |   
|Interest income                                    |  | $               | 60     |   |             | 0   | %  |                               | $ | 193    |             |  | 1  | %             |  | $ | (133     | ) |  | (69  | )%
|Interest and amortization of debt discount expense |  |                 | (1,105 | ) |             | (4  | )% |                               |   | (1,062 | )           |  | (3 | )%            |  |   | (43      | ) |  | 4    | % 
|Valuation gain (loss), net                         |  |                 | 174    |   |             | 1   | %  |                               |   | (1,679 | )           |  | (5 | )%            |  |   | 1,853    |   |  | (110 | )%
|Other expense, net                                 |  |                 | (185   | ) |             | (1  | )% |                               |   | 705    |             |  | 2  | %             |  |   | (890     | ) |  | (126 | )%
|                                                   |  |                 |        |   |             |     |    |                               |   |        |             |  |    |               |  |   |          |   |  |      |   
|Total other income (expense), net                  |  | $               | (1,056 | ) |             | (4  | )% |                               | $ | (1,843 | )           |  | (5 | )%            |  | $ | 787      |   |  | (43  | )%
|                                                   |  |                 |        |   |             |     |    |                               |   |        |             |  |    |               |  |   |          |   |  |      |   
|Provision for income taxes                         |  | $               | 7,662  |   |             | (26 | )% |                               | $ | (3,130 | )           |  | 9  | %             |  | $ | 10,792   |   |  | (345 | )%
|                                                   |  |                 |        |   |             |     |    |                               |   |        |             |  |    |               |  |   |          |   |  |      |   
|                                                   |  |                 |        |   |             |    
|Six Months Ended:                                  |  | November 1,2009 |        |   | % ofRevenue |     |    | November 2,2008(as adjusted)1 |   |        | % ofRevenue |  |    | Dollar Change |  |   | % Change |  
|Operating income, net                              |  |                 |        |   |             |     |    |                               |   |        |             |  |    |               |  |   |          |   |  |      |   
|Interest income                                    |  | $               | 105    |   |             | 0   | %  |                               | $ | 379    |             |  | 1  | %             |  | $ | (274     | ) |  | (72  | )%
|Interest and amortization of debt discount expense |  |                 | (2,262 | ) |             | (8  | )% |                               |   | (2,046 | )           |  | (6 | )%            |  |   | (216     | ) |  | 11   | % 
|Valuation gain (loss), net                         |  |                 | 326    |   |             | 1   | %  |                               |   | (1,679 | )           |  | (5 | )%            |  |   | 2,005    |   |  | (119 | )%
|Other expense, net                                 |  |                 | (787   | ) |             | (3  | )% |                               |   | 609    |             |  | 2  | %             |  |   | (1,396   | ) |  | (229 | )%
|                                                   |  |                 |        |   |             |     |    |                               |   |        |             |  |    |               |  |   |          |   |  |      |   
|Total other income (expense), net                  |  | $               | (2,618 | ) |             | (10 | )% |                               | $ | (2,737 | )           |  | (8 | )%            |  | $ | 119      |   |  | (4   | )%
|                                                   |  |                 |        |   |             |     |    |                               |   |        |             |  |    |               |  |   |          |   |  |      |   
|Provision for income taxes                         |  | $               | 7,266  |   |             | (24 | )% |                               | $ | (3,569 | )           |  | 10 | %             |  | $ | 10,835   |   |  | (304 | )%
|                                                   |  |                 |        |   |             |     |    |                               |   |        |             |  |    |               |  |   |          |   |  |      |   



|1 | November 2, 2008 adjusted for adoption of ASC 470-50. See Footnote 1.
|- | ---------------------------------------------------------------------

Interest income decreased by 69% and 72% in the three and six months ended November 1, 2009, respectively, compared to the three
and six months ended November 2, 2008 primarily due to the lower interest rates on investments of cash in money market funds to maintain liquidity.

Interest expense primarily represents amortization of debt discount and issuance costs in connection with our 2010 Notes and 2014 Notes and interest on our line of credit facility. Interest expense
increased by $43,000 and $0.2 million in the three and six months ended November 1, 2009, respectively, compared to the three and six months ended November 2, 2008. For the three months ended November 1, 2009 the increase was
primarily due to an additional $0.2 million interest payment on the 2010 Notes and 2014 Notes and on the line of credit with Wells Fargo Bank. This was offset by the reduction in the amortization of debt discount costs of $0.1 million due to $26.7
million in principal amount of 2010 Notes being exchanged for 2014 Notes. The remainder of the fluctuation in interest expense was accounted for by other individually insignificant items, such as amortization of debt issuance costs and interest
expense on the capital leases. The increase for six months ended November 1, 2009 was primarily due to the exchange of the 2% 2010 Notes for the higher interest rate 6% 2014 Notes.

Valuation gain (loss),net increased by $1.9 million and $2.0 million in the three and six months ended November 1, 2009,
respectively, compared to the three and six months ended November 2, 2008, primarily due to the recognition of unrealized loss on the ARS securities of $2.8 million which was offset by a gain on the purchase of the put option of $1.1 million in
the three and six months ended November 2, 2008.



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Other (expense), netincreased by $0.9 million and $1.4 million in the three and six
months ended November 1, 2009, respectively, compared to the three and six months ended November 2, 2008 primarily due to a $0.4 million and $0.9 million foreign exchange loss for the three and six months ended November 1, 2009. The
loss on foreign exchange was offset by a gain of $0.3 million on the exchange of the 2010 Notes for the three and six months ended November 1, 2009.

During fiscal 2009, we entered into foreign currency forward contracts to mitigate exposure in movements between the U.S. dollar and Japanese Yen. The derivatives do not qualify for hedge accounting
treatment under ASC 815, Derivatives and Hedging. We recognize the gain and loss on foreign currency forward contracts in the same period as the remeasurement loss and gain of the related foreign currency-denominated exposures.

Benefit from (provision for) income taxes.Our effective tax rate was 4.3% and 7.4%, excluding the effect of the unrecognized tax
benefit related to withholding taxes in South Korea, in the three and six months ended November 1, 2009, respectively, and 14% and 10% for the three and six months ended November 2, 2008, respectively. Our effective tax rates vary from the
U.S. statutory rate primarily due to changes in our U.S. valuation allowance, goodwill impairment, state taxes, foreign income taxed at other than U.S. rates, stock compensation expenses, research and development tax credits, and foreign withholding
taxes for which no U.S. tax benefits were received due to our full U.S. valuation allowance. U.S. income tax expense was $0.1 million, and $0.5 million, excluding the effect of the unrecognized tax benefit related to withholding taxes in South
Korea, in the three and six months ended November 1, 2009 and $3.1 million and $3.6 million for the three and six months ended November 2, 2008, respectively. The income tax expense is comprised primarily of state and local taxes, income
taxes in certain foreign jurisdictions, and foreign withholding taxes offset by federal refundable research and development tax credits.

During the second quarter of fiscal 2010, we received new information related to the unrecognized tax benefit related to withholding taxes in South Korea. This information was not available to us in
previous financial reporting periods and is considered new information for purposes of assessing the Companys uncertain tax positions as required by ASC 740-10, Income Taxes (ASC 740-10). We considered this new information
collectively with all other information available at November 1, 2009 and concluded that it is more-likely- than-not the license revenue sourced in South Korea is not subject to withholding tax, and therefore, that the full amount of the tax
position will ultimately be realized. Accordingly, a $7.8 million tax benefit related to South Korean withholding tax was recognized into income, and a corresponding decrease in long term tax liabilities was recorded, at November 1, 2009. The
recognition of the tax benefit is a discrete item, and therefore, is not reflected in the estimated annual effective tax rate, nor does it have any current period or future period cash impact.

