10-K405

                                    Form 10-K

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
    OF 1934

                   For the fiscal year ended December 31, 1999

                        Commission file number 0 - 13442



                           MENTOR GRAPHICS CORPORATION
             (Exact name of registrant as specified in its charter)

               Oregon                                     93-0786033
   (State or other jurisdiction of                       (IRS Employer
   incorporation or organization)                     Identification No.)

            8005 SW Boeckman Road                       97070-7777
             Wilsonville, Oregon                        (Zip Code)
  (Address of principal executive offices)

        Registrant's telephone number, including area code (503) 685-7000

        Securities registered pursuant to Section 12(b) of the Act: None

        Securities registered pursuant to Section 12(g) of the Act:
                        Common Stock, without par value

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X    No
                                      ---      ---
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was approximately $1,049,845,650 on March 6, 2000 based upon the last
price of the Common Stock on that date reported in the Nasdaq National Market.
On March 6, 2000, there were 65,384,532 shares of the Registrant's Common Stock
outstanding.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or in any amendment to
this Form 10-K.  X
                ---

                     DOCUMENTS INCORPORATED BY REFERENCE


              Document                          Part of Form 10-K into which incorporated
              --------                          -----------------------------------------
                                             
Portions of the 2000 Proxy Statement                            Part III




Table of Contents                                                                                                Page
- -------------------------------------------------------------------------------------------------------------------
                                                                                                            
Part
   Item 1.     Business                                                                                            2
   Item 2.     Properties                                                                                          5
   Item 3.     Legal Proceedings                                                                                   5
   Item 4.     Submission of Matters to a Vote of Security Holders                                                 6

Part II
   Item 5.     Market for the Registrant's Common Equity and Related Stockholder Matters                           7
   Item 6.     Selected Consolidated Financial Data                                                                8
   Item 7.     Management's Discussion and Analysis of Financial Condition and Results of Operations               8


                                                                               1


   Item 7A.    Quantitative and Qualitative Disclosures About Market Risk                                         15
   Item 8.     Financial Statements and Supplementary Data                                                        17
   Item 9.     Changes in and Disagreements with Accountants on Accounting and Financial Disclosure               34

Part III
   Item 10.    Directors and Executive Officers of Registrant                                                     34
   Item 11.    Executive Compensation                                                                             34
   Item 12.    Security Ownership of Certain Beneficial Owners and Management                                     34
   Item 13.    Certain Relationships and Related Transactions                                                     34
   Item 14.    Exhibits, Financial Statement Schedules, and Reports on Form 8-K                                   34



Item 1. Business

This Form 10-K contains forward-looking statements that involve risks and
uncertainties. Actual results may differ materially from the forward-looking
statements. Factors that could cause or contribute to such differences include,
but are not limited to, those set forth under the caption "Factors That May
Affect Future Results and Financial Condition" under "Item 7, Management's
Discussion and Analysis of Results of Operations and Financial Condition."


GENERAL
Mentor Graphics Corporation (the "Company") manufactures, markets and supports
software and hardware Electronic Design Automation (EDA) products, embedded
systems software products and provides related services which enable engineers
to design, analyze, simulate, model, implement and verify the components of
electronic systems. The Company markets its products primarily to large
companies in the communications, computer, consumer electronics, semiconductor,
aerospace, and transportation industries. Customers use the Company's software
in the design of such diverse products as supercomputers, automotive
electronics, telephone-switching systems, cellular base stations and handsets,
computer network hubs and routers, signal processors and personal computers. The
Company licenses its products through its direct sales force and an affiliate
channel of distributors and sales representatives. The Company was incorporated
in Oregon in 1981 and its common stock is traded on the Nasdaq National Market
under the symbol "MENT." The Company's executive offices are located at 8005
S.W. Boeckman Road, Wilsonville, Oregon 97070-7777. The telephone number at that
address is (503) 685-7000. The Company Website address is www.mentor.com.


PRODUCTS
Customers use the Company's products in the design, analysis, simulation,
modeling, implementation and verification of electronic designs for
communications, computer, consumer electronics, semiconductor, aerospace, and
transportation products. This use is intended to make design engineers more
productive, enable designs not otherwise possible, improve the accuracy of
complex designs and, shrink time-to-market schedules.

The electronic design process begins when an electrical engineer describes the
architectural, behavioral, functional and structural characteristics of an
integrated circuit (IC), printed circuit board (Board) or electronic system. In
this process the engineer describes the overall product system architecture and
then implements it by creating a design description, simulating the design to
reveal defects and reiterating the description until it meets the previously
determined design specifications. Engineers use the Company's products to
specify the components of the IC or Board, determine the interconnections among
the components and define the components' associated physical properties.
Engineers also use the Company's simulation products throughout the design
process to identify design errors before the design is manufactured. Simulation
also gives engineers the ability to test design alternatives. Engineers use the
Company's verification products to identify functionality and performance issues
while the cost to correct is still low.


Board System Design

The Company's Board design tools allow designers to select from a library of
parts to be included in a board to simulate and test the performance of the
board, to test for manufacturability, to analyze thermal and signal integrity,
and to output the data required to manufacture the board. A "board" is a common
way to package electronic circuits, and typically consists of epoxy material
upon which ICs, application specific integrated circuits (ASICs), and discrete
components such as resistors and capacitors are mounted. Products within the
Board design flow include Design Architect-Registered Trademark-, Board
Station-Registered Trademark- and the Company's Interconnect Synthesis (IS)
products. In addition, on October 31, 1999, the Company purchased the assets of
VeriBest, Inc. a subsidiary of Intergraph Corporation. VeriBest is a supplier of
Board and other system EDA tools focused on the Windows and Window NT platforms.
The VeriBest acquisition provides the Company with an industry recognized Board
router and other Board design solutions. Overall, the Company expects the
VeriBest product line to make Board design an area of growth in 2000 and beyond.

FPGA Design

The Company's Field Programmable Gate Array (FPGA) design solutions include
Renoir-TM-, Leonardo-TM-, ModelSim-Registered Trademark-, and FPGA
Advantage-TM-. Renoir, a Hardware Description Language (HDL) graphical entry
product line, provides a highly automated environment for the design of
electronic systems, using graphical tools to capture or reuse high-level designs
and functional behavior. Sales of the Company's Leonardo Insight-TM- and
Leonardo Spectrum-TM- products made it the number one provider of synthesis
solutions for multi-


                                                                               2


million gate FPGAs. The Company's ModelSim simulation product is the market
leader in the VHDL simulation market for ASICs and FPGAs. The Company's FPGA
Advantage provides a complete design flow and a unified solution for FPGA
design within a single tool.

Physical Verification/Analysis

The Company's Physical Verification and Analysis products include its
Calibre-Registered Trademark-, xCalibre-Registered Trademark-, MachTA-TM-, and
ELDO-TM- product lines. The Calibre product line is specifically engineered for
physical verification of deep submicron circuit designs. The term "deep
submicron" is generally defined as any IC manufacturing process that has
transistor gate lengths under 0.35mu (microns). Calibre tools are used through
physical design as well as during the last steps before a chip design is sent
off to mask making and silicon manufacturing. The Calibre solution is relied
upon by 19 of the world's 25 largest integrated device manufacturers, all the
major Japanese IC companies, 80 percent of deep submicron library houses and the
majority of the world's top foundries and ASIC vendors for physical verification
of their deep submicron designs. In December 1999 Taiwan Semiconductor
Manufacturing Company selected the Calibre product line as its physical
verification tool for its deep submicron designs.

Xcalibre is the Company's brand for deep submicron IC back-end physical
extraction products. The xCalibre product's complete design flow provides
technology for deep submicron parasitic extraction. Parasitic extraction is the
process of creating early in the design process, an electrical model
representation of the physical connections present between devices in an IC. The
xCalibre product provides the ability to organize vast amounts of input data,
extract parasitics to the desired level of accuracy, and manage this extracted
data into a form usable by post-layout analysis tools. Advances in deep
submicron process technology and IC complexity have forced designers to seek new
solutions for physical extraction. xCalibre products close the gap between
creating designs for deep submicron processes and verifying the physical
implementation of those designs at a system level.

The Mach TA tool provides fast, accurate, dynamic timing analysis and detailed
transistor level circuit simulation with SPICE-like accuracy for memory and
processor IC designs. The ELDO analog and system simulator products are
primarily used for the design and verification of complex analog effects in
digital circuits.

System-on-Chip Verification

System-on-Chip (SoC) Verification includes the Company's XRAY-Registered
Trademark- and VRTX-Registered Trademark- embedded systems software products,
the Seamless-Registered Trademark- hardware/software co-verification product,
and the Celaro-TM- accelerated verification. Embedded systems control the
function of hardware components dedicated to specialized tasks of such common
consumer products as cellular telephones, set-top boxes and fax machines.
Embedded systems software is also used in a range of other products in the
aerospace, communications, medical instrumentation, transportation, computer,
industrial and consumer markets. The Seamless product family enables
simultaneous simulation of the hardware and software components of a system
design. These tools verify the software-hardware interface by running the
software against simulated models of the hardware. Seamless tools allow
designers to verify software much earlier in the system design process instead
of waiting until the hardware design has been completed, verified and
manufactured into a prototype. Early verification of the system identifies
functionality and performance issues while the cost to correct them is still
small and reduces the overall design cycle. The Celaro accelerated verification
product of the Company's Meta Systems SRL (Meta) subsidiary is marketed outside
of the U.S.

PLATFORMS
The Company's software products are available on UNIX, Windows NT and LINUX
platforms in a broad range of price and performance levels. Platforms are
purchased by customers primarily from Hewlett-Packard Company, Sun Microsystems,
Inc. and Compaq Computer Corporation. These computer manufacturers have a
substantial installed base and make frequent introductions of new products.

MARKETING AND CUSTOMERS
In 1999, the Company again focused its marketing and selling resources on a
limited number of emerging products. Those products include the Calibre physical
verification product, the Seamless hardware/software co-verification tool, and
the IS routing products of its Interconnectix business unit. The Celaro products
of the Company's Meta subsidiary were marketed as emerging products outside of
the U.S. The Company's marketing emphasizes a direct sales force and large
corporate account penetration in the communications, computer, consumer
electronics, semiconductor, aerospace, and transportation industries.

The Company licenses its products through its direct sales force and sales
representatives in North America and a sales force and distributors in the rest
of the world. During the years ending December 31, 1999, 1998, and 1997 sales
outside of the Americas accounted for 51%, 45% and 45% percent of total sales.
The Company enters into foreign currency forward contracts to help mitigate the
impact of foreign currency fluctuations. These contracts do not eliminate all
potential impact of foreign currency fluctuations and significant exchange rate
movements may have a material adverse impact on the Company's results. See pages
13-15, "Factors That May Affect Future Results and Financial Condition," for a
discussion of the effect foreign currency fluctuation may have on the Company's
business and operating results. Additional information relating to foreign and
domestic operations is contained in Note 12 of Notes to consolidated financial
statements beginning on Page 30, below.

No material portion of the Company's business is dependent on a single customer.
The Company has traditionally experienced some seasonal fluctuations in receipts
of orders, which are typically stronger in the second and fourth quarters of the
year. Due to the complexity of the Company's products, the selling cycle can be
three to six months or longer. During the selling cycle the Company's account
managers, application engineers and technical specialists make technical
presentations and product demonstrations to the customer. At some point during
the selling cycle, the Company's products may also be "loaned" to customers for
on-site evaluation. As is typical of many other companies in the electronics
industry, the Company generally ships its products to customers within 180 days
after receipt of an order, and a substantial portion of quarterly shipments tend
to be made in the last month of each quarter. Only those products requested


                                                                               3



for delivery within six months of the purchase order date are booked. Only those
services requested for delivery within one year of the purchase order date are
booked.

