Document:

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                                                                     EXHIBIT 4.1

                       FORM OF COMMON STOCK CERTIFICATE

[LOGO]
NUMBER
SHARES
SC-
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
CUSIP 559181
SEE REVERSE FOR CERTAIN DEFINITIONS

THIS CERTIFIES THAT MAGMA DESIGN AUTOMATION, INC. is the record holder of FULLY
PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $.0001 PAR VALUE OF MAGMA DESIGN
AUTOMATION, INC. transferable on the books of the Corporation by the holder
hereof in person or by duly authorized Attorney upon surrender of this
certificate properly endorsed. This certificate is not valid until countersigned
by the Transfer Agent and Registrar.

WITNESS the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.

Dated:

[Roy E. Jewell]
PRESIDENT
[SEAL]

[Rajeev Madhavan]
SECRETARY
COUNTERSIGNED AND REGISTERED:
MELLON INVESTOR SERVICES, L.L.C.
__________________________
__________________________
AND REGISTRAR
BY
AUTHORIZED SIGNATURE

MAGMA DESIGN AUTOMATION, INC.
A statement of all of the powers, designations, preferences and relative,
participating, optional, or other special rights of each class of stock or
series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights as established by the Certificate of Incorporation, as
amended, may be obtained by any stockholder upon request and without charge from
the principal office of the Corporation.

The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:

TEN COM- as tenants in common
TEN ENT- as tenants by the entireties
JT TEN- as joint tenants with right
of survivorship and not as
tenants in common
<PAGE>

UNIF GIFT MIN ACT- _______________ Custodian ______________
(Cust) (Minor)
under Uniform Gift to Minors
Act ________
(State)
UNIF TRF MIN ACT- _________ Custodian (until age ______________)
(Cust)
__________ under Uniform Transfers
(Minor)
to Minors Act ____________
(State)
Additional abbreviations may also be used though not in the above list.
ASSIGNMENT
For Value Received ___________ hereby sell(s), assign(s) and transfer(s) unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE(S)
of the Shares of capital stock represented by the within Certificate and do(es)
hereby irrevocably constitute and
appoint ________ Attorney
to transfer the said Shares on the books of the within named Corporation with
full power of substitution in the premises.

Dated

NOTE: The signature to this assignment must correspond with
the names as written upon the face of the certificate in every
particular, without alteration or enlargement or any change whatever.
Signatures must be guaranteed.

Signature(s) Guaranteed:
By

THE SIGNATURES MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN
AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM) PURSUANT TO S.E.C. RULE
17Ad-15.<PAGE>

                                                                    EXHIBIT 10.2

                         MAGMA DESIGN AUTOMATION, INC.

                           2001 STOCK INCENTIVE PLAN

                     (Adopted by the Board on May 4, 2001)
<PAGE>

                                TABLE OF CONTENTS
                                -----------------

<TABLE>
<CAPTION>
                                                                       Page
                                                                       ----
<S>                                                                    <C>
SECTION 1. ESTABLISHMENT AND PURPOSE...............................     1

SECTION 2. DEFINITIONS.............................................     1

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

SECTION 3. ADMINISTRATION..........................................     5
   (a)   Committee Composition.....................................     5
   (b)   Committee for Non-Officer Grants..........................     6
</TABLE>

                                      -i-
<PAGE>

<TABLE>
<S>                                                                    <C>
   (c)   Committee Procedures......................................     6
   (d)   Committee Responsibilities................................     6

SECTION 4. ELIGIBILITY.............................................     7

   (a)   General Rule..............................................     7
   (b)   Outside Directors.........................................     7
   (c)   Ten-Percent Stockholders..................................     9
   (d)   Attribution Rules.........................................    10
   (e)   Outstanding Stock.........................................    10

SECTION 5. STOCK SUBJECT TO PLAN...................................    10

   (a)   Basic Limitation..........................................    10
   (b)   Annual Increase in Shares.................................    10
   (c)   Additional Shares.........................................    10
   (d)   Dividend Equivalents......................................    10

SECTION 6. RESTRICTED SHARES.......................................    11

   (a)   Restricted Stock Agreement................................    11
   (b)   Payment for Awards........................................    11
   (c)   Vesting...................................................    11
   (d)   Voting and Dividend Rights................................    11

SECTION 7. OTHER TERMS AND CONDITIONS OF AWARDS OR SALES...........    11

   (a)   Duration of Offers and Nontransferability of Rights.......    11
   (b)   Withholding Taxes.........................................    11
   (c)   Restrictions on Transfer of Shares........................    11