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

We are subject to income taxes in the United States and in numerous foreign jurisdictions and,
in the ordinary course of business, there are many transactions and calculations where the ultimate tax determination is uncertain. The statute of limitations for adjustments to our historic tax obligations will vary from jurisdiction to
jurisdiction. The tax years 2002 to 2007 remain open to examination by the major tax jurisdictions where we operate. At November 1, 2009, we do not anticipate that our total unrecognized tax benefits will significantly change due to any
settlement of examination or expiration of statute of limitations within the next twelve months. In addition, we do not believe that the ultimate settlement of these obligations will materially affect our liquidity.



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Liquidity and Capital Resources

The table below sets forth certain cash, cash equivalents and short-term investments as of November 1, 2009 and May 3, 2009, and
cash flow data for the three and six months ended November 1, 2009 and November 2, 2008 (in thousands):



|                                                          |  |                  |        |                 |   |        |  
|--------------------------------------------------------- |  | ---------------- | ------ | --------------- | - | ------ | -
|                                                          |  | November 1,2009  |        | May 3,2009      |  
|Cash, cash equivalents and short-term investments         |  | $                | 63,944 |                 | $ | 32,888 |  
|                                                          | 
|                                                          |  | Six Months Ended |       
|                                                          |  | November 1,2009  |        | November 2,2008 |  
|Net cash flows provided by (used in) operating activities |  | $                | 9,591  |                 | $ | (7,294 | )
|Net cash flows provided by (used in) investing activities |  | $                | 459    |                 | $ | (9,405 | )
|Net cash provided by financing activities                 |  | $                | 3,663  |                 | $ | 10,108 |  

Our cash, cash equivalents and short term investments were approximately
$63.9 million on November 1, 2009, an increase of $31.0 million or 95% from May 3, 2009, the end of fiscal 2009. The increase is primarily the result of $18.0 million in auction rate securities and purchased put options that were
classified as long term investments at May 3, 2009 being classified as short term investments at November 1, 2009. In addition, cash provided by operations was $9.6 million, cash provided by investing activities was $0.5 million and cash
provided by financing activities was $3.6 million for the six months ended November 1, 2009.

We hold our cash and cash
equivalents in the United States and in foreign accounts, primarily in Japan, the Netherlands and India. As of November 1, 2009, we held an aggregate of $39.8 million in cash and cash equivalents in the United States and an aggregate of $7.2
million in foreign accounts.

Net cash provided by operating activities

Net cash provided by operating activities increased by $16.9 million in the six months ended November 1, 2009 compared to the six months
ended November 2, 2008 due to an increase in cash from customers of $4.6 million, a decrease in cash used in cost and expenses of $22.8 million, and a decrease of $1.1 million in payments on accounts payable and accrued liabilities balances,
partially offset by an increase of $1.7 million in payments on prepaid and other assets and a decreased in long term liabilities of $8.6 million. The aggregate balance of accounts payable and accrued liabilities decreased by $1.5 million and $2.7
million, respectively, in the six months ended November 1, 2009 and November 2, 2008. The decrease in accrued liabilities in the six months ended November 1, 2009 was primarily due to a reduction in annual employee bonus accrual and
acquisition related accruals. The increase in cash from customers was primarily due to collection of accounts receivable. The decrease in costs and expenses was primarily due our cost reduction initiatives resulting in lower sales and marketing
expense of $5.5 million, lower research and development expense of $7.3 million, lower general and administrative expense of $2.2 million and a decrease of $3.1 million of restructuring expense.

Net cash used in investing activities

Net cash provided by investing activities increased by $9.9 million for the six months ended November 1, 2009 compared to the six months ended November 2, 2008. The change was primarily the
result of a decrease of $2.0 million in cash paid for business and asset acquisitions, net of cash acquired, a decrease of $10.2 million in the restricted cash related to acquisition related earnouts, and the fact that in the first half of fiscal
2010 we did not purchase any strategic investments but used $1.8 million to purchase strategic investments in the six months ended November 1, 2008. These increases in the cash provided by investing activities was offset by an increase of $0.4
million paid for purchase of property and equipment, and a decrease in the cash available from sale of investments by $3.7 million.



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Net cash used in financing activities

Net cash provided by financing activities decreased $6.4 million in the six months ended November 1, 2009, compared to the six months
ended November 2, 2008. For the six months ended November 1, 2009, net cash from the issuance of common stock decreased by $0.8 million, repayment of lease obligations decreased by $0.3 million, and repayment of a secured credit line
increased by $1.1 million as compared to the six months ended November 2, 2008. In addition we incurred $1.8 million in issuance costs on the exchange of our 2010 Notes for 2014 Notes in the six months ended November 1, 2009. Compared to
the six months ended November 2, 2008, we had proceeds from the revolving note and secured line of credit decrease by $13.0 million and $12.6 million, respectively, offset by a release in restricted cash of $7.5 million related to our revolving
debt with Wells Fargo in the six months ended November 1, 2009. In addition we repaid $15.3 million of convertible notes during the six months ended November 2, 2008; we did not make any such repayments during the six months ended
November 1, 2009.

Capital resources

Cash and cash equivalents available for use aggregated a total of $47.0 million at November 1, 2009.

As of our 2009 fiscal year end, our auditors issued an opinion raising substantial doubt about our ability to continue as a going concern. Since inception, we have incurred aggregate consolidated net
losses of approximately $380.0 million, and may incur net losses for the foreseeable future. In addition, we experienced a significant decline in revenues during fiscal 2009 and the six months ended November 1, 2009. As of the end of fiscal
2009, the Company did not have the financing in place to pay the $49.9 million 2010 Notes maturing May 15, 2010.

As more
fully described in Note 10, Convertible Notes, Current and Long-Term, on September 11, 2009 we completed an exchange offer pursuant to which an aggregate principal amount of $26.7 million of our 2010 Notes were exchanged for $26.7
million principal amount of newly issued 2014 Notes. As a result of the exchange, approximately $23.2 million principal amount of the 2010 Notes remains outstanding.

Given the current adverse economic conditions generally, and in the semiconductor industry in particular, the credit market crisis and our own liquidity position, we have increased our focus on cash
management and identifying and taking actions to sustain and enhance our liquidity position. These actions include operational expense reduction initiatives and re-timing or eliminating certain capital spending or research and development projects.
As a result of these efforts and other factors, we generated positive cash flow of $9.6 million of cash from operations in the six months ended November 1, 2009.

Our ability to fund our cash needs over the short and long term will also depend on our ability to continue to generate cash from operations, which is subject to general economic and financial market
conditions, competition and other factors and to maintain our existing credit facility. It could be difficult to obtain additional financing on favorable terms, or at all, due to our financial condition, and current credit market conditions may make
external financing difficult to obtain. Any external credit financing that we are able to obtain may contain terms that are not as favorable to us as historical financings. We may try to obtain additional financing by means that could dilute our
existing stockholders. We believe we will have sufficient capital resources to fund our working capital requirements and operations, capital investments, and debt service during the next twelve months, and to retire the remaining $23.2 million
outstanding 2010 Notes at maturity. However any of these factors could have a materially adverse impact on our financial position and results of operations. For a complete discussion of the risks facing our business, including our liquidity, please
see Part II, Item 1A, Risk Factors.

In recent years, we have funded our operations primarily through
operating cash flows and through the issuance of convertible debt and equity securities. In the first quarter of fiscal 2009, we began implementing cost reduction measures which continued through the end of the first quarter of fiscal 2010.
Additionally, we have taken action to receive liquidity from our $16.9 million invested in auction rate securities (ARS) as of November 1, 2009, which have been illiquid since February 2008. We entered into a settlement agreement
with



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UBS Financial Services, Inc. (UBS) which allows us to recover the par value of the ARS on or about June 30, 2010 (see Note 2, Liquidity). Concurrently, we entered
into a no net cost secured line of credit with UBS offered as part of the total settlement agreement (see Note 12, Secured Credit Line). This secured line of credit provided us with cash of $12.5 million until the ARS can be
sold back to UBS at par value in 2010.