The Company licenses its products and some third party products pursuant to
purchase and license agreements. The Company generally schedules deliveries only
after receipt of purchase orders under these agreements.

UNIVERSITY PROGRAMS
The Company shares its technology and expertise with universities worldwide
through its Higher Education Program (HEP). Founded in 1985 because the Company
believes the success of the electronics industry is dependent upon highly
skilled engineers, the HEP offers colleges and universities a cost-effective way
to acquire the Company's products for teaching and academic research. This
program helps to insure that engineering graduates enter industry proficient in
the use of state-of-the-art tools and techniques. Through the HEP, the Company
develops long term relationships with engineering colleges and universities
around the world. The Company has partnerships with more than 436 colleges and
universities worldwide.

BACKLOG
The Company's backlog of firm orders was approximately $81 million on December
31, 1999 as compared to $77 million on December 31, 1998. This backlog includes
products not shipped and unfulfilled professional services and training
contracts. The Company does not track backlog for support services. Support
services are typically delivered under annual contracts that are accounted for
on a pro rata basis over the twelve-month term of each contract. Substantially
all the December 31, 1999 backlog of orders is expected to ship during 2000.

MANUFACTURING OPERATIONS
The Company's manufacturing operations primarily consist of reproduction of the
Company's software and documentation. In the Americas, manufacturing is
substantially outsourced, with distribution to Western Hemisphere customers
occurring from major West Coast sites in the U.S. The Company's line of
accelerated verification products, which is comprised of both hardware and
software, is manufactured in France. In 1999 the Company completed transfer of
its European manufacturing and distribution from the Netherlands to Ireland.
Mentor Graphics (Ireland) Limited is now responsible for manufacturing and
distributing the Company's products to the European, Middle East, and African
markets through the Company's established sales channels. The Company has a
distribution center in Singapore which handles manufacturing and distribution in
Asia.

PRODUCT DEVELOPMENT
The Company's research and development is focused on continued improvement of
its existing products and the development of new products. During the years
ended December 31, 1999, 1998 and 1997, the Company expensed $118,848,000,
$117,853,000 and $112,227,000 respectively, related to product research and
development. The Company also seeks to expand existing product offerings and
pursue new lines of business through acquisitions. Acquisitions accommodate the
Company's focused strategic requirements by filling gaps in existing products or
technologies, eliminating dependencies on third parties and providing the
Company with an avenue into new lines of business. The Company's future success
depends on its ability to develop or acquire competitive new products that
satisfy customer requirements.

SUPPLIERS
A limited number of third party products fill gaps in the Company's existing
product lines and allow it to offer products which are needed by customers but
which are not central to the Company's business. Supplier agreements are
sometimes used to explore possible new lines of business. Supplier agreements
are typically multi-year agreements with royalty payments based on a percentage
of product revenue. Customer support for supplier products is usually provided
by the Company with the supplier providing backup support and research and
development in the event of a problem with the product itself.


CUSTOMER SUPPORT AND CONSULTING
The Company has a worldwide organization to meet its customers' needs for
software support. The Company offers support contracts providing software
updates and support. Most of the Company's customers have entered into software
support contracts. In December 1999, the Software Support Professionals
Association (SSPA) announced that the Company's Customer Support Division had
won its 1999 SSPA STAR (Software Technical Assistance Recognition) Award in the
Complex Support category. The STAR Awards are given annually to recognize
excellence in six areas of software and technical support. Competing companies
undergo a rigorous self-nominating process. Applicants are then evaluated by
SSPA's Advisory Board. The winner in Complex Support category must demonstrate a
consistently high level of support for mission-critical applications used in
scientific, engineering, and other highly technical environments. The Company's
Customer Support Division also won the STAR Award in 1993, 1995 and 1998.

Mentor Consulting, the Company's consulting division, is comprised of a
worldwide team of consulting professionals. The Company's consulting group was
established in 1987. The services provided to customers by Mentor Consulting
include advising customers on design process, design reuse and IC verification
and test. Design process consulting helps customers improve how they design.
Design reuse consulting helps customers modify existing designs for use in new
designs. Mentor Consulting's model for delivering services, Knowledge-Sourcing,
focuses on solving a customer's immediate design challenge while giving the
organization the knowledge it needs to solve similar challenges in the future.


                                                                               4



COMPETITION
The markets for the Company's products are competitive and are characterized by
price reductions, rapid technological advances in application software,
operating systems and hardware, and new market entrants. The EDA industry tends
to be labor intensive rather than capital intensive. This means that the number
of actual and potential competitors is significant. While many competitors are
large companies with extensive capital and marketing resources, the Company also
competes with small companies with little capital but innovative ideas.

The Company believes the main competitive factors affecting its business are
breadth and quality of application software, product integration, ability to
respond to technological change, quality of a company's sales force, price, size
of the installed base, level of customer support and professional services. The
Company believes that it generally competes favorably in these areas. The
Company can give no assurance, however, that it will have financial resources,
marketing, distribution and service capability, depth of key personnel or
technological knowledge to compete successfully in its markets.

The Company's principal competitors are Cadence Design Systems, Inc., Synopsys,
Inc., Avant! Corporation, IKOS Systems, Inc., Wind River Systems Inc. and
numerous small companies.

EMPLOYEES
The Company and its subsidiaries employed approximately 2,700 people full time
as of December 31, 1999. The Company's success will depend in part on its
ability to attract and retain employees who are in great demand. The Company
continues to enjoy satisfactory employee relations.

PATENTS AND LICENSES
The Company holds 39 United States and 9 foreign patents on various
technologies. In 1999, the Company was granted 7 patents and filed 32 patent
applications worldwide. As of January 2000, the Company has a total of 74 patent
applications filed and pending, 3 allowed but not issued, and an additional 19
in process but not yet filed. While the Company believes the pending
applications relate to patentable technology, there can be no assurance that any
patent will be issued or that any patent can be successfully defended. Although
the Company believes that patents are less significant to the success of its
business than technical competence, management ability, marketing capability and
customer support, the Company believes that software patents are becoming
increasingly important in the software industry.

The Company regards its products as proprietary and protects all products with
copyrights, trade secret laws, and internal non-disclosure safeguards, as well
as patents, when appropriate, as noted above. The Company typically includes
restrictions on disclosure, use and transferability in its agreements with
customers and other third parties.



Item 2. Properties

The Company owns six buildings on 53 acres of land in Wilsonville, Oregon. The
Company occupies 341,000 square feet, in five of those buildings, as its
corporate headquarters. The Company leases the remaining building and portions
of one headquarters building to third parties. The Company also owns an
additional 98 acres of undeveloped land adjacent to its headquarters. All
corporate functions and a majority of its domestic research and development
operations are located at the Wilsonville site.

The Company leases additional space in San Jose, California, and Boulder,
Colorado, where some of its domestic research and development takes place, and
in various locations throughout the United States and in other countries,
primarily for sales and customer service operations. Some additional research
and development is done in locations outside the U.S. The Company believes that
it will be able to renew or replace its existing leases as they expire and that
its current facilities will be adequate through at least 2000.



Item 3. Legal Proceedings

During 1995, the Company filed suit in U.S. Federal District Court in Portland,
Oregon, against Quickturn Design Systems, Inc. (Quickturn) for a declaratory
judgment of non-infringement, invalidity and unenforceability of three of
Quickturn's patents. This action related to the SimExpress products of Meta
Systems SRL (Meta), a French company acquired by the Company in 1996. Quickturn
filed a counterclaim against the Company alleging infringement of six Quickturn
patents, including the three patents subject to the declaratory judgment action.
The counterclaim sought a permanent injunction prohibiting sales of the
Company's SimExpress products in the U.S., compensatory and punitive damages and
attorneys' fees. In June 1999, the Company and Quickturn settled this
litigation. The Company agreed that five Quickturn patents are valid and
enforceable, and were infringed by the Company's sale in the U.S. of its
SimExpress product from 1995-1997. Mentor Graphics also paid Cadence Design
Systems, Quickturn's parent company, $3 million in damages for infringement,
with each side to bear its own fees and costs. The court directed that the
Company's payment and its consent to the validity and infringement of the
Quickturn patents may not be used as evidence or for any other purpose in
litigation outside the U.S., and that the settlement does not address in any way
the issue of whether the Company's Celaro product infringes any patent issued in
the U.S. or other countries.

Quickturn filed an administrative complaint with the U.S. International Trade
Commission (ITC) in 1996 seeking to prohibit the distribution of SimExpress
products in the U.S. In December 1997, the ITC issued a Cease and Desist Order
prohibiting the Company from importing certain hardware emulation products or
components and from providing repair or maintenance services to its existing
U.S.


                                                                               5


customers. That order took effect in 1998. In October 1997, Quickturn filed an
action against the Company's German subsidiary in a German District Court
alleging infringement by SimExpress of a European patent. The German court ruled
in April 1999 that the Company's German subsidiary's sales of SimExpress
violated a European patent owned by Quickturn and awarded unspecified damages.
The Company's German subsidiary no longer offers the SimExpress product in
Germany. Although the Company is appealing the ruling and contesting the
validity of the Quickturn patent, the Company can give no assurance as to the
outcome of such proceedings.

In October 1998, Quickturn filed an action against Meta and the Company in
France alleging infringement by SimExpress and Celaro of a European patent.
There have been no rulings by the French court regarding the merits of this case
to date.

In February 1998, Meta filed a patent infringement action against Quickturn in
the U.S. District Court for the Northern District of California in San
Francisco, California. The complaint, which is based on a patent licensed to the
Company and Meta and which Meta has a right to enforce, seeks damages for
infringement as a result of Quickturn's manufacture and sale of certain
emulation equipment. Meta, which has been joined in the suit by Aptix
Corporation of San Jose, California, will ultimately seek an injunction
prohibiting further infringement by Quickturn. A trial in U.S. District Court is
expected to occur in October 2000.

In July 1999, the Company filed suit in U.S. District Court for the District of
Delaware against Quickturn alleging infringement of two Mentor Graphics owned
patents by Quickturn's Mercury product. That lawsuit has been transferred to the
Northern District of California. The Company is seeking a permanent injunction
prohibiting sales of Quickturn's Mercury products in the U.S., along with
damages and attorney's fees.

In addition to the above litigation, from time to time the Company is involved
in various disputes and litigation matters that arise from the ordinary course
of business. These include disputes and lawsuits relating to intellectual
property rights, licensing, contracts, and employee relations matters. The
Company believes that final resolution of such disputes and lawsuits will not
have a material adverse effect on the Company's financial position or results of
operations.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of the security holders of the Company
during the fourth quarter of the fiscal year ended December 31, 1999.


EXECUTIVE OFFICERS OF REGISTRANT
The following are the executive officers of the Company:




Name                       Position                              Age
- -------------------------------------------------------------------------------
                                                            
Walden C. Rhines           President, Chief Executive             53
                           Officer and Director
Gregory K. Hinckley        Executive Vice President,              53
                           Chief Operating Officer and
                           Chief Financial Officer
L. Don Maulsby             Senior Vice President,                 48
                           World Trade
Dean Freed                 Vice President,                        41
                           General Counsel and Secretary
Anne Wagner                Vice President and General Manager     47
                           HDL Design Division
Henry Potts                Vice President and General Manager     53
                           BSD Division
Donald Guiou               Vice President and General Manager     45
                           S/MI Division and Meta
Anthony B. Adrian          Vice President,                        57
                           Corporate Controller
Dennis Weldon              Treasurer                              52



- -------------------------------------------------------------------------------
The executive officers are elected by the Board of Directors of the Company at
its annual meeting. Officers hold their positions until they resign, are
terminated or their successors are elected. There are no arrangements or
understandings between the officers or any other person pursuant to which
officers were elected and none of the officers are related.