SECTION 8. TERMS AND CONDITIONS OF OPTIONS.........................    12

   (a)   Stock Option Agreement....................................    12
   (b)   Number of Shares..........................................    12
   (c)   Exercise Price............................................    12
   (d)   Withholding Taxes.........................................    12
   (e)   Exercisability and Term...................................    12
   (f)   Nontransferability........................................    13
   (g)   Exercise of Options Upon Termination of Service...........    13
   (h)   Effect of Change in Control...............................    13
   (i)   Leaves of Absence.........................................    13
   (j)   No Rights as a Stockholder................................    13
   (k)   Modification, Extension and Renewal of Options............    14
   (l)   Restrictions on Transfer of Shares........................    14
   (m)   Buyout Provisions.........................................    14

SECTION 9. PAYMENT FOR SHARES......................................    14

   (a)   General Rule..............................................    14
   (b)   Surrender of Stock........................................    14
   (c)   Services Rendered.........................................    14
   (d)   Cashless Exercise.........................................    14
</TABLE>

                                      -ii-
<PAGE>

<TABLE>
<S>                                                                    <C>
   (e)   Exercise/Pledge.............................................. 14
   (f)   Promissory Note.............................................. 15
   (g)   Other Forms of Payment....................................... 15

SECTION 10. STOCK APPRECIATION RIGHTS................................. 15

   (a)   SAR Agreement................................................ 15
   (b)   Number of Shares............................................. 15
   (c)   Exercise Price............................................... 15
   (d)   Exercisability and Term...................................... 15
   (e)   Effect of Change in Control.................................. 15
   (f)   Exercise of SARs............................................. 16
   (g)   Special Holding Period....................................... 16
   (h)   Special Exercise Window...................................... 16
   (i)   Modification or Assumption of SARs........................... 16

SECTION 11. STOCK UNITS............................................... 16

   (a)   Stock Unit Agreement......................................... 16
   (b)   Payment for Awards........................................... 16
   (c)   Vesting Conditions........................................... 16
   (d)   Voting and Dividend Rights................................... 17
   (e)   Form and Time of Settlement of Stock Units................... 17
   (f)   Death of Recipient........................................... 17
   (g)   Creditors' Rights............................................ 17

SECTION 12. ADJUSTMENT OF SHARES...................................... 18

   (a)   Adjustments.................................................. 18
   (b)   Dissolution or Liquidation................................... 18
   (c)   Reorganizations.............................................. 18
   (d)   Reservation of Rights........................................ 19

SECTION 13. DEFERRAL OF AWARDS........................................ 19

SECTION 14. AWARDS UNDER OTHER PLANS.................................. 19

SECTION 15. PAYMENT OF DIRECTOR'S FEES IN SECURITIES.................. 20

   (a)   Effective Date............................................... 20
   (b)   Elections to Receive NSOs, Restricted Shares or Stock Units.. 20
   (c)   Number and Terms of NSOs, Restricted Shares or Stock Units... 20

SECTION 16. LEGAL AND REGULATORY REQUIREMENTS......................... 20

SECTION 17. WITHHOLDING TAXES......................................... 20

   (a)   General...................................................... 20
   (b)   Share Withholding............................................ 20

SECTION 18. LIMITATION ON PARACHUTE PAYMENTS.......................... 21

   (a)   Scope of Limitation.......................................... 21
   (b)   Basic Rule................................................... 21
</TABLE>

                                     -iii-
<PAGE>

<TABLE>
<S>                                                                          <C>
   (c)   Reduction of Payments...........................................    21
   (d)   Overpayments and Underpayments..................................    21
   (e)   Related Corporations............................................    22

SECTION 19. NO EMPLOYMENT RIGHTS.........................................    22

SECTION 20. DURATION AND AMENDMENTS......................................    22

   (a)   Term of the Plan................................................    22
   (b)   Right to Amend or Terminate the Plan............................    22
   (c)   Effect of Amendment or Termination..............................    22

SECTION 21. EXECUTION....................................................    22
</TABLE>

                                      -iv-
<PAGE>

                         MAGMA DESIGN AUTOMATION, INC.
                         -----------------------------

                           2001 STOCK INCENTIVE PLAN

SECTION 1. ESTABLISHMENT AND PURPOSE.
------------------------------------

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

SECTION 2. DEFINITIONS.
----------------------

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

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

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

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

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

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

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

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

                                      -1-
<PAGE>

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

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

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

          (v)   Both:

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

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

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

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

                                      -2-
<PAGE>

stockholders of the Company in substantially the same proportions as their
ownership of the Stock.