Revolving Line of Credit

Effective as of October 31, 2008, we entered into a secured revolving line of credit facility with Wells Fargo Bank, N.A. (the
Credit Facility). As amended by the First Amendment dated March 11, 2009, the Second Amendment dated May 21, 2009, and the Third Amendment dated October 9, 2009, the Credit Facility provides for (i) a single revolving
line of credit note of up to $15 million replacing the two previous $7.5 million revolving line of credit notes, (ii) eliminates the requirement that Magma maintain a minimum accounts receivable borrowing base and cash collateral, and
(iii) extends the term of the line of credit to September 30, 2010. The Amendment also, among other things, requires that we provide certain financial statements to Wells Fargo, amends or removes certain financial covenants and amends the
definition of Event of Default. The note bears an annual interest rate equal to a fluctuating rate of 3.5% above the one month LIBOR rate on outstanding borrowings.

The Credit Facility restricts our ability to pay dividends or make other distributions on our stock and requires that we maintain certain
financial conditions. As of November 1, 2009, we were in compliance with the financial conditions.

As of
November 1, 2009, we had aggregate outstanding borrowings of $12.2 million and two letters of credit totaling $1.7 million under the Credit Facility. In connection with the Third Amendment to the Credit Facility we have released a $7.5 million
collateralized certificate of deposit earlier classified as restricted cash. We believe that we will be able to extend the maturity of the Credit Facility or replace it with a new facility prior to its expiration on September 30, 2010.

Convertible notes

On May 22, 2003, we issued $150.0 million principal amount of the 2008 Notes resulting in net proceeds of approximately $145.1 million. The 2008 Notes did not bear coupon interest and were
convertible into shares of our common stock at an initial conversion price of $22.86 per share. Through March 2007, we paid $85.0 million in cash to repurchase $100.1 million in face amount of the 2008 Notes.

In March 2007, we exchanged an aggregate principal amount of $49.9 million (or approximately 76.7% of the remaining principal amount)
of the 2008 Notes for an equal aggregate principal amount of the 2010 Notes. At the same time we terminated a corresponding portion of the hedging arrangements entered into with the initial purchaser in connection with the initial private placement
of the 2008 Notes. The 2010 Notes bear interest at 2% per annum and are convertible into shares of our common stock at an initial conversion price of $15.00 per share, for an aggregate of approximately 3.33 million shares. The 2010 Notes
are unsecured senior indebtedness of Magma, which rank equally in right of payment to our Wells Fargo credit facility. The 2010 Notes are effectively subordinated in right of payment to our Wells Fargo credit facility to the extent of the security
interest held by Wells Fargo in such facility. We have the option to redeem the 2010 Notes for cash in an amount equal to 100% of the aggregate outstanding principal amount at the time of such redemption. The 2010 Notes also contain a net share
settlement provision that requires us to deliver to a holder upon conversion of their 2010 Notes cash equal to the lesser of $1,000 and the conversion value of the 2010 Notes, and in the event that the conversion value is in excess of $1,000 upon
conversion of the 2010 Notes, cash or common stock at our election.

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



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As more fully described in Note 10, Convertible Notes, Current and Long-Term, on
September 11, 2009 we completed an exchange offer pursuant to which an aggregate principal amount of $26.7 million of our 2010 Notes were exchanged for $26.7 million principal amount of newly issued 2014 Notes. As a result of the exchange,
approximately $23.2 million principal amount of the 2010 Notes remains outstanding.

Contractual obligations

As of November 1, 2009, our principal contractual obligations consisted of $57.5 million from fiscal 2010 through fiscal 2013.
Contractual obligations consist of the operating leases on our office facilities for $7.8 million, repayments of $23.2 million of the remaining principal of the 2010 Notes due in May 2010, secured line of credit of $11.4 million, revolving note of
$12.2 million and $2.8 million in capital lease obligations for computer equipment and purchase obligations. We have no material commitments for capital expenditures and, as a result of the cost reduction plans we initiated in fiscal 2009, we do not
anticipate an increase in our capital expenditures and lease commitments. Purchase obligations represent an estimate of all open purchase orders and contractual obligations in the normal course of business for which we have not received the goods or
services as of November 1, 2009. Although open purchase orders are considered enforceable and legally binding, the terms generally allow us the option to cancel, reschedule and adjust our requirements based on our business needs prior to the
delivery of goods or performance of services. In addition, we have other obligations for goods and services entered into in the normal course of business. These obligations, however, are either unenforceable or not legally binding or are subject to
change based on our business decisions.

Our acquisition agreements related to certain business combination and asset purchase
transactions obligate us to pay certain contingent cash consideration based on meeting certain financial or project milestones and continued employment of certain employees. The total amount of cash contingent consideration that could be paid under
our acquisition agreements, assuming all contingencies are met, was $7.8 million as of November 1, 2009. Subject to the uncertainties further described in Capital resources above, these contingent consideration obligations are not
expected to affect our estimate that our existing cash and cash equivalents will be sufficient to meet our anticipated operating and working capital expenditure requirements in the ordinary course of business for at least the next 12 months.

Income taxes

As of November 1, 2009 and May 3, 2009, we recorded unrecognized tax benefits of $19.8 million and $27.1 million, respectively, of which $2.1 million and $9.7 million, respectively, are included in our long-term tax liabilities on
our consolidated balance sheet. We are not able to estimate the amount or timing of any cash payments required to settle these liabilities; however, we do not anticipate the settlement of the liabilities will require payment of cash within the next
twelve months and do not believe that the ultimate settlement of these obligations will materially affect our liquidity.

Off-balance
Sheet Arrangements

As of November 1, 2009, 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 our normal business practices. We estimate
the fair



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value of our 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 November 1, 2009.

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 retain directors and officers insurance that reduces our exposure and enables us to recover portions of amounts paid. As a result of our insurance coverage, we believe the estimated fair value of these indemnification
agreements is minimal. Accordingly, no liabilities have been recorded for these agreements as of November 1, 2009.

In
connection with certain of our recent business acquisitions, we have also agreed to assume, or cause our subsidiaries to assume, the indemnification obligations of those companies to their respective officers and directors. No liabilities have been
recorded for these agreements as of November 1, 2009.

Warranties

We warrant to our customers that our products will conform to the documentation provided. To date, there have been no payments or material
costs incurred related to fulfilling these warranty obligations. Accordingly, we have no liabilities recorded for these warranties as of November 1, 2009. 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.



|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 November 1, 2009, a hypothetical 100 basis point increase in interest rates would not result in material impact on the fair value of our cash
equivalents and short-term investments.

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

Credit Risk

During the fourth quarter of fiscal 2008, the $18.4 million auction rate securities we held failed auction due to sell orders exceeding buy
orders. In October 2008, we entered into an agreement with UBS which provides us with Auction Rate Securities Rights (Rights) to sell our ARS at par value to UBS at any time during the period June 30, 2010 through July 2, 2012.
These Rights are a separate freestanding instrument accounted for separately from the ARS, and are registered, nontransferable securities accounted for as a purchased put option initially recorded at fair value. Under the Rights agreement, UBS may,
at its discretion, sell the ARS at any time through July 2, 2012 without prior notice to us and must pay us par value for the ARS within one day of the sale transaction settlement. Additionally, UBS offered a no net cost loan to us
up to 75% of the market value of the ARS as determined by UBS until June 30, 2010. Due to our entering into this agreement with UBS and enabling UBS to sell the ARS at any time, the ARS previously reported as available-for-sale have been
transferred to trading securities.