Dr. Rhines has served as Director, President and Chief Executive Officer of the
Company since joining the Company in October 1993. From 1972 to 1993, Dr. Rhines
was employed by Texas Instruments Incorporated, a manufacturer of electrical and
electronics products, where he held a variety of technical and management
positions and was most recently Executive Vice President of Texas Instruments


                                                                               6


Semiconductor Group. Dr. Rhines is currently a director of Cirrus Logic, Inc.,
and Triquint Semiconductor, Inc., both semiconductor manufacturers.

Mr. Hinckley has served as Executive Vice President, Chief Operating Officer and
Chief Financial Officer since joining the Company in January 1997. From November
1995 until December 1996 he held the position of Senior Vice President with VLSI
Technology, Inc. (VLSI), a manufacturer of complex ASICs. From August 1992 until
December 1996, Mr. Hinckley held the position of Vice President, Finance and
Chief Financial Officer with VLSI. Mr. Hinckley is a director of Amkor
Technology, Inc., an IC packaging, assembly and test services company.

Mr. Maulsby has served as Senior Vice President, World Trade since October 1999.
From June 1998 to October 1999 he was president of Tri-Tech and Associates, a
manufacturer's representative firm. From June 1997 to June 1998 he was Vice
President of World Wide Sales and Marketing for Interphase Corporation, a
manufacturer of high performance network and mass storage products. From April
1988 to December 1997 he was employed by VLSI Technology, Inc. where his duties
included Vice President Worldwide Sales and Vice President and General Manager
of its Computing Division.

Mr. Freed has served as Vice President, General Counsel and Secretary of the
Company since July 1995. Mr. Freed served as Deputy General Counsel and
Assistant Secretary of the Company from April 1994 to July 1995, and was
Associate General Counsel and Assistant Secretary from 1990 to April 1994. He
has been employed by the Company since January 1989.

Ms. Wagner has served as Vice President and General Manager of the Hardware
Description Language (HDL) Design Division since April 1999. From June 1998 to
April 1999, Ms. Wagner served as Vice President, Marketing. From 1996 to 1998,
Ms. Wagner was Vice President of Corporate Marketing for the SunSoft operating
company of Sun Microsystems, Inc. From 1977 to 1996, Ms. Wagner was employed by
National Semiconductor Corporation where her duties included Vice President,
Marketing and Communications. Ms. Wagner has been with the Company since June
1998.

Mr. Potts has served as Vice President and General Manager of the Board Systems
Division (BSD) since April 1999. From 1997 to 1998 Mr. Potts was Vice President
of Engineering for Hitachi Micro Systems, a semiconductor research and
development company. From 1994 to 1997 he was employed by Motorola Semiconductor
where his duties included leading the development activities for Advanced Signal
Processor Silicon and software products.

Mr. Guiou has served as Vice President and General Manager of the System Level
Co-Design and Mixed-Signal IC Design (S/MI) Division since June 1998. Mr. Guiou
served as General Manager of the S/MI Division from April 1998 to June 1998.
From February 1996 to March 1998 Mr. Guiou served as Strategic Business Unit
(SBU) Director for the Simulation SBU. From August 1995 to January 1999, Mr.
Guiou was the Director of Marketing for the IC/Mixed Signal Division. Mr. Guiou
has been with the Company since August 1989.

Mr. Adrian has served as Vice President, Corporate Controller since joining the
Company in January 1998. From August to December of 1997 he held the position of
Vice President and Acting Controller for Wickland Oil Company, a petroleum
marketing and distribution company. From January 1996 to August 1997 Mr. Adrian
served as Managing Director of Wickland Terminals in Australia. From November
1992 to January 1996 Mr. Adrian served as Vice President and Controller of
Wickland Oil.

Mr. Weldon has served as Treasurer and Director of Business Development since
February 1996. Mr. Weldon served as Director of Business Development from June
1994 to January 1996. From July 1991 to June 1994 Mr. Weldon served as Director
of Finance. Mr. Weldon has been employed by the Company since July 1988.



                                     PART II


Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters

The Company's Common Stock trades on the Nasdaq National Market under the symbol
"MENT." The following table sets forth for the periods indicated the high and
low sales prices for the Company's Common Stock, as reported by the Nasdaq
National Market:




QUARTER ENDED        MARCH 31         JUNE 30       SEPTEMBER 30      DECEMBER 31
- ----------------- ---------------- --------------- ---------------- ----------------
                                                           
1999
   High               $ 15 1/16        $ 14 15/16      $ 14 3/4        $ 13 7/16
   Low                $  7 1/2         $ 11 1/2        $  8            $  7 3/4
- ----------------- ---------------- --------------- ---------------- ----------------
1998
   High               $ 11 1/8         $ 11 13/16      $ 11 1/16       $ 10 5/16
   Low                $  8 1/8         $  9 3/8        $  6 19/32      $  5 7/16
- ----------------- ---------------- --------------- ---------------- ----------------


As of December 31, 1999, the Company had 951 stockholders of record.

No dividends were paid in 1998 or 1999. The Company does not intend to pay
dividends in the foreseeable future.

On October 31, 1999, as part of the purchase price for the acquisition of
substantially all of the assets of VeriBest, Inc., the Company


                                                                               7



issued a warrant to VeriBest to purchase 500,000 shares of the Company's Common
Stock for $15 per share exercisable from October 31, 2001 until October 31,
2002. The issuance of the warrant was exempt from registration under Section
4(2) of the Securities Act of 1933 because the issuance was made to only one
sophisticated investor who acknowledged that the warrant is subject to
securities law transfer restrictions.

ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA



YEAR ENDED DECEMBER 31,                              1999          1998          1997          1996          1995
- ----------------------------------------------- ------------- ------------- ------------- ------------- -------------
IN THOUSANDS,
EXCEPT PER SHARE DATA AND PERCENTAGES
                                                                                         

STATEMENT OF OPERATIONS DATA
- ----------------------------------------------- ------------- ------------- ------------- ------------- -------------

Total revenues                                  $    511,134  $    490,393  $    454,727  $    447,886  $    432,517
Research and development                        $    118,848  $    117,853  $    112,227  $     92,905  $     86,782
Operating income (loss)                         $     15,880  $      4,742  $    (36,370) $     (9,849) $     52,554
Net income (loss)                               $      2,234  $       (519) $    (31,307) $     (4,978) $     50,506
Gross margin percent                                     77%           75%           65%           70%           73%
Operating income (loss)
  as a percent of revenues                                3%            1%          (8)%          (2)%           12%

PER SHARE DATA
- ----------------------------------------------- ------------- ------------- ------------- ------------- -------------

Net income (loss) per share - basic             $       0.03  $      (0.01) $      (0.48) $      (0.08) $       0.79
Net income (loss) per share - diluted           $       0.03  $      (0.01) $      (0.48) $      (0.08) $       0.78
Weighted average number of shares
  outstanding - basic                                 65,629        65,165        64,885        64,134        63,710
Weighted average number of shares
  outstanding - diluted                               66,324        65,165        64,885        64,134        65,134

BALANCE SHEET DATA
- ----------------------------------------------- ------------- ------------- ------------- ------------- -------------

Cash and investments, short-term                $    133,187  $    137,585  $    137,060  $    197,079  $    211,996
Cash and investments, long-term                 $         --  $         --  $         --  $     30,000  $     30,000
Working capital                                 $    133,203  $    148,313  $    148,191  $    200,848  $    213,491
Property, plant and equipment, net              $     83,970  $     95,214  $    103,452  $    102,253  $     99,605
Total assets                                    $    449,339  $    464,123  $    402,302  $    513,359  $    495,372
Short-term borrowings                           $         --  $     24,000  $         --  $      9,055  $      9,358
Long-term debt and other deferrals              $      1,221  $      1,425  $        617  $     56,375  $     55,054
Stockholders' equity                            $    288,780  $    295,282  $    277,537  $    319,640  $    326,226

- ----------------------------------------------- ------------- ------------- ------------- ------------- -------------


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

ALL NUMERICAL REFERENCES IN THOUSANDS, EXCEPT PERCENTAGES AND PER SHARE DATA

NATURE OF OPERATIONS

The Company is a supplier of EDA systems -- advanced computer software,
accelerated verification systems and intellectual property designs and databases
used to automate the design, analysis and testing of electronic hardware and
embedded systems software in electronic systems and components. The Company
markets its products and services primarily to customers in the communications,
computer, semiconductor, consumer electronics, aerospace, and transportation
industries. The Company sells and licenses its products through its direct sales
force in North and South America (Americas), Europe, Japan and Pacific Rim, and
through distributors where third parties can extend sales reach more effectively
or efficiently. In addition to its corporate offices in Wilsonville, Oregon, the
Company has sales, support, software development and professional service
offices worldwide.

RECENT DEVELOPMENTS

In 1999, the Company completed two business combinations, which were accounted
for as purchases. In January 1999, the Company completed the purchase of the
remaining minority interest of its then 84% owned subsidiary, Exemplar Logic,
Inc. (Exemplar) for cash and stock options valued at $13,003. The purchase
accounting allocation resulted in charges for in-process R&D and compensation
and other related costs of $624 and $6,951, respectively. In addition,
capitalized goodwill and technology allocations were $4,452 and $976,
respectively. The results of operations of Exemplar were previously included in
the Company's results of operations for all periods


                                                                               8



presented as a result of the Company's original majority interest. On October
31, 1999, the Company purchased certain assets and all liabilities of VeriBest,
Inc. (VeriBest) for cash, a warrant and assumed net liabilities with a total
value of $19,100. The purchase accounting allocations resulted in a charge for
in-process R&D of $5,200, goodwill of $7,500, and capitalized technology of
$6,400. The results of operations of VeriBest are included in the Company's
consolidated financial statements only from the date of acquisition forward.

RESULTS OF OPERATIONS

REVENUES AND GROSS MARGINS



YEAR ENDED DECEMBER 31,                           1999         CHANGE          1998         CHANGE          1997
- --------------------------------------------- ------------- ------------- -------------- ------------- --------------
                                                                                        
System and software revenues                  $    295,325        6%      $    277,396        18%      $    235,808
System and software gross margins             $    265,599        6%      $    250,860        38%      $    182,316
         Gross margin percent                        90%                         90%                          77%
Service and support revenues                  $    215,809        1%      $    212,997        (3)%     $    218,919
Service and support gross margins             $    127,481       10%      $    116,036         2%      $    113,378
         Gross margin percent                        59%                         55%                          52%
Total revenues                                $    511,134        4%      $    490,393         8%      $    454,727
Total gross margins                           $    393,080        7%      $    366,896        24%      $    295,694
         Gross margin percent                        77%                         75%                          65%

- --------------------------------------------- ------------- ------------- -------------- ------------- --------------


SYSTEM AND SOFTWARE

System and software revenues are derived from the sale of licenses of software
products, third party owned software products for which the Company pays
royalties, accelerated verification systems and some workstation hardware. For
1999, the increase in system and software revenue was attributable to increased
accelerated verification systems sales and to a lesser extent, increased
software product sales. The current accelerated verification systems product
offering named Celaro was available for the entire year and realized continued
market acceptance and demand in Europe and Japan. The Company's accelerated
verification products are not available in U.S. markets. See "Part I - Item 3.
Legal Proceedings" for further discussion. The growth in software product
revenues in 1999 was primarily attributable to growth of the Company's newer
product offerings, offset in part by a decline in sales of its older products
during the year. In addition, software revenues were favorably affected by the
acquisition of VeriBest on October 31, 1999 for which no revenues were reported
prior to the acquisition date. For 1998, the increase in software product
revenues was attributable to growth of the Company's newer product offerings. In
addition, the Company realized improved demand for several of the Company's
older product offerings in 1998 as a result of product upgrades such as Year
2000 compliance and ports to the Windows NT platform. Accelerated verification
revenue also improved in 1998 as next generation Celaro systems began shipping
in the first half of the year. For 1998, these increases occurred despite the
weakening of the Japanese Yen versus the U.S. dollar which negatively impacted
revenues. See "Geographic Revenues Information" for further discussion.