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

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

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

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

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

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

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

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

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

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

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

                                      -3-
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

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

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

                                      -4-
<PAGE>

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

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

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

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

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

     (cc) "Stock" shall mean the Common Stock of the Company.

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

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

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

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

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

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

SECTION 3. ADMINISTRATION.
-------------------------

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

                                      -5-
<PAGE>

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

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

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

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

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

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

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

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

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

             (v)    To select the Offerees and Optionees;

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

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

                                      -6-
<PAGE>

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

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

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

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

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

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

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

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

SECTION 4.   ELIGIBILITY.
------------------------

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

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

                                      -7-
<PAGE>

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

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

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

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

        (v)    Twenty-five percent of the Shares subject to each Option granted
     under Sections 4(b)(ii) and 4(b)(iii) shall become exercisable on the first
     anniversary of the date of grant. The balance of the Shares subject to each
     Option (i.e., the remaining seventy-five percent (75%)) granted under
             ----
     Sections 4(b)(ii) and 4(b)(iii) shall become exercisable monthly over a
     three-year period beginning on the date which is one month after the first
     anniversary of the date of grant.  Accordingly, the balance of the Shares
     shall vest, from and after the date which is one month after the first
     anniversary of the date of grant, at a monthly rate of 2.08333% of the
     total number of Shares subject to such Options.  Notwithstanding the
     foregoing, each Option shall become exercisable in full (100%) in the event
     that a Change in Control occurs with respect to the Company.

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

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

                                      -8-
<PAGE>

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

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

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

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

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

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

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

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

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

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

                                      -9-
<PAGE>

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

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

SECTION 5. STOCK SUBJECT TO PLAN.
--------------------------------

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

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

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

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

                                      -10-
<PAGE>

SECTION 6. RESTRICTED SHARES.
----------------------------

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

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

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

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

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

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

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

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

                                      -11-
<PAGE>

SECTION 8. TERMS AND CONDITIONS OF OPTIONS.
------------------------------------------

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

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

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

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

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

                                      -12-
<PAGE>

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

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

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

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

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

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

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

                                      -13-
<PAGE>

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

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

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

SECTION 9. PAYMENT FOR SHARES.
-----------------------------

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

     (b)  Surrender of Stock. To the extent that a Stock Option Agreement so
          ------------------
provides, payment may be made all or in part by surrendering, or attesting to
the ownership of, Shares which have already been owned by the Optionee or his
representative for more than 12 months. Such Shares shall be valued at their
Fair Market Value on the date when the new Shares are purchased under the Plan.
The Optionee shall not surrender, or attest to the ownership of, Shares in
payment of the Exercise Price if such action would cause the Company to
recognize compensation expense (or additional compensation expense) with respect
to the Option for financial reporting purposes.

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

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

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

                                      -14-
<PAGE>

to deliver all or part of the loan proceeds to the Company in payment of the
aggregate Exercise Price.

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

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

SECTION 10. STOCK APPRECIATION RIGHTS.
-------------------------------------

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

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

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

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

     (e)  Effect of Change in Control. The Committee may determine, at the time
          ---------------------------
of granting a SAR or thereafter, that such SAR shall become fully exercisable as
to all Common Shares subject to such SAR in the event that a Change in Control
occurs with respect to the Company, subject to the following sentence. If the
Company and the other party to the transaction constituting a Change in Control
agree that such transaction is to be treated as a "pooling of interests" for
financial reporting purposes, and if such transaction in fact is so

                                      -15-
<PAGE>

treated, then the acceleration of exercisability shall not occur to the extent
that the Company's independent accountants and such other party's independent
accountants separately determine in good faith that such acceleration would
preclude the use of "pooling of interests" accounting.