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Based on the Level 3 valuation and the transfer of the ARS from the available-for-sale
category to the trading category, an other-than-temporary gain of $0.2 million and $0.3 million in Valuation gain (loss), net in the three and six months ended November 1, 2009, respectively, was reported in the consolidated
statement of operations. Based on our ability to access our cash, cash equivalents and other short-term operating cash flows, we do not anticipate the current lack of liquidity on these investments to have a material impact on our financial
condition or results of operations.

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 November 1, 2009, we had approximately $4.4 million of cash and money market funds in foreign currencies. During the third quarter of fiscal 2008, we entered into foreign currency forward contracts to mitigate exposure in movements
between the U.S. Dollar and Japanese Yen. The derivatives do not qualify for hedge accounting treatment under ASC 815,Derivatives and Hedging. We recognize the gain and loss on foreign currency forward contracts in the same period as
the remeasurement loss and gain of the related foreign currency-denominated exposures. In the three and six months ended November 1, 2009, net foreign exchange loss of $0.4 million and $0.9 million, respectively, was included in Other
income (expense), net in our condensed consolidated statements of operations.



|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, 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 principal executive officer and principal
financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Based on their evaluation as of
the end of the period covered by this Quarterly Report on Form 10-Q, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended November 1, 2009 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
|------- | -----------------

We are
subject to certain legal proceedings and disputes that arise in the ordinary course of business. The number and significance of these legal proceedings and disputes may increase as our size changes. Any claims against us, whether meritorious or not,
could be time consuming, result in costly litigation, require significant amounts of management time and result in the diversion of significant operational resources. As a result, these legal proceedings and disputes could harm our business and have
an adverse effect on its consolidated financial statements. However, the results of any litigation or dispute are inherently uncertain and, at this time, no estimate could be made of the loss or range of loss, if any, from such litigation matters
and disputes unless they are or are close to being settled. Liabilities are recorded when a loss is probable and the amount can be reasonably estimated. No accrued legal settlement liabilities are recorded on the condensed consolidated balance sheet
as of November 1, 2009 or May 3, 2009. Litigation settlement and legal fees are expensed in the period in which they are incurred.



|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 May 3, 2009.

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

We have a substantial amount of indebtedness, which could adversely affect our financial position.

We currently have and will continue to have for the foreseeable future, a substantial amount of indebtedness. Our indebtedness has increased over time and may increase in the future. As of
November 1, 2009, we had an aggregate principal amount of approximately $75.9 million in outstanding debt, $23.2 million of which was the 2010 Notes. On September 11, 2009 we completed a tender offer and registration to exchange our 2010
Notes for new 2014 Notes. As a result of the exchange, approximately $23.2 million principal amount of the 2010 Notes remains outstanding and approximately $26.7 million principal amount of newly issued 2014 Notes is outstanding. In addition, as of
November 1, 2009, we had outstanding borrowings of $12.2 million and two letters of credit totaling $1.7 million under our revolving credit facility, which expires on September 30, 2010. If cash on hand and cash flow from operations are
not sufficient to meet our working capital needs, capital requirements, and debt repayment obligations, we may need to incur additional indebtedness. Our outstanding indebtedness will also require us to use a substantial portion of our cash flow
from operations to make debt service payments. If we do not increase our revenue, we could have difficulty making required payments on our indebtedness. If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make
required payments, or if we fail to comply with the various requirements of our indebtedness, we would be in default, which would permit the holders of our indebtedness to accelerate the maturity of the indebtedness and could cause defaults under
any indebtedness we may incur in the future. Any default under our indebtedness would have a material adverse effect on our business, operating results and financial condition.

In addition, our substantial indebtedness may:



| |  |  | make it difficult for us to satisfy our financial obligations;
| | - |  | --------------------------------------------------------------



| |  |  | limit our ability to use our cash flow, use our available financings to the fullest extent possible, or obtain additional financing for future working
capital, capital expenditures, acquisitions or other general corporate purposes;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | limit our flexibility to plan for, or react to, changes in our business and industry;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | place us at a competitive disadvantage compared to our less leveraged competitors;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | increase our vulnerability to the impact of adverse economic and industry conditions; and
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | cause our business to go into bankruptcy or cause our business to fail.
| | - |  | -----------------------------------------------------------------------

General economic conditions, industry cycles and financial, business and other factors affecting our operations, many of which are beyond
our control, may affect our future performance, which may affect our ability to make principal and interest payments on our indebtedness. If we cannot generate sufficient cash flow from operations in the future to service our debt, we may, among
other things:



| |  |  | seek additional financing in the debt or equity markets, and the documentation governing any future financing may contain covenants that limit or
restrict our strategic, operating or financing activities;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | attempt to refinance or restructure all or a portion of our indebtedness;
| | - |  | -------------------------------------------------------------------------



| |  |  | attempt to sell selected assets;
| | - |  | --------------------------------



| |  |  | reduce or delay planned capital expenditures; or
| | - |  | ------------------------------------------------



| |  |  | reduce or delay planned research and development expenditures.
| | - |  | --------------------------------------------------------------

These measures may not be successful, may not be sufficient to enable us to service our indebtedness and may harm our business and
prospects. In addition, any financing, refinancing or sale of assets might not be available, or available on economically favorable terms.

The convertible notes we issued in March 2007 must be repaid in cash in May 2010, unless they are redeemed by us or converted into shares of our common stock at an earlier date, which is unlikely to occur if the price of our common stock
does not exceed the conversion price.

On May 15, 2010, we will be required to repay in full the remaining $23.2
million principal amount outstanding on our 2010 Notes, unless the holders of the remaining 2010 Notes elect to convert them into shares of our common stock before the repayment date, or the 2010 Notes are otherwise redeemed by us. The conversion
price is $15.00 for the 2010 Notes, subject to adjustment in certain circumstances. On December 8, 2009, the last reported sale price of our common stock on the Nasdaq Global Market was $2.45 per share. If the price of our common stock does not
rise above the applicable conversion price prior to maturity, conversion of the 2010 Notes is unlikely and we would be required to repay the principal amount of the 2010 Notes in cash. In that event, we may not have enough cash to meet our repayment
obligations and we would be in default under the 2010 Notes, which would have a material adverse effect on our business, operating results and financial condition.

If we cannot generate sufficient operating cash flow or alternatively obtain external financing, our business and financial condition may be materially adversely affected, and our business may fail.

As of November 1, 2009, we had cash and cash equivalents, excluding restricted cash, of $47.0 million. Our short-term
investments of $16.9 million as of November 1, 2009, consisted of auction rate securities, for which auctions have not occurred since February 2008, and a purchased put option.

We experienced a decrease in revenue during fiscal 2009 and the first half of fiscal 2010 and, if adverse semiconductor industry or general
economic conditions persist or worsen, we could experience further decreases in revenue. In the second quarter of fiscal 2009, we increased cost cutting activities, including reducing the number of employees, capital spending, research and
development projects and administrative expenses. In the third quarter of fiscal 2009, we further increased cost cutting activities, including reducing the number of employees, closing some offices and consolidating other offices. We cannot assure
you that we will be able to achieve anticipated expense reductions or that we will not be required to make further cost reductions. Some cost



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cutting activities may require initial cost outlays before the cost reductions are realized. If our revenue continues to decrease, or if our expense reduction efforts are unsuccessful, our
operating results and business may be materially adversely affected, and our business may fail.