System and software gross margins were approximately flat in 1999 compared to
1998, as there were no significant increased costs such as technology
amortization or third party royalties. Gross margins were significantly higher
for 1998 compared to 1997 due to lower costs for direct materials and overhead,
lower third party product sales for which royalties were paid, lower purchased
technology and capitalized software development costs amortization, and a
write-down of certain previously capitalized software development costs in 1997.

Amortization of previously capitalized software development costs to system and
software cost of revenues was zero in 1999 and 1998 compared to $5,448 in 1997.
In 1997, the Company recognized impairment in value of certain previously
capitalized software development costs primarily as a result of the accelerated
decline in sales of older software product offerings. These costs, which totaled
$5,358, were determined to be unrecoverable and were charged to system and
software cost of revenues in the first quarter of 1997. Amortization of
purchased technology costs to system and software cost of revenues was $1,363,
$2,278 and $5,484 for 1999, 1998 and 1997, respectively. The decline in
amortization in 1999 and 1998 was attributable to a significant decline in
business acquisitions in 1998 and 1997 and accelerated amortization of
technologies in 1997 where assets were impaired or disposed of. Purchased
technology costs are amortized over a three-year period to system and software
cost of revenues.

SERVICE AND SUPPORT

Service and support revenues consist of revenues from annual software support
contracts and professional services, which includes consulting services,
training services, custom design services and other services. For 1999 compared
to 1998, software support was approximately flat while professional service
revenues increased slightly. For 1998 compared to 1997, the decrease was due
primarily to an approximate 20% decrease in professional service revenues offset
by a slight increase in support revenues.

For 1999, the flattening of software support revenues was due in part to pricing
pressures in the EDA industry and low growth of software product sales. For
1998, growth levels for software support revenues compared to software product
revenues were lower due in part to the carryover effect of the prior year
decline in software product revenues. Since growth in software support is
affected by continued success of the software product offerings, increases in
the Company's installed customer base, and the impact of acquisitions, future
software support revenue levels are difficult to predict.


                                                                               9


Professional service revenues totaled approximately $50,000, $49,000, and
$60,000 in 1999, 1998 and 1997, respectively. The flattening of revenues in 1999
was due to a strategy to increase focus on engagements that help customers
better utilize the Company's products and substantially decrease focus on custom
design service engagements. The decrease in 1998 compared to 1997 was due to the
initial implementation of this strategy. In addition, consulting engagements
with printed circuit board design customers declined in 1998 due in part to
lower printed circuit board software product sales in 1998.

Service and support gross margins increased in 1999 as a result of improved
professional service gross margins, due in part to the cost structure
improvements associated with the strategic changes previously discussed. Service
and support gross margins increased in 1998 as a result of higher software
support revenues and approximately flat software support cost of revenues.
Professional service gross margins were negative in 1998 as several prior period
contracts continued to require resources.

GEOGRAPHIC REVENUES INFORMATION

Americas revenues including service and support revenues, decreased by 8% from
1998 to 1999 and increased by 8% from 1997 to 1998. Revenues outside of the
Americas represented 51% of total revenues in 1999 and 45% of revenues in 1998
and 1997. European revenues increased by approximately 3% from 1998 to 1999 and
23% from 1997 to 1998. Decreased domestic versus international revenues in 1999
were attributable to sales of accelerated verification systems outside the U.S.
Increased European revenues in 1998 were attributable to improved economic
conditions primarily in the telecommunications industry and increased demand for
newer product offerings. The effects of exchange rate differences from European
currencies to the U.S. dollar for 1999 and 1998 were not significant. Japanese
revenues increased by approximately 52% from 1998 to 1999 and decreased by
approximately 17% from 1997 to 1998. The effects of exchange rate differences
from the Japanese yen to the U.S. dollar positively impacted revenues by
approximately 20% in 1999 and negatively impacted revenues by approximately 10%
in 1998. Exclusive of currency effects, higher revenue levels in Japan in 1999
were primarily attributable to increased sales of accelerated verification
systems. For 1998, lower revenue levels in Japan were the result of continued
economic difficulties. Since the Company generates approximately half of its
revenues outside of the U.S. and expects this to continue in the future, revenue
results should continue to be impacted by the effects of future foreign currency
fluctuations.


OPERATING EXPENSES



YEAR ENDED DECEMBER 31,                           1999         CHANGE          1998         CHANGE          1997
- --------------------------------------------- ------------- ------------- -------------- ------------- --------------
                                                                                        
Research and development                      $    118,848        1%      $    117,853         5%      $    112,227
     Percent of total revenues                       23%                         24%                          25%
Marketing and selling                         $    172,622        2%      $    169,034         7%      $    157,343
     Percent of total revenues                       34%                         35%                          35%
General and administration                    $     47,134        3%      $     45,825         5%      $     43,636
     Percent of total revenues                        9%                          9%                          10%
Special charges                               $     25,821       23%      $     20,942        11%      $     18,858
     Percent of total revenues                        5%                          4%                           4%
Merger and acquisition related charges        $     12,775       50%      $      8,500        --       $        --
     Percent of total revenues                        3%                          2%                            --
- --------------------------------------------- ------------- ------------- -------------- ------------- --------------


RESEARCH AND DEVELOPMENT

As a percent of revenue, R&D costs decreased slightly from 1998 to 1999 and 1997
to 1998. For 1999, increased R&D expenses were attributable to the purchase of
VeriBest on October 31, 1999 offset in part by business disposals throughout
1998 and to a lesser extent 1999. During 1999, the Company disposed of two
business units which were not core to its strategy, one of which was a R&D
organization and the other was a professional service organization. During 1998,
the Company disposed of several businesses which were not core to its strategy
which reduced R&D costs by approximately $6,000 compared to 1997. Increased
spending for activities more closely aligned to Company strategy offset these
savings. During 1997, 1998 and 1999, the Company did not capitalize software
development costs based on the timing and content of product development
activities. As a result, costs eligible for capitalization were not significant
and have been expensed on a current basis. The Company does not expect
significant capitalization in 2000.

MARKETING AND SELLING

For 1999 compared to 1998, the increase in marketing and selling costs was
principally attributable to increased product sales through the Company's direct
sales force and third party distributors, the acquisition of VeriBest previously
discussed and the negative effect of exchange rates for the Japanese yen. These
increases were offset in part by savings resulting from subsidiary divestitures.
In 1998 the increase in marketing and selling costs was principally attributable
to increased product sales through the Company's direct sales force and third
party distributors, offset in part by savings resulting from subsidiary
divestitures. A weaker U.S. dollar during 1999 increased expenses by
approximately 15% in Japan, while a stronger U.S. dollar during 1998 reduced
expenses by approximately 10%.


                                                                              10



GENERAL AND ADMINISTRATION

For 1999 compared to 1998 general and administrative (G&A) costs remained flat
as a percent of sales. The increase in absolute dollars was attributable to the
acquisition of VeriBest previously discussed, some headcount overlap and
training costs associated with the transition of the European distribution
center to Ireland and increased costs to support the higher sales volume. The
distribution center overlap costs were significantly reduced by the second
quarter of 1999. For 1998 compared to G&A costs decreased as a percent of sales
due to subsidiary divestitures and higher sales volume. For 1998, the absolute
dollar increase in G&A was attributable to increased headcount to maintain and
support business systems and support higher sales volume.


SPECIAL CHARGES

During 1999, the Company recorded special charges of $25,821. The charges
included costs attributable to the terminated tender offer for Quickturn Design
Systems, Inc. (Quickturn) net of a gain from the sale of acquired stock, the
terminated acquisition negotiations for certain assets and liabilities of an EDA
software company, and two subsidiary divestitures and related employee
terminations. In addition, the Company incurred costs for other employee
terminations due in part to the acquisition of VeriBest and recognized
impairment in value of certain goodwill. Substantially all of these costs were
expended in 1999 and the remaining amount should be expended in the first half
of 2000. There have been no significant modifications to the amount of the
charges.

During 1998, the Company recorded special charges of $20,942. The charges
primarily consist of four subsidiary divestitures, moving of the European
distribution center to Ireland, related terminations arising from the
divestitures and the distribution center move, and impairment in value of
certain assets. Substantially all of these costs were expended in 1998 and the
remaining amount was primarily expended in the first half of 1999.
There were no significant modifications to the amount of the charges.

During 1997, the Company recorded special charges of $18,858. The charges
consisted of disposals of subsidiaries and related employee terminations, early
termination of an interest rate swap agreement, recognition of the impairment in
value of certain goodwill and purchased technology and some streamlining of
worldwide operations and reserves for various legal claims. Substantially all of
the costs associated with these charges were expended in 1997 and the first half
of 1998. There were no significant modifications to the amount of the charges.


MERGER AND ACQUISITION RELATED CHARGES

In 1999, the Company completed two business combinations which were accounted
for as purchases. In January 1999, the Company completed the purchase of the
remaining minority interest of its then 84% owned subsidiary, Exemplar, for cash
and stock options valued at $13,003. The purchase accounting allocation resulted
in charges for in process R&D and compensation and other related costs of $624
and $6,951, respectively. On October 31, 1999, the Company purchased certain
assets and all liabilities of VeriBest for cash, a warrant and assumed net
liabilities with a total value of $19,100. The purchase accounting allocations
resulted in a charge for in-process R&D of $5,200.

In 1998, the Company completed three business combinations which were accounted
for as purchases. The purchase accounting allocations resulted in charges for
in-process R&D of $8,500, goodwill of $6,613, and technology capitalization of
$1,400.


OTHER INCOME (EXPENSE), NET



YEAR ENDED DECEMBER 31,                     1999               1998              1997
- --------------------------------- ------------------ ----------------- ------------------
                                                                   
Other income (expense), net            $    (13,011)      $    (4,721)      $      3,319

- --------------------------------- ------------------ ----------------- ------------------


Other income (expense) was negatively impacted by legal costs associated with
the ongoing patent litigation with Quickturn, which became a subsidiary of
Cadence Design Systems, Inc. in the second quarter of 1999. These costs totaled
$15,312 in 1999 compared to $10,301 and $4,675 for 1998 and 1997, respectively.
The 1998 to 1999 increase was attributable to a legal settlement of $3,000 for
the Portland, Oregon SimExpress trial and other trial related costs during the
first half of 1999. The 1997 to 1998 increase was attributable to license fees
for certain intellectual property rights licensed from Aptix Corporation and
expenses attributable to a patent infringement lawsuit filed jointly by a
subsidiary of the Company and Aptix against Quickturn. See "Part I Item 3. Legal
Proceedings" for further discussion. Interest income was $7,152, $7,771 and
$7,723 in 1999, 1998 and 1997, respectively. Interest expense was $993, $768 and
$555 in 1999, 1998 and 1997, respectively. Foreign currency loss was $1,006 in
1999 compared to a loss of $79 in 1998 and a gain of $167 in 1997.