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

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

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

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

SECTION 11. STOCK UNITS.
-----------------------

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

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

     (c)  Vesting Conditions. Each Award of Stock Units may or may not be
          ------------------
subject to vesting. Vesting shall occur, in full or in installments, upon
satisfaction of the conditions specified in the Stock Unit Agreement. A Stock
Unit Agreement may provide for accelerated

                                      -16-
<PAGE>

vesting in the event of the Participant's death, disability or retirement or
other events. The Committee may determine, at the time of granting Stock Units
or thereafter, that all or part of such Stock Units shall become vested in the
event that a Change in Control occurs with respect to the Company, except as
provided in the next following sentence. If the Company and the other party to
the transaction constituting a Change in Control agree that such transaction is
to be treated as a "pooling of interests" for financial reporting purposes, and
if such transaction in fact is so treated, then the acceleration of vesting
shall not occur to the extent that the Company's independent accountants and
such other party's independent accountants separately determine in good faith
that such acceleration would preclude the use of "pooling of interests"
accounting.

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

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

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

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

                                      -17-
<PAGE>

SECTION 12. ADJUSTMENT OF SHARES.
--------------------------------

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

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

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

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

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

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

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

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

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

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

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

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

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

                                      -18-
<PAGE>

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

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

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

SECTION 13. DEFERRAL OF AWARDS.
------------------------------

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

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

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

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

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

SECTION 14. AWARDS UNDER OTHER PLANS.
------------------------------------

     The Company may grant awards under other plans or programs. Such awards may
be settled in the form of Shares issued under this Plan. Such Shares shall be
treated for all purposes

                                      -19-
<PAGE>

under the Plan like Shares issued in settlement of Stock Units and shall, when
issued, reduce the number of Shares available under Section 5.

SECTION 15. PAYMENT OF DIRECTOR'S FEES IN SECURITIES.
----------------------------------------------------

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

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

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

SECTION 16. LEGAL AND REGULATORY REQUIREMENTS.
---------------------------------------------

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

SECTION 17. WITHHOLDING TAXES.
-----------------------------

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

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

                                      -20-
<PAGE>

SECTION 18. LIMITATION ON PARACHUTE PAYMENTS.
--------------------------------------------

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

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

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

     (d) Overpayments and Underpayments. As a result of uncertainty in the
         ------------------------------
application of Section 280G of the Code at the time of an initial determination
by the Auditors hereunder, it is possible that Payments will have been made by
the Company that should not have been made (an "Overpayment") or that additional
Payments that will not have been made by the Company could have been made (an
"Underpayment"), consistent in each case with the calculation of the Reduced
Amount hereunder. In the event that the Auditors, based upon the assertion of a
deficiency by the Internal Revenue Service against the Company or the
Participant that the Auditors believe has a high probability of success,
determine that an Overpayment has been made, such Overpayment shall be treated
for all purposes as a loan to the Participant which he or she shall repay to the
Company, together with interest at the applicable federal rate provided in

                                      -21-
<PAGE>

Section 7872(f)(2) of the Code; provided, however, that no amount shall be
payable by the Participant to the Company if and to the extent that such payment
would not reduce the amount subject to taxation under Section 4999 of the Code.
In the event that the Auditors determine that an Underpayment has occurred, such
Underpayment shall promptly be paid or transferred by the Company to or for the
benefit of the Participant, together with interest at the applicable federal
rate provided in Section 7872(f)(2) of the Code.

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

SECTION 19. NO EMPLOYMENT RIGHTS.
--------------------------------

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

SECTION 20. DURATION AND AMENDMENTS.
-----------------------------------

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

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

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

SECTION 21. EXECUTION.
---------------------

     To record the adoption of the Plan by the Board of Directors effective as
of May 4, 2001 the Company has caused its authorized officer to execute the
same.

                                      MAGMA DESIGN AUTOMATION, INC.

                                      By  /s/ Rajeev Madhavan
                                         __________________________

                                      Title _______________________

                                      -22-
<PAGE>

                             STOCK OPTION AGREEMENT

                              TERMS AND CONDITIONS

                         MAGMA DESIGN AUTOMATION, INC.

                           2001 Stock Incentive Plan

     THIS STOCK OPTION AGREEMENT TERMS AND CONDITIONS (the "Stock Option
Agreement Terms and Conditions") together with the Notice of Stock Option Grant
(the "Notice of Grant") to which this Stock Option Agreement Terms and
Conditions is attached and the Notice of Stock Option Exercise (the "Notice of
Exercise") attached to this Stock Option Agreement Terms and Conditions contain
the terms and conditions of the Option granted to you pursuant to the Notice of
Grant.  This Option is intended to be an Incentive Stock Option or a
Nonstatutory Stock Option, as provided in the Notice of Grant.