In addition, the $23.2
million remaining principal amount outstanding on our 2010 Notes will become due and payable on May 15, 2010. We will be required to generate cash sufficient to conduct our business operations and pay our indebtedness and other liabilities,
including all amounts, both principal and interest, as they become due on the 2010 Notes and 2014 Notes. We may not generate sufficient cash flow from operations to cover our anticipated debt service obligations, including making payments on any
outstanding notes or repaying any 2010 Notes that remain outstanding at maturity. Our ability to meet our future debt service obligations will depend upon our future performance, which will be subject to financial, business and other factors
affecting our operations, many of which are beyond our control. Accordingly, we cannot assure you that we will be able to make required principal and interest payments on our notes when due in the absence of additional sources of equity or debt
financing. In addition, if our customers believe that we are not financially sound, they may choose to stop doing business with us, which would materially adversely affect our business and financial condition.

We may try to access private and public sources of external financing, including debt and equity, to repay our existing indebtedness. We are
also currently exploring and may explore in the future sources of external financing in order to achieve growth or other business objectives. Such financing may not be available in sufficient amounts, when needed or on terms acceptable to us. In
addition, any equity financing may not be desirable because of resulting dilution to our stockholders, which may be significant in light of the current trading price of our common stock and the size of our market capitalization compared to our
outstanding debt. We also may, from time to time, redeem, tender for, exchange for, or repurchase our securities in the open market or in privately negotiated transactions depending upon availability of our cash resources, market conditions and
other factors. Moreover, the availability of funds under our existing $15 million revolving line of credit may be adversely affected by our financial condition, results of operations and incurrence or maintenance of additional debt. If we are unable
to obtain needed financing or generate sufficient cash from operations, our ability to expand, develop or enhance our services or products, fund our working capital requirements or respond to competitive pressures would be limited, which would
materially adversely affect our business and financial condition.

We are currently party to and may enter into debt arrangements in the
future, each of which may subject us to restrictive covenants which could limit our ability to operate our business.

We
are party to a $15 million senior secured revolving line of credit that impose various restrictions and covenants on us that limit our ability to incur or guarantee indebtedness, make investments, declare dividends or make distributions, acquire or
merge into other entities, sell substantial portions of our assets and grant security interests in our assets. In the future, we may incur additional indebtedness through arrangements such as credit agreements or term loans that may also impose
similar restrictions and covenants. These restrictions and covenants limit, and any future covenants and restrictions may limit, our ability to respond to market conditions, make capital investments or take advantage of business opportunities. Any
debt arrangements we enter into may require us to make regular interest or principal payments, which would adversely affect our results of operations.

We cannot assure you that in the future we will be able to satisfy or comply with the provisions, covenants, financial tests and ratios of our debt instruments, which can be affected by events beyond our
control. If we fail to satisfy or comply with such provisions, covenants, financial tests and ratios, or if we disagree with our lenders about whether or not we are in compliance, we cannot assure you that we will be able to obtain waivers for any
failures to comply with our financial covenants or any other terms of the debt instruments. We also may not be able to obtain amendments that will prevent a failure to comply in the future. A breach of any of the provisions, covenants, financial
tests or ratios under our debt instruments could result in a default under the applicable agreement, which in turn could accelerate the timing of our repayment obligations such that our indebtedness would become immediately due and payable and could
trigger cross-defaults under our other debt instruments, any of which would materially adversely affect our business and financial condition.



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Financial market conditions may impede access to or increase the cost of financing operations and
investments.

The volatility and disruption in the capital and credit markets has reached unprecedented levels over the
past several quarters. These changes in U.S. and global financial and equity markets, including market disruptions and tightening of the credit markets, may make it more difficult for us to obtain financing for our operations or investments or
increase the cost of obtaining financing.

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

A portion of our revenue backlog is variable based on volume of usage of our products by customers or includes specific future deliverables
or is recognized as 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 revenue from backlog as expected. At November 1, 2009, three customers each accounted for more than 10% of accounts receivable. 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.

We rely on a small number of customers for a significant portion of our revenue, and our revenue could decline if
customers delay orders or fail 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. Although one customer accounted for 10% or more of our consolidated revenue for the quarter ended November 1, 2009, we expect that we
will generally 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, defaults on its payment obligations to us, or fails to renew licenses, our business and operating results could be harmed. In addition, if our
customers believe that we are not financially sound, they may choose to stop doing business with us, which would materially adversely affect our business and financial condition.

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

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



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

We currently compete with companies that hold dominant shares in the electronic design automation (EDA) market, such as Cadence
Design Systems, Inc. (Cadence), Synopsys, Inc. (Synopsys) and Mentor Graphics Corporation (Mentor). Each of these companies has a longer operating history and significantly greater financial, technical and
marketing resources than we do, as well as greater name recognition and a larger installed customer base. Our competitors are better able to offer aggressive discounts on their products, a practice they often employ. Competition and corresponding
pricing pressures among EDA vendors or other factors could cause the overall market for EDA products to have low growth rates, remain relatively flat or even decrease in terms of overall dollars. Our competitors offer a more comprehensive range of
products than we do. For example, we do not offer logic simulation, which can sometimes be an impediment to our winning a particular customer order. In addition, our industry has traditionally viewed acquisitions as an effective strategy for growth
in products and market share, and our competitors greater cash resources and higher market capitalization would likely give them a relative advantage over us in acquiring companies with promising new chip design products or companies that may
be too large for us to acquire without a strain on our resources and liquidity.

Competition in the EDA market has increased
as customers rationalized their EDA spending by using products from fewer EDA vendors. Continued consolidation in the EDA market could intensify this trend. In addition, gaining market share in the EDA market can be difficult as it may take years
for a customer to move from a competitor. Many of our competitors, such as Cadence, Synopsys and Mentor, have established relationships with our current and potential customers and can devote substantial resources aimed at preventing us from
establishing or enhancing our customer relationships. Competitive pressures may prevent us from obtaining new customers and gaining market share, may require us to reduce the price of products and services or cause us to lose existing customers,
which could harm our business. To execute our business strategy successfully, we must continue our efforts to increase our sales worldwide. If we fail to do so in a timely manner or at all, we may not be able to gain market share and our business
and operating results could suffer.

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

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

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

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. A continued sharp downturn (such as that currently being experienced in the semiconductor and systems industries), a reduced number of design starts, a reduction in the
complexity of integrated circuits, a reduction in our customers EDA budgets or consolidation among our customers would accelerate the decrease in revenue we have experienced during fiscal 2009 and the six months ended November 1, 2009,
and 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. A continued downturn in our customers markets or in



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general economic conditions that results in the cutback of research and development budgets or the delay of software purchases would likely result in lower demand for our products and services
and could harm our business. The continuing threat of terrorist attacks in the United States, the ongoing events in Afghanistan, Iraq, Iran, the Middle East, North Korea and other parts of the world, recent problems with the financial system, such
as problems involving banks as well as the mortgage markets and the recent financial crisis, and other worldwide events have increased uncertainty in the United States economy. If the economy continues to decline as a result of this economic,
financial and political turmoil, existing customers may decrease their purchases of our software products or delay their implementation of our software products, and prospective customers may decide not to adopt our software products, any of which
could negatively impact our business and operating results.

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

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

Customers for our software products typically commit significant resources to evaluate available software. The complexity of our products
requires us to spend substantial time and effort to assist potential customers in evaluating our software and in benchmarking our products against those of our competitors. As the complexity of the products we sell increases, we expect our sales
cycle to lengthen. In addition, potential customers may be limited in their current spending by existing time-based licenses with their legacy vendors. In these cases, customers delay a significant new commitment to our software until the term of
the existing license has expired. Also, because our products require our customers to invest significant time and incur significant costs, we must target those individuals within our customers organizations who are able to make these decisions
on behalf of their companies. These individuals tend to be senior management in an organization, typically at the vice president level. We may face difficulty identifying and establishing contact with such individuals. Even after those individuals
decide to purchase our products, the negotiation and documentation processes can be lengthy and could lead the decision-maker to reconsider the purchase. Our sales cycle typically ranges between three and nine months but can be longer. Any delay in
completing sales in a particular quarter could cause our operating results to fall below expectations. Furthermore, economic downturns, technological changes, litigation risk or other competitive factors could cause some customers to shorten the
terms of their licenses significantly, and such shorter terms could in turn have an impact on our total results for orders for this fiscal year. In addition, the precise mix of orders is subject to substantial fluctuation in any given quarter or
multiple quarter periods, and the actual mix of licenses sold affects the revenue we recognize in the period. Even if we achieve the target level of total orders, we may not meet our revenue targets if we are unable to achieve our target license
mix. In particular, we may fall short of our revenue targets if we deliver more long-term or ratable licenses than expected, or we may exceed our revenue targets if we deliver more short-term licenses than expected.