                                                                              11



PROVISION (BENEFIT) FOR INCOME TAXES

The provision (benefit) for income taxes was $635, $540, and $(1,744) in 1999,
1998 and 1997, respectively. The tax provision (benefit) in all periods is the
result of the mix of profits earned by the Company and its subsidiaries in tax
jurisdictions with a broad range of income tax rates.

Because the Company's income tax position for each year combines the effects of
available tax benefits in certain countries where the Company does business,
benefits from available net operating loss carryforwards and tax expense for
subsidiaries with pre-tax income, the Company's income tax position and
resultant effective tax rate is uncertain for 2000 and beyond.

EFFECTS OF FOREIGN CURRENCY FLUCTUATIONS

Approximately half of the Company's revenues are generated outside of the United
States. For 1999, 1998 and 1997, approximately half of European and all of
Japanese revenues were subject to exchange rate fluctuations as they were booked
in local currencies. The effects of these fluctuations were substantially offset
by local currency cost of revenues and operating expenses, which resulted in an
immaterial net effect on the Company's results of operations.

The "accumulated other comprehensive income - foreign currency translation
adjustment," as reported in the stockholders' equity section of the consolidated
balance sheets, increased to $19,664 at December 31, 1999, from $14,176 at the
end of 1998. This reflects the increase in the value of net assets denominated
in foreign currencies since year-end 1998 as a result of a stronger U.S. dollar
at the close of 1998 versus 1999.

NEW ACCOUNTING PRONOUNCEMENTS


In June 1999, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 137, Accounting for Derivative
Instruments and Hedging Activities, which amends the effective date of SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 137
establishes accounting and reporting standards for derivative financial
instruments and hedging activities and requires the Company to recognize all
derivatives as either assets or liabilities on the balance sheet and measure
them at fair value. Gains and losses resulting from changes in fair value will
be accounted for based on the use of the derivative and whether it is designated
and qualifies for hedge accounting. The Company will adopt SFAS No. 137 as
required in 2001. The Company has not determined the impact that SFAS No. 137
will have on its financial statements but does not expect it to have a material
impact on its consolidated financial statements.

In December 1998, the AICPA issued SOP 98-9, Modification of SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions, which amends SOP 97-2
and supercedes SOP 98-4. SOP 98-9 amends certain paragraphs of SOP 97-2 to
require recognition of revenue using the "residual method" in circumstances
outlined in the SOP. Under the residual method revenue is recognized as follows:
(1) the total fair value of undelivered elements, as indicated by vendor
specific objective evidence (VSOE), is deferred and subsequently recognized in
accordance with the relevant sections of SOP 97-2 and (2) the difference between
the total arrangement fee and the amount deferred for the undelivered elements
is recognized as revenue related to the delivered elements. SOP 98-9 is
effective for fiscal years beginning after March 15, 1999. Also, the provisions
of SOP 97-2 that were deferred by SOP 98-4 will continue to be deferred until
the date SOP 98-9 becomes effective. The Company has applied the residual method
to multi-element transactions when VSOE was not present for all delivered
elements in 1999.



LIQUIDITY AND CAPITAL RESOURCES



YEAR ENDED DECEMBER 31,                                                                   1999              1998
- -------------------------------------------------------------------------------- ----------------- ------------------
                                                                                                  
Current assets                                                                        $   290,919       $    314,559
Cash and investments, short-term                                                      $   133,187       $    137,585
Cash provided by operations                                                           $    61,351       $      2,766
Cash used for investing activities, excluding short-term investments                  $   (22,944)      $    (40,651)
Cash provided (used) by financing activities                                          $   (43,356)      $     35,261

- -------------------------------------------------------------------------------- ----------------- ------------------


CASH AND INVESTMENTS

Cash provided by operations was $61,351, an increase of $58,585 from 1998. Net
income of $2,234, a decrease in prepaid expenses and other of $6,036, a decrease
in trade accounts receivable of $18,493 and non-cash asset write-downs and
business disposals of $32,271 positively impacted cash provided by operations in
1999. Cash provided by operations was negatively impacted by payments related to
special charges taken in 1999 and an increase in term receivables, long-term of
$3,153. For 1998, a net loss of $519 and an increase in


                                                                              12



term receivables, long-term of $4,380 negatively impacted cash provided by
operations, offset by non-cash asset write-downs and business disposals totaling
$20,828.

Cash used for investing activities includes capital expenditures of $15,565 and
$21,627 in 1999 and 1998, respectively. In 1999, the purchase of equity
interests of Exemplar and asset purchase of VeriBest totaled $18,579, compared
to the purchase of equity interests of Mentor Korea LTD, CLK CAD, OPCT and
Quickturn of $19,024 in 1998. For 1999, investing cash flows were positively
impacted by cash received from the sale of Quickturn stock of $8,191. In 1999,
the repayment of all prior year short-term borrowings reduced financing cash
flows. In 1998, cash provided by financing activities was favorably impacted by
short-term borrowings of $24,000 to meet short-term cash demands of foreign
subsidiaries. Cash and short-term investments were positively impacted by the
proceeds from issuance of common stock upon exercise of stock options and
employee stock plan purchases in the amount of $14,197 and $11,381 in 1999 and
1998, respectively. In 1999, repurchases of common stock of $33,553 and
repayment of short-term borrowings of $24,000 offset this increase.


TRADE ACCOUNTS RECEIVABLE

Trade accounts receivable decreased to $125,417 at December 31, 1999 from
$134,959 at December 31, 1998. Excluding the current portion of term receivables
of $54,375 and $44,362, average days sales outstanding were 41 days and 56 days
at December 31, 1999 and December 31, 1998, respectively. Average days sales
outstanding in total accounts receivable decreased from 84 days at the end of
1998 to 73 days at the end of 1999. This decrease in average trade receivable
days sales outstanding and the trade accounts receivable balance was primarily
attributable to the sale of $23,011 of short-term accounts receivable to a
financing institution on a non-recourse basis in the fourth quarter of 1999.


PREPAID EXPENSES AND OTHER

Prepaid expenses and other decreased $8,582 from December 31, 1998 to December
31, 1999. This decrease was primarily due to the write-off of capitalized
acquisition costs related to the unsolicited tender offer for Quickturn of
$4,614 in 1999 due to the Company's withdrawal of the offer. In addition, the
accelerated verification systems inventory balance decreased by $4,555 due to
shipments in 1999.


TERM RECEIVABLES, LONG-TERM

Term receivables, long-term increased to $31,695 at December 31, 1999 compared
to $27,315 at December 31, 1998. The balances were attributable to demand for
multi-year, multi-element term license and perpetual license installment sales
agreements principally from the Company's top-rated credit customers. Balances
under term agreements that are due within one year are included in trade
accounts receivable and balances that are due in more than one year are included
in term receivables, long-term. The Company uses term agreements as a standard
business practice and has a history of successfully collecting under the
original payment terms without making concessions on payments, products or
services. The increase was primarily attributable to ongoing demand for
agreements of this nature.


DEFERRED REVENUE

Deferred revenue increased $9,941 from December 31, 1998 to December 31, 1999
which was primarily attributable to the VeriBest acquisition.


CAPITAL RESOURCES

Expenditures for property and equipment decreased to $15,565 for 1999 compared
to $21,627 for 1998. The decrease in capital expenditures was a result of fewer
individually significant projects in 1999 as compared to 1998. In 1999, the
Company completed two business combinations, which resulted in cash payments of
$18,579. In 1998, the Company completed three business acquisitions and
purchased Quickturn stock, which resulted in cash payments of $19,024. The
Company anticipates that current cash balances anticipated cash flows from
operating activities, and existing credit facilities will be sufficient to meet
its working capital needs for at least the next twelve months.


FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION

The statements contained in this report that are not statements of historical
fact, including without limitation, statements containing the words "believes,"
"expects," and words of similar import, constitute forward-looking statements
that involve a number of risks and uncertainties. Moreover, from time to time
the Company may issue other forward-looking statements. The following discussion
highlights factors that could cause actual results to differ materially from the
forward-looking statements. The forward-looking statements should be considered
in light of these factors.


                                                                              13



The Company competes in the highly competitive and dynamic EDA industry. The
Company's success is dependent upon its ability to develop and market products
and selling models that are innovative, cost-competitive and meet customer
expectations. Competition in the EDA industry is intense, which can create
adverse effects including, but not limited to, price reductions, lower product
margins, loss of market share and additional working capital requirements.
Additionally, new pricing and selling models in the industry, including the use
of fixed term licenses and subscription transactions versus traditional
perpetual licenses further complicate the Company's ability to effectively price
and package large multi-element contracts that are competitive and profitable.

The Company's business is largely dependent upon the success and growth of the
electronics industry. From time to time the electronics industry cuts costs
through employee layoffs and reductions in the number of electronic design
projects which could reduce demand for the Company's products and services. In
addition, there have been a number of mergers in the electronics industry
worldwide, which could result in decreased or delayed capital spending patterns.
The above business challenges for the electronics and related industries may
have a material adverse effect on the Company's financial condition and results
of operations.

As a result of the acquisition of Meta Systems and its accelerated verification
products, the Company is in the hardware development and assembly business. Risk
factors include procuring hardware components on a timely basis, assembling and
shipping systems on a timely basis with appropriate quality control, developing
new distribution and shipment processes, managing inventory and related
obsolescence issues, developing new processes to deliver customer support of the
hardware and placing new demands on the sales force. In addition, the Company is
engaged in litigation with Quickturn in which Quickturn has asserted that the
Company and Meta are infringing Quickturn patents. See "Part I-Item 3. Legal
Proceedings" for further discussion. The Company has been prohibited from using,
selling or marketing its SimExpress emulation products in the United States and
Germany. While the Company settled one SimExpress court case in the second
quarter of 1999, other legal proceedings and litigation continue. These actions
could adversely effect the Company's ability to sell its accelerated
verification products in other jurisdictions worldwide and may negatively affect
demand for accelerated verification products for the Company worldwide until the
outcome is determined. This litigation could result in lower sales of
accelerated verification products, increase the risk of inventory obsolescence
and have a materially adverse effect on the Company's results of operations.

A material amount of the Company's software product revenue is usually the
result of current quarter order performance of which the majority is usually
booked in the last few weeks of each quarter. In addition, the Company's revenue
often includes multi-million dollar contracts. The timing of the completion of
these contracts and the terms of delivery of software, hardware and other
services can have a material impact on revenue recognition for a given quarter.
The combination of these factors impairs and delays the Company's ability to
identify shortfalls or overages from quarterly revenue targets.

The Company uses term or installment sales agreements as a standard business
practice and has a history of successfully collecting under the original payment
terms without making concessions on payments, products or services. These
multi-year, multi-element term license and perpetual license term agreements are
from the Company's top-rated credit customers and average between one and three
years in length. These agreements may increase the element of risk associated
with collectibility from customers that can arise for a variety of reasons
including ability to pay, product satisfaction or disagreements and disputes. If
collectibility for any of these multi-million dollar agreements becomes a
problem the Company's results of operations could be adversely affected.

The Company generally realizes approximately half of its revenues outside the
U.S. and expects this to continue in the future. As such, the effects of foreign
currency fluctuations can impact the Company's business and operating results.
To hedge the impact of foreign currency fluctuations, the Company enters into
foreign currency forward contracts. However, significant changes in exchange
rates may have a material adverse impact on the Company's results of operations.
International operations subject the Company to other risks including, but not
limited to, changes in regional or worldwide economic or political conditions,
government trade restrictions, limitations on repatriation of earnings,
licensing and intellectual property rights protection.