1.   Exercise.  The Option evidenced by this Stock Option Agreement Terms and
     --------
Conditions becomes exercisable in accordance with the provisions set forth in
Sections 7 and 8 of the Notice of Grant. Your rights to exercise the Option
accrue only for the time period you render Service to the Company from and after
the Credited Service Commencement Date set forth in Section 6 of the Notice of
Grant.

2.   Term.  The Option expires on the date shown in the Notice of Grant, but in
     ----
no event later than the tenth anniversary of the Date of Grant set forth in
Section 5 of the Notice of Grant.

3.   Regular Termination.  If your Service with the Company or a Subsidiary
     -------------------
terminates for any reason excluding death, Total and Permanent Disability or
Cause, this Option will expire on the date specified in Section 9(A) of the
Notice of Grant.

4.   Death or Disability.  If your Service with the Company or a Subsidiary
     -------------------
terminates as a result of your Total and Permanent Disability or death, this
Option will expire on the date specified in Section 9(B) of the Notice of Grant.

5.   Cause.  If your Service with the Company or a Subsidiary terminates for
     -----
Cause, this Option will expire on the date specified in Section 9(C) of the
Notice of Grant.

6.   Leaves of Absence.  For purposes of this Option, your Service does not
     -----------------
terminate when you go on a military leave of absence, a sick leave of absence or
another bona fide leave of absence, if the leave of absence was approved by the
Company in writing and if continued crediting of Service is required by the
terms of the leave or by applicable law. Your Service will terminate when the
approved leave of absence ends unless you immediately return to active work.

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

8.   Notice of Exercise.  When you wish to exercise this Option you must notify
     ------------------
the Company by completing the attached Notice of Exercise form and filing it
with the Human

                                       1
<PAGE>

Resources Department of the Company. The exercise of your Option will be
effective when the Notice of Exercise and payment of the Exercise Price is
received by the Company. If someone else wants to exercise this Option after
your death, that person must prove to the Company's satisfaction that he or she
is entitled to do so.

9.   Form of Payment.  When you submit your Notice of Exercise, you must include
     ---------------
payment of the Exercise Price for the Shares you are purchasing. Payment may be
made in the form specified in your Notice of Grant.

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

11.  Restrictions on Resale.  By entering into this Stock Option Agreement Terms
     ----------------------
and Conditions, you agree not to sell any Shares at a time when applicable laws,
Company policies or an agreement between the Company and its underwriters
prohibit a sale (e.g., a lock-up period after the Company goes public). This
restriction will apply as long as you are providing Service to the Company or a
Subsidiary.

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

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

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

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

                                       2
<PAGE>

Exercise Price. No adjustments are made for dividends or other rights if the
applicable record date occurs before you exercise this Option, except as
described in the Plan.

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

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

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

            BY SIGNING THE NOTICE OF GRANT, YOU AGREE TO ALL OF THE
          TERMS AND CONDITIONS DESCRIBED IN THE NOTICE OF GRANT, THE
          STOCK OPTION AGREEMENT TERMS AND CONDITIONS, THE NOTICE OF
                            EXERCISE AND THE PLAN.

                                       3
<PAGE>

                        NOTICE OF STOCK OPTION EXERCISE

Magma Design Automation, Inc.

______________________________

______________________________

Attn:  Chief Financial Officer

Re:  Exercise of Stock Option

Dear Sir or Madam:

     Pursuant to the Notice of Stock Option Grant and Stock Option Agreement
Terms and Conditions, dated __________, 200____ and the Company's 2001 Stock
Incentive Plan (the "Plan"), I hereby elect to purchase _____________ Shares of
Stock at an aggregate Exercise Price of $__________.  I enclose payment and/or
other documents (check all that are applicable) as follows:

          [_]  My check in the amount of $___________;

          [_]  Shares of Company Stock which have been owned by me or my
          representative for more than twelve (12) months and which are hereby
          surrendered to the Company in good form for transfer.

          [_]  A Committee-approved form of irrevocable direction to a
          securities broker approved by the Company to sell all or part of the
          Shares subject to the Option and to deliver to the Company from the
          sale proceeds an amount sufficient to pay the Exercise Price and any
          withholding taxes and to deliver the balance of the sale proceeds, if
          any, to me.