We have a history of losses, except for fiscal 2003 and fiscal 2004, and had an accumulated deficit of approximately $380.0 million as of
November 1, 2009. If we continue to incur losses, the trading price of our stock would likely decline and we may be forced to discontinue our operations altogether.

We had an accumulated deficit of approximately $380.0 million as of November 1, 2009. Except for fiscal 2003 and fiscal 2004, we
incurred losses in all other fiscal years since our incorporation in 1997. As a result of our limited cash resources, outstanding debt and history of operating losses, our auditors have expressed in their report on our consolidated financial
statements that there is doubt about our ability to continue as a going concern. If we continue to incur losses, or if we fail to achieve profitability at levels expected by securities analysts or investors, the market price of our common stock is
likely to decline. If we continue to incur losses, we may not be able to maintain or increase our number of employees or our investment in capital equipment, sales, marketing, and research and development programs. Further, we may be forced to
discontinue our operations entirely.



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

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



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



| |  |  | the mix of products licensed and types of license agreements;
| | - |  | -------------------------------------------------------------



| |  |  | our ability to recognize revenue in a given quarter;
| | - |  | ----------------------------------------------------



| |  |  | 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 requires 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);
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in accounting rules and practices related to revenue recognition;
| | - |  | -------------------------------------------------------------------------



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



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



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



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



| |  |  | higher-than-anticipated costs in connection with litigation;
| | - |  | ------------------------------------------------------------



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



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

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

We have faced lawsuits related to patent infringement and other claims in the past. For example, Synopsys previously filed various suits,
including actions for patent infringement, against us. In addition, a putative stockholder class action lawsuit and a putative derivative lawsuit were filed against us. All claims brought against us by Synopsys have been fully resolved by a
settlement and a license under the asserted patents, although other similar litigation involving Synopsys or other parties may follow. In the future, other parties may assert intellectual property infringement claims against us or our customers. We
may have acquired or may in the future acquire software as a result of our acquisitions, and we could be subject to claims that such software infringes the intellectual property rights of third parties. We also license technology from certain third
parties and could be subject to claims if the software which we license is deemed to infringe the rights of others. In addition, we are often involved in or threatened with commercial litigation unrelated to intellectual property infringement claims
such as labor litigation and contract claims, and we may acquire companies that are actively engaged in such litigation.



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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 against third-party intellectual property infringement claims that are brought against them based on their use of our
products. Also, we may be unaware of filed patent applications that relate to our software products. We believe that the patent portfolios of our competitors generally are far larger than ours. This disparity between our patent portfolio and the
patent portfolios of our competitors may increase the risk that they may sue us for patent infringement and may limit our ability to counterclaim for patent infringement or settle through patent cross-licenses.

The outcome of intellectual property litigation and other types of litigation could result in our loss of critical proprietary rights and
unexpected operating costs and substantial monetary damages. Intellectual property litigation and other types of litigation are expensive and time-consuming and could divert our managements attention from our business. If there is a successful
claim against us for infringement, we may be ordered to pay substantial monetary damages (including punitive damages), be prevented from distributing all or some of our products, and 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 any required proprietary rights on a timely basis could harm our business.

Publicly announced developments in 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 stock.

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 flow, and harm our ability to execute our business plan.

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

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

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

Our customers are currently working on a range of design geometries, including without limitation 45-nanometer,
65-nanometer and 90-nanometer designs. We continue to work toward developing and enhancing our product line in anticipation of increased customer demand for 65-nanometer and other smaller design geometries. Notwithstanding our efforts to support
65-nanometer and other smaller design geometries, customers may fail to adopt, or may face technical difficulties in adopting, these geometries on a large scale and we may be unable to persuade our customers to purchase our related software
products. Accordingly, any revenue we receive from enhancements to our products or acquired technologies may be less than the development or acquisition costs. If customers fail to or delay the adoption of 65-nanometer and other smaller design
geometries



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on a large scale, our operating results may be harmed. In addition, if customers are not able successfully to generate profits as they adopt smaller geometries, demand for our products may be
adversely affected, and our operating results may be harmed.

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

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

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



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



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



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



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

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

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.

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 EDA software companies. Our competitors may not support efforts by us or by our
customers to integrate our products into their existing design flows. We must develop cooperative relationships with competitors so that they will work with us to integrate our software into customers design flow. Currently, our software is
designed to interface with the existing software of Cadence, Synopsys and others. If we are unable to persuade customers to adopt our software products instead of those of competitors (including competitors



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offering a broader set of products), or if we are unable to persuade other software companies to work with us to interface our software to meet the demands of chip designers and manufacturers,
our business and operating results will suffer.

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

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



| |  |  | delayed market acceptance of our software products;
| | - |  | ---------------------------------------------------



| |  |  | delays in product shipments;
| | - |  | ----------------------------



| |  |  | unexpected expenses and diversion of resources to identify the source of errors or to correct errors;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | damage to our reputation;
| | - |  | -------------------------



| |  |  | delayed or lost revenue; and
| | - |  | ----------------------------



| |  |  | product liability claims.
| | - |  | -------------------------

Our product functions are often critical to our customers, especially because of the resources our customers expend on the design and fabrication of integrated circuits. Many of our licensing agreements
contain provisions to provide a limited warranty. In addition, some of our licensing agreements provide the customer with a right of refund for the license fees if we are unable to correct errors reported during the warranty period. If our
contractual limitations are unenforceable in a particular jurisdiction or if we are exposed to claims that are not covered by insurance, a successful claim could harm our business. We currently carry insurance coverage and limits that we believe are
consistent with similarly situated companies within the EDA industry; however, our insurance coverage may prove insufficient to protect against any claims that we may experience.

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



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

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

If we fail to offer and maintain competitive 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.

If the compensation of our employees is not competitive or satisfactory to the employees, we may have difficulty in 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. Our stock price has declined significantly for many years due to market conditions and had until recently been negatively affected
by uncertainty surrounding the outcome of our litigation with Synopsys, Inc. discussed above. In addition, our stock price has declined significantly in light of our recent financial results.

As a result, many of our outstanding stock options have exercise prices per share that are currently above the trading price per share of
our common stock. Even though we recently exchanged certain stock options of employees for restricted stock units as a means to try to retain employees, such exchange might not be sufficient to retain employees. Therefore, we may be forced to grant
additional options or other equity to retain employees. This in turn could result in:



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



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

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.

We have had to implement a series of restructuring efforts recently. In the event that these
efforts result in ineffective interoperability between our products or ineffective collaboration among our employees, or we are unable to continue to manage the pace of our growth, our business could be harmed.