The Company's operating expenses are generally committed in advance of revenue
and are based to a large degree on future revenue expectations. Operating
expenses are incurred to generate and sustain higher future revenue levels. If
the revenue does not materialize as expected, the Company's results of
operations can be adversely impacted.

Acquisitions of complementary businesses are a part of the Company's overall
business strategy. There are several risks associated with this strategy
including integration of sales channels, training and education of the sales
force for new product offerings, integration of product development efforts,
retention of key employees, integration of systems of internal controls, and
integration of information systems. All of these factors can impair the
Company's ability to forecast, to meet quarterly revenue and earnings targets,
to meet various debt obligations used to finance acquisitions and to effectively
manage the business for long-term growth. There can be no assurance that these
challenges will be effectively met.

The Company has been able to recruit and retain necessary personnel to research
and develop, market, sell and service products that satisfy customers' needs.
There can be no assurance that the Company can continue to recruit and retain
such personnel.

Generally accepted accounting principles require management to make estimates
and assumptions that affect the reported amounts of assets, liabilities and
contingencies at the date of the financial statements and the reported amounts
of revenue and expenses during the reporting periods. Actual results could
differ from those estimates.


                                                                              14



The Company is involved in various administrative matters and litigation. There
can be no assurance that various litigation and administrative matters will not
have a material adverse impact on the Company's consolidated financial position
or results of operations. See "Part I-Item 3. Legal Proceedings" for further
discussion.

Due to the factors above, as well as other market factors outside the Company's
control, the Company's future earnings and stock price may be subject to
significant volatility. Past financial performance should not be considered a
reliable indication of future performance. The investment community should use
caution in using historical trends to estimate future results or trends. In
addition, if future results vary significantly from expectations of analysts,
the Company's stock price could be adversely impacted.

YEAR 2000

In 1998, the Company began working to address the possible effects of the
potential inability of computer programs to adequately process date information
after December 31, 1999 (Year 2000). The Company conducted a review of its
products, information technology and facilities computer systems to identify all
software that could be affected by the Year 2000 issue and developed and
executed plans to address it. These actions were completed in the fourth quarter
of 1999. With the passing of January 1, 2000, the Company can report that no
significant Year 2000 problems arose. Identifiable expenditures through the
fourth quarter of 1999 totaled approximately $4,145. These costs were expensed
as incurred. No further significant expenditures related to the Year 2000 issue
are expected.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ALL NUMERICAL REFERENCES IN THOUSANDS, EXCEPT RATE DATA

INTEREST RATE RISK

The Company's exposure to market risk for changes in interest rates relates
primarily to its investment portfolio. The Company does not use derivative
financial instruments for speculative or trading purposes. The Company places
its investments in instruments that meet high credit quality standards, as
specified in the Company's investment policy. The policy also limits the amount
of credit exposure to any one issuer and type of instrument. The Company does
not expect any material loss with respect to its investment portfolio.

The table below presents the carrying value and related weighted-average
interest rates for the Company's investment portfolio. The carrying value
approximates fair value at December 31, 1999. In accordance with the Company's
investment policy all investments mature in twelve months or less.



                                                                CARRYING            AVERAGE
PRINCIPAL (NOTIONAL) AMOUNTS IN U.S. DOLLARS:                     AMOUNT      INTEREST RATE
- ------------------------------------------------------- ----------------- ------------------
IN THOUSANDS, EXCEPT INTEREST  RATES
                                                                            
Cash equivalents - fixed rate                                 $   68,749          4.25%
Short-term investments - fixed rate                               37,550          5.17%
                                                        ----------------- -------------

     Total interest bearing instruments                       $  106,299          4.58%
                                                        ================= =================

- ------------------------------------------------------- ----------------- ------------------


FOREIGN CURRENCY RISK

The Company enters into forward foreign exchange contracts as a hedge against
foreign currency sales commitments and intercompany balances. To hedge its
foreign currency against highly anticipated sales transactions, the Company also
purchases foreign exchange options which permit but do not require foreign
currency exchanges at a future date with another party at a contracted exchange
price. Remeasurement gains and losses on forward and option contracts are
deferred and recognized when the sale occurs. All subsequent remeasurement gains
and losses are recognized as they occur to offset remeasurement gains and losses
recognized on the related foreign currency accounts receivable balances. These
contracts generally have maturities which do not exceed twelve months. At
December 31, 1999 and 1998, the difference between the recorded value and the
fair value of the Company's foreign exchange position related to these contracts
was approximately zero. The fair value of these contracts was calculated based
on dealer quotes. The Company does not anticipate non-performance by the
counter-parties to these contracts. Looking forward, the Company does not expect
any material adverse effect on its consolidated financial position, results of
operations, or cash flows resulting from the use of these instruments. There can
be no assurance that these strategies will be effective or that transaction
losses can be minimized or forecasted accurately.

The following table provides information about the Company's foreign exchange
forward contracts at December 31, 1999. Due to the short-term nature of these
contracts, the contract rate approximates the weighted-average contractual
foreign currency exchange rate and the amount in U.S. dollars approximates the
fair value of the contract at December 31, 1999. These forward contracts mature
in approximately thirty days. The following table presents short-term forward
contracts to sell and buy foreign currencies in U.S. dollars related to customer
receivables and intercompany balances:


                                                                              15





                                                                    AVERAGE
SHORT-TERM FORWARD CONTRACTS:                     AMOUNT      CONTRACT RATE
- --------------------------------------- ----------------- ------------------

                                                          
Forward Contracts:
     Euro                                     $   37,969        $   1.01
     Swedish krona                                 6,518            8.50
     British pound sterling                        5,726            1.57
     Swiss franc                                   3,050            1.59
     Japanese yen                                  1,574          101.78
     Other                                           960           --
- --------------------------------------- ----------------- ------------------


The unrealized gain (loss) on the outstanding forward contracts at December 31,
1999 was not material to the Company's consolidated financial statements. The
realized gain (loss) on these contracts as they matured was not material to the
Company's consolidated financial position, results of operations, or cash flows
for the periods presented.


                                                                              16



ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


CONSOLIDATED STATEMENTS OF OPERATIONS



- -------------------------------------------------------------------------------------------------------

YEAR ENDED DECEMBER 31,                                      1999             1998            1997
- -------------------------------------------------------- ------------- --------------- ----------------
IN THOUSANDS, EXCEPT PER SHARE DATA
                                                                                 
REVENUES:
     System and software                                 $    295,325     $   277,396     $    235,808
     Service and support                                      215,809         212,997          218,919
                                                         ------------     -----------     ------------

               Total revenues                                 511,134         490,393          454,727
                                                         ------------     -----------     ------------

COST OF REVENUES:
     System and software                                       29,726          26,536           53,492
     Service and support                                       88,328          96,961          105,541
                                                         ------------     -----------     ------------

               Total cost of revenues                         118,054         123,497          159,033
                                                         ------------     -----------     ------------

               Gross margin                                   393,080         366,896          295,694
                                                         ------------     -----------     ------------

OPERATING EXPENSES:
     Research and development                                 118,848         117,853          112,227
     Marketing and selling                                    172,622         169,034          157,343
     General and administration                                47,134          45,825           43,636
     Special charges                                           25,821          20,942           18,858
     Merger and acquisition related charges                    12,775           8,500               --
                                                         ------------     -----------     ------------

         Total operating expenses                             377,200         362,154          332,064
                                                         ------------     -----------     ------------

OPERATING INCOME (LOSS)                                        15,880           4,742          (36,370)
     Other income (expense), net                              (13,011)         (4,721)           3,319
                                                         ------------     -----------     ------------

         Income (loss) before income taxes                      2,869              21          (33,051)
     Provision (benefit) for income taxes                         635             540           (1,744)
                                                         ------------     -----------     ------------

         Net income (loss)                               $      2,234     $      (519)    $    (31,307)
                                                         ============     ============    ============

     Net income (loss) per share:
         Basic                                           $       0.03      $    (0.01)    $      (0.48)
                                                         ============     ============    ============
         Diluted                                         $       0.03      $    (0.01)    $      (0.48)
                                                         ============     ============    ============
     Weighted average number of shares outstanding:
         Basic                                                 65,629          65,165           64,885
                                                         ============     ============    ============
         Diluted                                               66,324          65,165           64,885
                                                         ============     ============    ============

- ------------------------------------------------------------------------------------------------------

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                                                              17



CONSOLIDATED BALANCE SHEETS



- ---------------------------------------------------------------------------------------------------------------------

AS OF DECEMBER 31,                                                                       1999              1998
- -------------------------------------------------------------------------------- ----------------- ------------------
IN THOUSANDS
                                                                                                  
ASSETS
CURRENT ASSETS:
     Cash and cash equivalents                                                        $    95,637       $    118,512
     Short-term investments                                                                37,550             19,073
     Trade accounts receivable, net of allowance for doubtful
         accounts of $2,804 in 1999 and $2,987 in 1998                                    125,417            134,959
     Other receivables                                                                      6,440              7,575
     Prepaid expenses and other                                                            14,921             23,503
     Deferred income taxes                                                                 10,954             10,937
                                                                                 ----------------  -----------------

         Total current assets                                                             290,919            314,559

PROPERTY, PLANT AND EQUIPMENT, NET                                                         83,970             95,214
TERM RECEIVABLES, LONG-TERM                                                                31,695             27,315
OTHER ASSETS, NET                                                                          42,755             27,035
                                                                                 ----------------  -----------------

         Total assets                                                                 $   449,339       $    464,123
                                                                                 ================  =================

LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES:
     Short-term borrowings                                                            $        --       $     24,000
     Accounts payable                                                                       9,979             10,101
     Income taxes payable                                                                  22,599             20,408
     Accrued payroll and related liabilities                                               41,628             41,958
     Accrued liabilities                                                                   37,085             33,295
     Deferred revenue                                                                      46,425             36,484
                                                                                 ----------------  -----------------

         Total current liabilities                                                        157,716            166,246

OTHER LONG-TERM DEFERRALS                                                                   1,221              1,425
                                                                                 ----------------  -----------------

         Total liabilities                                                                158,937            167,671
                                                                                 ----------------  -----------------

COMMITMENTS AND CONTINGENCIES

MINORITY INTEREST                                                                           1,622              1,170

STOCKHOLDERS' EQUITY:
     Common stock, no par value, authorized 100,000 shares; 64,338 and 65,739
         issued and outstanding for 1999 and 1998, respectively                           289,478            303,352
     Incentive stock, no par value, authorized 1,200 shares; none issued                       --                 --
     Accumulated deficit                                                                  (20,362)           (22,246)
     Accumulated other comprehensive income
         -  foreign currency translation adjustment                                        19,664             14,176
                                                                                 ----------------  -----------------

         Total stockholders' equity                                                       288,780            295,282
                                                                                 ----------------  -----------------

         Total liabilities and stockholders' equity                                   $   449,339       $    464,123
                                                                                 ================  =================

- -------------------------------------------------------------------------------- ----------------- ------------------

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                                                              18



CONSOLIDATED STATEMENTS OF CASH FLOWS



- ---------------------------------------------------------------------------------------------------------------------

YEAR ENDED DECEMBER 31,                                                1999               1998              1997
- ------------------------------------------------------------- ------------------ ----------------- ------------------
IN THOUSANDS
                                                                                               
OPERATING CASH FLOWS:
Net income (loss)                                                  $      2,234       $      (519)      $    (31,307)

