1065034--6/15/2006--MAGMA_DESIGN_AUTOMATION

related topics

{regulation, change, law}

{property, intellectual, protect}

{customer, product, revenue}

{product, market, service}

{stock, price, operating}

{control, financial, internal}

{personnel, key, retain}

{acquisition, growth, future}

{system, service, information}

{operation, international, foreign}

{stock, price, share}

{cost, operation, labor}

{product, candidate, development}

{provision, law, control}

{operation, natural, condition}

{debt, indebtedness, cash}

{condition, economic, financial}

Our limited operating history makes it difficult to evaluate our business and prospects. We have a history of losses, except for fiscal 2003 and fiscal 2004, and had an accumulated deficit of approximately $136.6 million as of April 2, 2006; if we continue to incur losses, the trading price of our stock would be likely to decline. Our quarterly results are difficult to predict, and if we miss quarterly financial expectations, our stock price is likely to decline. We currently face lawsuits brought by Synopsys, Inc. related to patent infringement, and we may face additional intellectual property infringement claims or other litigation. Lawsuits can be costly to defend, can take the time of our management and employees away from day-to-day operations, and could result in our losing important rights and paying significant damages. We may not be able to hire and/or retain the number of qualified personnel required for our business, particularly engineering personnel, which would harm the development and sales of our products and limit our ability to grow. Our success is highly dependent on the technical, sales, marketing and managerial contributions of key individuals, and we may be unable to recruit and retain these personnel. Customer payment defaults may cause us to be unable to recognize revenue from backlog, and changes in the type of orders comprising backlog could affect the proportion of revenue recognized from backlog each quarter, which could have a material adverse effect on our financial condition and results of operations and on investor expectations. Our lengthy and unpredictable sales cycle, and the large size of some orders, makes it difficult for us to forecast revenue and increases the magnitude of quarterly fluctuations, which could harm our stock price. We rely on a small number of customers for a significant portion of our revenue, and our revenue could decline due to delays of customer orders or the failure of existing customers to renew licenses or if we are unable to maintain or develop relationships with current or potential customers. We compete against companies that hold a large share of the electronic design automation market and competition is increasing among EDA vendors as customers tightly control their EDA spending and use fewer vendors to meet their needs. If we cannot compete successfully, we will not gain market share and our revenue could decline. We may not be successful in integrating the operations of acquired companies and acquired technology. Our operating results may be harmed if our customers do not adopt, or are slow to adopt, 65-nanometer design geometries. Our operating results will be harmed if chip designers do not adopt Blast Fusion, Talus or products released under our Cobra initiative or our other current and future products. We recently changed our organizational structure, and if this organizational structure does not successfully lead to effective interoperability between our products or effective collaboration among the applicable employees, then our operating results may be harmed. If the industries into which we sell our products experience recession or other cyclical effects affecting our customers research and development budgets, our revenue would be likely to decline. Difficulties in developing and achieving market acceptance of new products and delays in planned release dates of our software products and upgrades may harm our business. Our costs of customer engagement and support are high, so our gross margin may decrease if we incur higher-than-expected costs associated with providing support services in the future or if we reduce our prices. Product defects could cause us to lose customers and revenue, or to incur unexpected expenses. Much of our business is international, which exposes us to risks inherent to doing business internationally that could harm our business. We also intend to expand our international operations. If our revenue from this expansion does not exceed the expenses associated with this expansion, our business and operating results could suffer. Future changes in accounting standards, specifically changes affecting revenue recognition, could cause adverse unexpected revenue fluctuations. Changes in laws and regulations that affect the governance of public companies have increased our operating expenses and will continue to do so. The effectiveness of disclosure controls is inherently limited. Forecasting our tax rates is complex and subject to uncertainty Our success will depend on our ability to keep pace with the rapidly evolving technology standards of the semiconductor industry; if we are unable to keep pace, our products could be rendered obsolete, which would cause our operating results to decline. If we fail to offer and maintain competitive stock option packages for our employees, or if our stock price declines materially for a protracted period of time, we might have difficulty retaining our employees and our business may be harmed. Due to changes in the accounting treatment for employee stock options, we are changing our employee compensation practices, and our reported results of operations will likely be adversely affected. If our sales force compensation arrangements are not designed effectively, we may lose sales personnel and resources. Fluctuations in our growth place a strain on our management systems and resources, and if we fail to manage the pace of our growth, our business could be harmed. If chip designers and manufacturers do not integrate our software into existing design flows, or if other software companies do not cooperate in working with us to interface our products with their design flows, demand for our products may decrease. We may not obtain sufficient patent protection, which could harm our competitive position and increase our expenses. We rely on trademark, copyright and trade secret laws and contractual restrictions to protect our proprietary rights, and if these rights are not sufficiently protected, it could harm our ability to compete and generate income. Our directors, executive officers and principal stockholders own a substantial portion of our common stock and this concentration of ownership may allow them to elect most of our directors and could delay or prevent a change in control of Magma. We may need additional capital in the future, but there is no assurance that funds would be available on acceptable terms. Our certificate of incorporation, bylaws and Delaware corporate law contain anti-takeover provisions which could delay or prevent a change in control even if the change in control would be beneficial to our stockholders. We could also adopt a stockholder rights plan, which could also delay or prevent a change in control. We are subject to risks associated with changes in foreign currency exchange rates. The convertible notes we issued in May 2003 are debt obligations that must be repaid in cash in May 2008 if they are not converted into our common stock at an earlier date, which is unlikely to occur if the price of our common stock does not exceed the conversion price. Hedging transactions and other transactions may affect the value of our common stock and our convertible notes. We may be unable to meet the requirements under the indenture to purchase our convertible notes upon a change in control. Failure to obtain export licenses could harm our business by preventing us from transferring our technology outside of the United States. Our business operations may be adversely affected in the event of an earthquake or other natural disaster.

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1065034--6/15/2006--MAGMA_DESIGN_AUTOMATION_INC