The recent global economic downturn has negatively affected the semiconductor industry and our business, and in response to these adverse
conditions we have had to implement a series of restructuring efforts. In the first quarter of fiscal 2008, we decreased our workforce and incurred restructuring charges of $0.3 million. In addition, we initiated a restructuring plan in May 2008 for
which we have incurred restructuring charges of $10.7 million in fiscal 2009, and $0.9 million in the six months ended November 1, 2009, primarily for employee termination and facility closure costs. It is likely that we will continue to
restructure our company and incur additional associated expenses during fiscal 2010. This reduction in force might harm operating results by making it more difficult for the reduced workforce to take advantage of business opportunities and reach
revenue



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goals. Furthermore, if our organizational structure or restructuring plan results in ineffective interoperability between our products or ineffective collaboration among our employees, then our
operating results may be harmed. For example, we could experience delays in new product development that could cause us to lose customer orders, which could harm our operating results. To pace the growth of our operations with the growth in our
revenue, we must continue to improve administrative, financial and operations systems, procedures and controls. Failure to improve our internal procedures and controls could hinder our efforts to manage our growth adequately, disrupt operations,
lead to additional expenses associated with restructurings, lead to deficiencies in our internal controls and financial reporting and otherwise harm our business.

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

We enter into standard license agreements in the ordinary course of business. Pursuant to these agreements, we agree to indemnify certain of our customers for losses suffered or incurred by them as a result of any patent, copyright, or
other intellectual property infringement claim by any third party with respect to our products. These indemnification obligations have perpetual terms. Our normal business practice is to limit the maximum amount of indemnification to the amount
received from the customer. On occasion, the maximum amount of indemnification we may be required to make may exceed our normal business practices. We estimate that the fair value of our indemnification obligations are insignificant, based upon our
historical experience concerning product and patent infringement claims. Accordingly, we have no liabilities recorded for indemnification under these agreements as of November 1, 2009. If an indemnification event were to occur, we might not
have enough funds to pay our indemnification obligations. Further, any material indemnification payment could have a material adverse effect on our financial condition and the results of our operations.

We have entered into certain indemnification agreements whereby certain of our officers and directors are indemnified for certain events or
occurrences while the officer or director is, or was, serving at our request in such capacity. Additionally, in connection with certain of our recent business acquisitions, we agreed to assume, or cause our subsidiaries to assume, indemnification
obligations to the officers and directors of the acquired companies. While we have directors and officers insurance that reduces our exposure and enables us to recover a portion of any future amounts paid pursuant to our indemnification obligations
to our officers and directors, the maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited. However, as a result of our directors and officers insurance coverage and our belief
that our estimated potential exposure to our officers and directors for indemnification liabilities is minimal, no liabilities have been recorded for these agreements as of November 1, 2009. Therefore, if an indemnification event were to occur,
we might not have enough funds to pay our indemnification obligations. Further, any material indemnification payment could have a material adverse effect on our financial condition and the results of our operations.

Our investments in marketable debt securities are subject to risks which may cause losses and affect the liquidity of these investments.

Our marketable securities portfolio is invested in auction rate securities which were structured to provide liquidity through an auction
process that reset the applicable interest rate generally every 28 days. Starting with the fourth quarter of fiscal 2008, the auction rate securities held by us at face value of $17.0 million as of November 1, 2009, failed at auction and have
continued to fail at auction due to sell orders exceeding buy orders. These auctions had historically provided a liquid market for these securities. All of the auction rate securities that failed are AAA rated and are secured by pools of student
loans guaranteed by state regulated higher education agencies and reinsured by the U.S. Department of Education. However, the liquidity and fair value of these investments have been impacted primarily by the uncertainty of the credit markets. Given
these circumstances and the lack of liquidity, we have classified all of our auction rate securities as long-term investments. In October 2008, we entered into a settlement agreement with UBS which provided us with an option to sell the auction rate
securities held by us back to UBS at par value beginning June 30, 2010 until July 2, 2012 and with an offer to provide no net cost loans to us of up to 75% of the market value of the auction rate securities. We intend to



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exercise our option and sell the auction rate securities back at par on or about June 30, 2010. We also entered into a no net cost secured line of credit with UBS for $12.6
million, which provides cash liquidity to us until June 30, 2010.

If UBS fails to meet its obligation to buy back the
auction rate securities at par value, if a certain concentration of the underlying reference portfolios default, if the issuing agent fails to make the required interest payments, or if the credit ratings on the underlying reference portfolios
deteriorate significantly, we may be required to further adjust the carrying value of these investments, which could materially affect our results of operations and financial condition.

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

Part of our growth strategy is to pursue acquisitions. We expect to continuously evaluate the possibility of
accelerating our growth through acquisitions, as is customary in the EDA industry. The recent decline in the price of our common stock, our focus on cash management and our need to reduce our debt levels may impact our ability to pursue acquisitions
for some period of time. Achieving the anticipated benefits of past and possible future acquisitions will depend in part upon whether we can integrate the operations, products and technology of acquired companies with our operations, products and
technology in a timely and cost-effective manner. The process of integrating acquired companies and acquired technology is complex, expensive and time consuming, and may cause an interruption of, or loss of momentum in, the product development and
sales activities and operations of both companies. In addition, the earnout arrangements we use, and expect to continue to use, to consummate some of our acquisitions, pursuant to which we agreed to pay additional amounts of contingent consideration
based on the achievement of certain revenue, bookings or product development milestones, can sometimes complicate integration efforts. We cannot be sure that we will find suitable acquisition candidates or that acquisitions we complete will be
successful. Assimilating previously acquired companies such as Sabio Labs, Inc. (Sabio), Knights Technology, Inc. (Knights), ACAD Corporation (ACAD), Mojave, Silicon Metrics Corporation, or any other companies we
have acquired or may seek to acquire in the future, involves a number of other risks, including, but not limited to:



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



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



| |  |  | difficulties in integrating or retaining key employees of the acquired company;
| | - |  | -------------------------------------------------------------------------------



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



| |  |  | the risk that actions incentivized by earnout provisions will ultimately prove not to be in our best interest if our interests change over time;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



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



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



| |  |  | diversion of our managements attention;
| | - |  | ----------------------------------------



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



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



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



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Because much of our business is international, we are exposed to risks inherent in doing business
internationally that could harm our business. We also intend to expand our international operations. If our revenue from this expansion does not exceed the expenses associated with this expansion, our business and operating results could suffer.

In the first half of fiscal 2010, we generated 45% of our total revenue from sales outside North America, compared to 47%
in fiscal 2009.

To the extent that we expand our international operations, we may need to continue to maintain 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;
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | current events in North Korea, the Middle East, and other parts of the world;
| | - |  | -----------------------------------------------------------------------------



| |  |  | the effects of terrorist attacks in the United States or against U.S. interests overseas;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | recent problems with the financial system, such as problems involving banks as well as the mortgage markets and the recent financial crisis; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | any related conflicts or similar events worldwide.
| | - |  | --------------------------------------------------

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

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 such
foreign currencies could increase the relative costs of our overseas operations, which could reduce our operating margins. This exposure is primarily related to a portion of revenue in Japan and operating expenses in Europe, Japan and Asia-Pacific,
which are denominated in the respective local currencies. As of November 1, 2009, we had approximately $4.4 million of cash and money market funds in foreign currencies. During the third quarter of fiscal 2008, we started entering into foreign
exchange forward contracts to mitigate the effects of our currency exposure risk for foreign currency transactions in Japanese Yen. While we assess the need to utilize financial instruments to hedge currency exposures on an ongoing basis, our
assessments may prove incorrect. Therefore, movements in exchange rates could negatively impact our business operating results and financial condition.

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



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| |  |  | future changes in ownership that may limit realization of certain assets;
| | - |  | -------------------------------------------------------------------------



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



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



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

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

Future changes in accounting standards or interpretations thereof, specifically those changes affecting software revenue recognition, could
require us to change our methods of revenue recognition. These changes could result in deferral of revenue recognized in current periods to subsequent periods or in accelerated recognition of deferred revenue to current periods, each of which could
cause shortfalls in meeting the expectations of investors and securities analysts. Our stock price could decline as a result of any shortfall.