Adjustments to reconcile net income (loss) to
   net cash provided by operating activities:
     Depreciation and amortization of
       property, plant and equipment                                     21,717            27,235             27,516
     Deferred taxes                                                      (5,143)           (2,223)            (8,434)
     Amortization of other assets                                         3,740             3,503             11,604
     Write-down of assets                                                25,718            16,315             12,422
     Business disposals                                                   6,553             4,513              5,395
     Gain on sale of investments                                         (3,669)               --                 --

Changes in operating assets and liabilities:
     Trade accounts receivable                                           18,493           (24,325)               711
     Prepaid expenses and other                                           6,036            (9,580)             5,036
     Term receivables, long-term                                         (3,153)          (23,850)            (3,465)
     Accounts payable                                                      (325)             (848)            (3,593)
     Accrued liabilities                                                (14,583)            8,484             (2,662)
     Other liabilities and deferrals                                      3,733             4,061                631
                                                              -----------------  ----------------  -----------------

Net cash provided by operating activities                                61,351             2,766             13,854
                                                              -----------------  ----------------  -----------------

INVESTING CASH FLOWS:
     Net maturities (purchases) of short-term investments               (18,477)           33,585            (21,746)
     Purchases of property, plant and equipment, net                    (15,565)          (21,627)           (32,614)
     Proceeds from sale of property, plant and equipment                  3,009                --                 --
     Purchases of equity interests and business                         (18,579)          (19,024)                --
     Proceeds from sale of investments                                    8,191                --                 --
     Purchases of technologies                                               --                --             (2,992)
                                                              -----------------  ----------------  ------------------

Net cash used by investing activities                                   (41,421)           (7,066)           (57,352)
                                                              ------------------ ----------------- ------------------

FINANCING CASH FLOWS:
     Proceeds from issuance of common stock                              14,197            11,381              9,447
     Proceeds (repayment) of short-term borrowings                      (24,000)           24,000             (8,782)
     Repayment of long-term debt                                             --              (120)           (52,321)
     Repurchase of common stock                                         (33,553)               --            (15,940)
     Decrease in cash and investments, long-term                             --                --             30,000
                                                              -----------------  ----------------  -----------------

Net cash provided (used) by financing activities                        (43,356)           35,261            (37,596)
                                                              ------------------ ----------------  ------------------
Effect of exchange rate changes on
     cash and cash equivalents
                                                                            551             3,149                 90
                                                              -----------------  ----------------  -----------------

Net change in cash and cash equivalents                                 (22,875)           34,110            (81,004)
Cash and cash equivalents at beginning of period                        118,512            84,402            165,406
                                                              -----------------  ----------------  -----------------

Cash and cash equivalents at end of period                         $     95,637       $   118,512       $     84,402
                                                              =================  ================  =================

- ------------------------------------------------------------- ------------------ ----------------- ------------------

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                                                              19



CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY



- ----------------------------------------------------------------------------------------------------------------------
                                                                         ACCUMULATED
                                                             RETAINED       OTHER                           TOTAL
                                           COMMON STOCK      EARNINGS   COMPREHENSIVE   COMPREHENSIVE    STOCKHOLDERS'
                                        SHARES     AMOUNT    (DEFICIT)  INCOME (LOSS)    INCOME (LOSS)      EQUITY
- -------------------------------------- ---------- ---------- ---------- --------------- ---------------- -------------
IN THOUSANDS
                                                                                        
BALANCE AT DECEMBER 31, 1996              64,608  $297,756   $   9,786      $   12,098                    $   319,640
                                       ---------  --------   ---------  --------------                   ------------

Net loss                                      --        --     (31,307)             --        (31,307)        (31,307)
   Foreign currency translation
     adjustment, net of tax benefit
     of $1,214                                --        --          --          (4,303)        (4,303)         (4,303)
                                                                                        -------------
Comprehensive loss                            --        --          --              --    $   (35,610)             --
                                                                                        ==============

Stock issued under stock option and
   stock purchase plans and tax
   benefit associated with options         1,414     9,447          --              --                          9,447
Repurchase of common stock                (1,655)  (15,940)         --              --                        (15,940)
                                       ---------  --------   ---------  --------------                   ------------

BALANCE AT DECEMBER 31, 1997              64,367   291,263     (21,521)          7,795                        277,537
                                       ---------  --------   ---------  --------------                   ------------

Net loss                                      --        --        (519)             --           (519)           (519)
   Foreign currency translation
     adjustment, net of tax expense
     of $1,800                                --        --          --           6,381          6,381           6,381
                                                                                        -------------
Comprehensive income                          --        --          --              --    $     5,862              --
                                                                                        =============

Stock issued under stock option and
   stock purchase plans and tax
   benefit associated with options         1,372    11,381          --              --                         11,381
Stock options issued for acquisition
   of business                                --       708          --              --                            708
Dividends to minority owners                  --        --        (206)             --                           (206)
                                       ---------  --------   ---------  --------------                   ------------

BALANCE AT DECEMBER 31, 1998              65,739   303,352     (22,246)         14,176                        295,282
                                       ---------  --------   ---------  --------------                   ------------

Net income                                    --        --       2,234              --          2,234           2,234
   Foreign currency translation
     adjustment, net of tax expense
     of $1,548                                --        --          --           5,488          5,488           5,488
                                                                                        -------------
Comprehensive income                          --        --          --              --    $     7,722              --
                                                                                        =============

Stock issued under stock option and
   stock purchase plans and tax
   benefit associated with options         2,127    14,197          --              --                         14,197
Stock options and a warrant issued
   for acquisition of business                --     5,482          --              --                          5,482
Repurchase of common stock                (3,528)  (33,553)         --              --                        (33,553)
Dividends to minority owners                  --        --        (350)             --                           (350)
                                       ---------  --------   ---------  --------------                   ------------

BALANCE AT DECEMBER 31, 1999              64,338  $289,478   $ (20,362)     $   19,664                    $   288,780
                                       =========  ========   =========  ==============                   ============

- -------------------------------------- ---------- ---------- ---------- --------------- ---------------- -------------

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                                                              20


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ALL NUMERICAL REFERENCES IN THOUSANDS, EXCEPT PERCENTAGES AND PER SHARE DATA

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of the
Company and its wholly owned and majority-owned subsidiaries. All significant
intercompany accounts and transactions are eliminated in consolidation.

FOREIGN CURRENCY TRANSLATION
Local currencies are the functional currencies for the Company's foreign
subsidiaries except for the Netherlands, Ireland and Singapore where the U.S.
dollar is used as the functional currency. Assets and liabilities of foreign
operations are translated to U.S. dollars at current rates of exchange, and
revenues and expenses are translated using weighted average rates. Gains and
losses from foreign currency translation are included as a separate component of
stockholders' equity. Foreign currency transaction gains and losses are included
as a component of other income and expense.

FINANCIAL INSTRUMENTS
The Company enters into forward foreign exchange contracts as a hedge against
foreign currency sales commitments and intercompany balances. To hedge its
foreign currency against highly anticipated sales transactions, the Company also
purchases foreign exchange options which permit but do not require foreign
currency exchanges at a future date with another party at a contracted exchange
price. Remeasurement gains and losses on forward and option contracts are
deferred and recognized when the sale occurs. All subsequent remeasurement gains
and losses are recognized as they occur to offset remeasurement gains and losses
recognized on the related foreign currency accounts receivable balances. At
December 31, 1999 and 1998, the Company had forward contracts and options
outstanding of $85,247 and $126,955, respectively, to primarily buy and sell
various foreign currencies. These contracts generally have maturities which do
not exceed twelve months. At December 31, 1999 and 1998, the difference between
the recorded value and the fair value of the Company's foreign exchange position
related to these contracts was approximately zero. The fair value of these
contracts was calculated based on dealer quotes. The Company does not anticipate
non-performance by the counterparties to these contracts.

The Company places its cash equivalents and short-term investments with major
banks and financial institutions. The Company's investment policy limits its
credit exposure to any one financial institution. Concentrations of credit risk
with respect to trade receivables are limited due to the large number of
customers comprising the Company's customer base, and their dispersion across
different businesses and geographic areas. The carrying amounts of cash
equivalents, short-term investments, trade receivables, accounts payable, and
short-term borrowings approximate fair value because of the short-term nature of
these instruments. The Company does not believe it is exposed to any significant
credit risk or market risk on its financial instruments.

CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS
The Company classifies highly liquid investments purchased with an original
maturity of three months or less as cash equivalents. Short-term investments
consist of certificates of deposit, commercial paper and other highly liquid
investments with original maturities in excess of three months. Short-term
investments are classified as available for sale and are recorded at amortized
cost, which approximates market value. These investments mature in less than one
year.

PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Expenditures for additions to
property, plant and equipment are capitalized. The cost of repairs and
maintenance is expensed as incurred. Depreciation of buildings and building
equipment, and land improvements, is computed on a straight-line basis over
lives of forty and twenty years, respectively. Depreciation of computer
equipment and furniture is computed principally on a straight-line basis over
the estimated useful lives of the assets, generally three to five years.
Leasehold improvements are amortized on a straight-line basis over the lesser of
the term of the lease or estimated useful lives of the improvements

In accordance with Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", management reviews long-lived assets and the related intangible
assets for impairment whenever events or changes in circumstances indicate the
carrying amount of such assets may not be recoverable. Recoverability of these
assets is determined by comparing the forecasted non-discounted net cash flows
of the operation to which the assets relate, to the carrying amount including
associated intangible assets of such operation. If the operation is determined
to be unable to recover the carrying amount of its assets, then intangible
assets are written down first, followed by the other long-lived assets of the
operation, to fair value. Fair value is determined based on discounted cash
flows or appraised values, depending upon the nature of the assets. Fair value
for goodwill is determined based on non-discounted cash flows or appraised
values.

INCOME TAXES
The Company uses the asset and liability method of accounting for income taxes.
Under the asset and liability method, deferred income taxes are recognized for
the future tax consequences attributable to temporary differences between the
financial statement carrying amounts and tax balances of existing assets and
liabilities. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
taxes of a change in tax rates is recognized in income in the period that
includes the enactment date. Deferred tax assets are recognized for deductible
temporary differences, net operating loss carryforwards, and credit
carryforwards if it is more likely than not that the tax benefits


                                                                              21



will be realized. For deferred tax assets that cannot be recognized under the
more likely than not test, the Company has established a valuation allowance.

REVENUE RECOGNITION
The Company has adopted the provisions of Statement of Position (SOP) 97-2
"Software Revenue Recognition." Under SOP 97-2, license revenues are recognized
when persuasive evidence of an arrangement exists, delivery of the product has
occurred, no significant company obligations remain, the fee is fixed or
determinable and collectibility is probable. Revenues from system and software
licenses are recognized at the time of shipment, except for those that include
rights to future software products or have significant other delivery
requirements. Product revenues from term or installment sales agreements which
include either perpetual or term licenses are with the Company's top-rated
credit customers and are recognized upon shipment while any maintenance revenues
included in these arrangements are deferred and recognized ratably over the
contract term. Revenues from subscription-type term license agreements, which
typically include software, rights to future software products, and services,
are deferred and recognized ratably over the term of the subscription period.
Training and consulting contract revenues are recognized using the percentage of
completion method or as contract milestones are achieved.