     Any Shares to be issued hereunder are to be registered in the name(s) of:

                    __________________________

                    __________________________

     I understand there may be tax consequences as a result of the purchase or
disposition of the Shares, I have consulted with any tax consultants I wished to
consult and I am not relying on the Company for any tax advice.  I understand
that my exercise is governed by my Notice of Stock Option Grant, Stock Option
Agreement Terms and Conditions and the Plan and agree to abide by and be bound
by their terms and conditions.  I represent that the Shares are being acquired
solely for my own account, and not as a nominee for any other party, and for

                                       1
<PAGE>

investment.  I will not offer, sell or otherwise dispose of any such Shares
except under circumstances that will not result in a violation of the Securities
Act of 1933, as amended, or any state securities laws.

Dated:  __________, _____.

                                        ___________________________________
                                                       Signature

                                        ___________________________________
                                                  Please Print Name

                                        ___________________________________
                                        ___________________________________
                                                        Address

                                       2
<PAGE>

                         MAGMA DESIGN AUTOMATION, INC.
                           2001 Stock Incentive Plan
                        NOTICE OF RESTRICTED SHARE AWARD

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

1.   Name of Grantee:  _________________________

2.   Total Number of Restricted Shares Awarded:  _________________________

3.   Fair Market Value per Restricted Share:  $_________________________

4.   Total Fair Market Value of Award:  $_________________________

5.   Purchase Price per Restricted Share:  $____________________________

6.   Total Purchase Price for all Restricted Shares:  $________________________

7.   Date of Award:  _______ __, ____

8.   Vesting Commencement Date:  _______ __, ____

9.   Vesting Schedule:

     The first _____% of the total number of Shares vest when you complete _____
months of Service from the Vesting Commencement Date.  An additional _____% of
the Shares vest when you complete each month of Service thereafter.

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

                                                MAGMA DESIGN AUTOMATION, INC.

                                                By:____________________________

                                                Its:___________________________

                                                RECIPIENT:

                                                -------------------------------
                                                Signature

                                                -------------------------------
                                                Please Print Name
<PAGE>

                         MAGMA DESIGN AUTOMATION, INC.

                           2001 Stock Incentive Plan

                           RESTRICTED SHARE AGREEMENT

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

     1.   Sale of Stock.  Subject to the terms and conditions of this Agreement,
          -------------
on the Purchase Date (as defined below) the Company will issue and sell to
Purchaser, and Purchaser agrees to purchase from the Company, _______ Shares at
a purchase price of $__________ per Share for a total purchase price of
$________________. The per Share purchase price of the Shares shall be not less
than 100% of the Fair Market Value of the Shares as of the date of the offer of
such Shares to the Purchaser, or, in the case of any person owning stock
representing more than ten percent of the total combined voting power of all
classes of outstanding stock of the Company, its Parent or any of its
Subsidiaries, the per Share purchase price shall be not less than 110% of the
Fair Market Value of the Shares as of such date. The term "Shares" refers to the
purchased Shares and all securities received in replacement of or in connection
with the Shares pursuant to stock dividends or splits, all securities received
in replacement of the Shares in a recapitalization, merger, reorganization,
exchange or the like, and all new, substituted or additional securities or other
properties to which Purchaser is entitled by reason of Purchaser's ownership of
the Shares.

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

     3.   Restrictions on Resale. By signing this Agreement, Purchaser agrees
          ----------------------
not to sell any Shares acquired pursuant to the Plan and this Agreement at a
time when applicable laws, regulations or Company or underwriter trading
policies prohibit exercise or sale. This restriction will apply as long as
Purchaser is providing Service to the Company or a Subsidiary of the Company.

     4.   Restrictive Legends and Stop-Transfer Orders.
          --------------------------------------------

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

                                       1
<PAGE>

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

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

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

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

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

     7.   Miscellaneous
          -------------

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

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

                                       2
<PAGE>

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

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

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

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

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

                           [Signature Page Follows]

                                       3
<PAGE>

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

                              MAGMA DESIGN AUTOMATION, INC.

                              By:____________________________________

                              Its:___________________________________

                              PURCHASER:

                              _______________________________________
                                           (Signature)

                              _______________________________________
                                        (Please Print Name)

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

                              _____________________________________________
                              Spouse of _______________________

                                       4
<PAGE>

                                    RECEIPT

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

     [_]  A check in the amount of $__________

     [_]  The cancellation of indebtedness in the amount of $__________

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

Dated:  ________________

                                   MAGMA DESIGN AUTOMATION, INC.

                                   By:_______________________________

                                   Its:______________________________
<PAGE>

                              RECEIPT AND CONSENT

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

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

Dated:  _________________________

                                             _________________________________
                                             Signature

                                             _________________________________
                                             Please Print Name

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