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

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

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

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (Section 404), we are required to report on, and our independent registered public accounting firm is required to attest to, the
effectiveness of our internal control over financial reporting. Our assessment of the effectiveness of our internal control over financial reporting must include disclosure of any material weaknesses in our internal control over financial reporting
identified by management. We have an ongoing program to perform the system and process evaluation and testing necessary to comply with these requirements. Effective internal controls are necessary for us to provide reliable financial reports. If we
cannot provide reliable financial reports, there could be an adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of our financial statements, which ultimately could negatively impact our stock price.

In addition, we must continue to monitor and assess our internal control over financial reporting because a failure to comply
with Section 404 could cause us to delay filing our public reports, potentially resulting in de-listing by the Nasdaq Global Market and penalties or other adverse consequences under our existing contractual arrangements. In particular, pursuant
to the indenture for the 2010 Notes, if we fail to file our annual or quarterly reports in accordance with the terms of that indenture, or if we do not comply with certain provisions of the Trust Indenture Act specified in the indenture, after the
passage of certain periods of time at the election of a certain minimum number of holders of the 2010 Notes, we may be in default under the indenture unless we pay a fee equal to 1% per annum of the aggregate principal amounts of the 2010
Notes, or the extension fee, to extend the default date. Even if we pay the applicable extension fee, we will eventually be in default for these filing failures if sufficient time passes and we have not made the applicable filing.



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The effectiveness of disclosure controls is inherently limited.

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

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 for our software and other proprietary technology. We currently have a number of issued patents in the United States,
but this number is relatively small in comparison to our competitors. Patents 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.

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

In addition to patents, we rely on a combination of trademark, copyright and trade secret laws, and contractual restrictions, such as
confidentiality agreements and licenses, to establish and protect our proprietary rights. 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
| | - |  | -----------------------------------------------------------------------------------------------



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| |  |  | 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 for our proprietary technologies. Reverse engineering, unauthorized copying or other misappropriation of our proprietary technologies could enable third parties to benefit from our technologies without paying us for them, which would harm
our competitive position and market share.

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

Our common stock trades on the Nasdaq Global Market under the
symbol LAVA. There have been previous quarters in which we have experienced shortfalls in revenue and earnings from levels expected by securities analysts and investors, which have had an immediate and significant adverse effect on the
trading price of our common stock. Furthermore, the price of our common stock has fluctuated significantly in recent periods. From January 1, 2008 until December 8, 2009, the closing price of our common stock has ranged from $0.71 to $2.45
per share.

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

In addition, the stock market in recent years, and particularly in the last year, 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 have in the past and may in the future adversely affect the price of our common stock, regardless
of our operating performance. Recent problems with the financial system, such as problems involving banks as well as the mortgage markets, might increase such market fluctuations.

Our certificate of incorporation and 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 in control would
be beneficial to the stockholders. These provisions could lower the price that future investors might be willing to pay for shares of our common stock. These anti-takeover provisions:



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



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



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



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



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



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



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Section 203 of the Delaware General Corporation Law and the terms of our stock option
plans also may discourage, delay or prevent a change in control of our company. Section 203 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. Our stock option plans include change-in-control provisions that allow us to grant options or stock purchase rights that will become vested immediately upon a change in control.

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

There may be additional dilution to our current stockholders upon achievement of various milestones pursuant to our mergers and acquisitions.

There may be additional dilution to our current stockholders upon achievement of various milestones pursuant to our mergers and acquisitions,
and such dilution would also dilute the voting power and ownership interest of our existing stockholders and could cause the market price of our common stock to decline and could increase the fluctuations in our stock price.

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

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

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

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



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|ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|------- | -----------------------------------------------------------

Recent Sales of Unregistered Securities

None.

Purchases of Equity Securities by the Issuer

None.



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

The following
documents are filed as Exhibits to this report:



|               |  |                                                                                                                                                             |  |                           |  |                   |  |                |  |                    |  |   |  |  
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- |  | ----------------- |  | -------------- |  | ------------------ |  | - |  | -
|Exhibit Number |  | Exhibit Description                                                                                                                                         |  | Incorporated by Reference |  | FurnishedHerewith |  | Filed Herewith
|               |  | Form                                                                                                                                                        |  | File No.                  |  | Exhibit           |  | Filing Date    |  |                   
|10.1           |  | Indenture, dated as of September 11, 2009, between Magma Design Automation, Inc. and U.S. Bank National Association                                         |  | 8-K                       |  | 000-33213         |  | 10.1           |  | September 15, 2009 |  |   |  |  
|               |  |                                                                                                                                                             |  |                           |  |                   | 
|10.2           |  | Third Amendment to Credit Agreement, effective as of October 1, 2009, between Magma and Wells Fargo                                                         |  | 8-K                       |  | 000-33213         |  | 10.1           |  | October 16, 2009   |  |   |  |  
|               |  |                                                                                                                                                             |  |                           |  |                   | 
|31.1           |  | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer                                                                                           |  |                           |  |                   |  |                |  |                    |  |   |  | X
|               |  |                                                                                                                                                             |  |                           |  |                   | 
|31.2           |  | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer                                                                                           |  |                           |  |                   |  |                |  |                    |  |   |  | X
|               |  |                                                                                                                                                             |  |                           |  |                   | 
|32.1           |  | Certification of Chief Executive Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 |  |                           |  |                   |  |                |  |                    |  | X |  |  
|               |  |                                                                                                                                                             |  |                           |  |                   | 
|32.2           |  | Certification of Chief Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 |  |                           |  |                   |  |                |  |                    |  | X |  |  



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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: December 10, 2009 |  |  |  | By                            |  | /s/    PETER S.
TESHIMA
|                         |  |  |  |                               |  |                         |  | Peter S. Teshima                                            
|                         |  |  |  |                               |  |                         |  | Corporate Vice PresidentFinance and Chief Financial Officer
|                         |  |  |  |                               |  |                         |  | (Principal Financial 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 NOVEMBER 1, 2009



|              |  |                                                                                                                                                             |  |                           |  |                   |  |                |  |                    |  |   |  |  
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- |  | ----------------- |  | -------------- |  | ------------------ |  | - |  | -
|ExhibitNumber |  | Exhibit Description                                                                                                                                         |  | Incorporated by Reference |  | FurnishedHerewith |  | Filed Herewith
|              |  | Form                                                                                                                                                        |  | File No.                  |  | Exhibit           |  | Filing Date    |  |                   
|10.1          |  | Indenture, dated as of September 11, 2009, between Magma Design Automation, Inc. and U.S. Bank National Association                                         |  | 8-K                       |  | 000-33213         |  | 10.1           |  | September 15, 2009 |  |   |  |  
|              |  |                                                                                                                                                             |  |                           |  |                   | 
|10.2          |  | Third Amendment to Credit Agreement, effective as of October 1, 2009, between Magma and Wells Fargo                                                         |  | 8-K                       |  | 000-33213         |  | 10.1           |  | October 16, 2009   |  |   |  |  
|              |  |                                                                                                                                                             |  |                           |  |                   | 
|31.1          |  | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer                                                                                           |  |                           |  |                   |  |                |  |                    |  |   |  | X
|              |  |                                                                                                                                                             |  |                           |  |                   | 
|31.2          |  | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer                                                                                           |  |                           |  |                   |  |                |  |                    |  |   |  | X
|              |  |                                                                                                                                                             |  |                           |  |                   | 
|32.1          |  | Certification of Chief Executive Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 |  |                           |  |                   |  |                |  |                    |  | X |  |  
|              |  |                                                                                                                                                             |  |                           |  |                   | 
|32.2          |  | Certification of Chief Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 |  |                           |  |                   |  |                |  |                    |  | X |  |  



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