In December 1998, the AICPA issued SOP 98-9, "Modification of SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions", which amends SOP
97-2 and supercedes SOP 98-4. SOP 98-9 amends certain paragraphs of SOP 97-2 to
require recognition of revenue using the "residual method" in circumstances
outlined in the SOP. Under the residual method revenue is recognized as follows:
(1) the total fair value of undelivered elements, as indicated by vendor
specific objective evidence (VSOE), is deferred and subsequently recognized in
accordance with the relevant sections of SOP 97-2 and (2) the difference between
the total arrangement fee and the amount deferred for the undelivered elements
is recognized as revenue related to the delivered elements. SOP 98-9 is
effective for fiscal years beginning after March 15, 1999. Also, the provisions
of SOP 97-2 that were deferred by SOP 98-4 will continue to be deferred until
the date SOP 98-9 becomes effective. The Company has applied the residual method
to multi-element transactions when VSOE was not present for all delivered
elements. Application of the residual method did not have a material impact on
the Company's consolidated financial statements.

TRANSFER OF FINANCIAL ASSETS
The Company finances certain software license and service agreements with
customers through the sale, assignment and transfer of the future payments under
those agreements to financing institutions on a non-recourse basis. The Company
records such transfers as sales of the related accounts receivable when it is
considered to have surrendered control of such receivables under the provisions
of SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities."

SOFTWARE DEVELOPMENT COSTS
The Company accounts for software development costs in accordance with SFAS No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed." Software development costs are capitalized beginning when a
product's technological feasibility has been established by completion of a
working model of the product and ending when a product is available for general
release to customers. In 1998 and 1999, completion of a working model of the
Company's products and general release have substantially coincided. As a
result, the Company has not capitalized any software development costs during
these periods since the amounts have not been material.

Amortization of capitalized software development costs is calculated as the
greater of the ratio that the current product revenues bear to estimated future
revenues or the straight-line method over the expected product life cycle of
approximately three years. Amortization is included in system and software cost
of revenues in the consolidated statements of operations and was zero for the
years ended December 31, 1999 and 1998 and $5,448 for the year ended December
31, 1997.

The Company recognized impairment in value of certain previously capitalized
software development costs in the first quarter of 1997 primarily as a result of
the accelerated decline in sales of older software product offerings. These
costs, which totaled $5,358, were determined to be unrecoverable and were
charged to system and software cost of revenues. All remaining previously
capitalized software costs were amortized evenly over the final three quarters
of 1997 to recognize the change in estimated useful lives of these older
technologies.

GOODWILL AND INTANGIBLES
Goodwill represents the excess of the aggregate purchase price over the fair
value of the tangible and intangible assets acquired in the various
acquisitions. Technology and goodwill costs are being amortized over a three to
five year period to system and software cost of revenues and operating expenses,
respectively.

The Company recognized impairment in value of certain goodwill and purchased
technology, which resulted in associated write-downs of $2,384 and $0 in 1999,
$2,732 and $2,708 in 1998 and $2,056 and $2,370 in 1997, respectively. Total
goodwill and purchased technology amortization expenses were $4,495, $2,935, and
$6,263 for the years ended December 31, 1999, 1998, and 1997, respectively.

NET INCOME (LOSS) PER SHARE
In 1997, the Company adopted SFAS No. 128 "Earnings Per Share" which provides
that "basic net income (loss) per share" and "diluted net income (loss) per
share" for all prior periods presented are to be computed using the weighted
average number of common shares outstanding during each period, with diluted net
income per share including the effect of potentially dilutive common shares.


                                                                              22



Common stock equivalents of 695 related to stock options have been included in
diluted earnings per share for the year ended December 31, 1999. Common stock
equivalents related to stock options are anti-dilutive in a net loss year and,
therefore, are not included in 1998, and 1997 diluted net loss per share.

COMPREHENSIVE INCOME (LOSS)
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income". SFAS No. 130 establishes standards for reporting and presentation of
comprehensive income and its components in a full set of financial statements.
Comprehensive income (loss) consists of net income (loss) and foreign currency
translation adjustment and is presented in the consolidated statement of
stockholders' equity. The Statement requires only additional disclosures in the
consolidated financial statements; it does not affect the Company's financial
position or results of operations.

USE OF ESTIMATES
Generally accepted accounting principles require management to make estimates
and assumptions that affect the reported amount of assets, liabilities and
contingencies at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting periods. Actual results could
differ from those estimates.

RECLASSIFICATIONS AND RESTATEMENTS
Certain  reclassifications  have been made in the accompanying  consolidated
financial statements for 1997 and 1998 to conform with the 1999 presentation.


2.   SPECIAL CHARGES

Following is a summary of the major elements of the special charges:



YEAR ENDED DECEMBER 31,                        1999               1998              1997
- ------------------------------------- ------------------ ----------------- ------------------
                                                                        
Employee severance                         $      4,877       $     4,982        $     2,322
Asset impairments                                 2,384             7,377              5,541
Business disposals                                9,888             4,513              5,395
Reserves for various claims                          --             1,860              3,950
Terminated acquisitions                           7,714                --                 --
Other                                               958             2,210              1,650
                                      -----------------  ----------------  -----------------

     Total                                 $     25,821       $    20,942        $    18,858
                                      =================  ================  =================

- ------------------------------------- ------------------ ----------------- ------------------



During 1999, the Company recorded special charges of $25,821. The charges
included costs attributable to the terminated tender offer for Quickturn Design
Systems, Inc. (Quickturn) net of a gain from the sale of acquired stock, the
terminated acquisition negotiations for certain assets and liabilities of an EDA
software company, and two subsidiary divestitures and related employee
terminations. In addition the Company incurred costs for other employee
terminations due in part to the acquisition of VeriBest, Inc. (VeriBest) and
recognized impairment in value of certain goodwill. Substantially all of these
costs were expended in 1999 and the remaining amount should be expended in the
first half of 2000. There have been no significant modifications to the amount
of the charges.

During 1998, the Company recorded special charges of $20,942. The charges
primarily consist of four subsidiary divestitures, moving of the European
distribution center to Ireland to strengthen the Company's tax position, related
terminations arising from the divestitures and the distribution center move, and
impairment in value of certain assets. Substantially all of these costs were
expended in 1998 and the remaining amount was expended in the first half of 1999
and there have been no significant modifications to the amount of the charges.

During 1997, the Company recorded special charges of $18,858. The charges
consisted of subsidiary divestitures and related employee terminations, early
termination of an interest rate swap agreement, recognition of the impairment in
value of certain goodwill and purchased technology and some streamlining of
worldwide operations and reserves for various legal claims. Substantially all of
the costs associated with these charges were expended in 1997 and the first half
of 1998 and there have been no significant modifications to the amount of the
charges.


3.   MERGERS AND ACQUISITIONS

In 1999, the Company completed two business combinations which were accounted
for as purchases. In January 1999, the Company completed the purchase of the
remaining minority interest of its then 84% owned subsidiary, Exemplar Logic,
Inc. (Exemplar) for cash and stock options valued at $13,003. The purchase
accounting allocation resulted in charges for in process R&D and compensation
and other related costs of $624 and $6,951, respectively. In addition,
capitalized goodwill and technology allocations were $4,452 and $976,


                                                                              23



respectively. The results of operations of Exemplar were previously included in
the Company's results of operations for all periods presented as a result of the
Company's original majority interest. On October 31, 1999, the Company purchased
certain assets and all liabilities of VeriBest for cash, a warrant and assumed
net liabilities with a total value of $19,100. The purchase accounting
allocations resulted in a charge for in-process research and development (R&D)
of $5,200, capitalized goodwill of $7,500, and capitalized technology of $6,400.
The results of operations of VeriBest are included in the Company's consolidated
financial statements only from the date of acquisition forward.

In connection with these acquisitions, the Company recorded one-time charges to
operations for the write-off of Exemplar's and VeriBest's in-process R&D. The
value assigned to in-process R&D related to research projects for which
technological feasibility had not been established. The value was determined by
estimating the net cash flows from the sale of products resulting from the
completion of such projects, and discounting the net cash flows back to their
present value. The Company then estimated the stage of completion of the
products at the date of the acquisition based on R&D costs that had been
expended as of the date of acquisition as compared to total R&D costs at
completion. The percentages derived from this calculation were then applied to
the net present value of future cash flows to determine the in-process charge.
The nature of the efforts to develop the in-process technology into commercially
viable products principally related to the completion of all planning,
designing, prototyping, verification and testing activities that are necessary
to establish that the product can be produced to meet its design specification,
including function, features and technical performance requirements. The
estimated net cash flows from these products were based on management's
estimates of related revenues, cost of sales, R&D costs, selling, general and
administrative costs and income taxes. The Company will monitor how underlying
assumptions compare to actual results.

The following Mentor Graphics and VeriBest pro forma information assumes the
acquisition occurred as of the beginning of the earliest year presented. The pro
forma results are not necessarily indicative of what actually would have
occurred had the acquisition been in effect for the periods presented. In
addition, they are not intended to be a projection of future results that may be
achieved from the combined operations.




YEAR ENDED DECEMBER 31,                                  1999               1998
- ---------------------------------------------- ----------------- ------------------
                                                                    
Revenues                                                534,220            518,636
Net loss                                                 (5,534)           (16,262)
Basic and diluted net loss per share                   $  (0.08)          $  (0.25)

- ---------------------------------------------- ----------------- ------------------



In 1998, the Company completed three business combinations which were accounted
for as purchases. In March 1998, the Company purchased an additional 32%
ownership interest of its Korean distributor, Mentor Korea Co. LTD (MGK) for a
total ownership interest of 51%. In November 1998, the Company purchased CLK
Computer-Aided Design Inc. (CLK CAD) and OPC Technology Inc. (OPCT). CLK CAD is
primarily engaged in developing and marketing timing driven placement and
optimization tools for deep submicron designs. OPCT is primarily engaged in
developing and marketing software, which extends the life of optical
lithography, by modifying IC physical layout to compensate for manufacturing
distortions prior to design tape out. The total purchase price including
acquisition expenses for all 1998 purchase acquisitions was $16,513. The Company
paid the purchase price in cash and notes payable for MGK and OPCT and in cash
and stock options for CLK CAD. The cost of each acquisition was allocated on the
basis of estimated fair value of assets and liabilities assumed. The purchase
accounting allocations resulted in charges for in-process R&D of $8,500,
goodwill capitalization of $6,613, and technology capitalization of $1,400.

In connection with these acquisitions, the Company recorded one-time charges to
operations for the write-off of OPCT's and CLK CAD's in-process R&D. The value
assigned to in-process R&D was calculated consistent with the discussion above.


                                                                              24



4.       Income Taxes

Domestic and foreign pre-tax income (loss) is as follows:



YEAR ENDED DECEMBER 31,                                                1999               1998              1997
- ------------------------------------------------------------- ------------------ ----------------- ------------------
                                                                                               
Domestic                                                           $     (3,235)      $   (15,759)      $    (17,976)
Foreign                                                                   6,104            15,780            (15,075)
                                                              -----------------  ----------------  ------------------

     Total                                                         $      2,869       $        21       $    (33,051)
                                                              =================  ================  ==================

- ------------------------------------------------------------- ------------------ ----------------- ------------------



The provision (benefit) for income taxes is as follows:



YEAR ENDED DECEMBER 31,                                                1999               1998              1997
- ------------------------------------------------------------- ------------------ ----------------- ------------------
                                                                                               
Current:
     Federal                                                       $      2,094       $     1,113       $      3,730
     State                                                                  295               122                150
     Foreign                                                              3,389             1,528              2,810
                                                              -----------------  ----------------  -----------------

     Total current                                                        5,778             2,763              6,690
                                                              -----------------  ----------------  -----------------

Deferred:
     Federal                                                             (5,622)           (1,308)            (5,848)
     Foreign                                                                479              (915)            (2,586)
                                                              -----------------  ----------------- ------------------

     Total deferred                                                      (5,143)           (2,223)            (8,434)
                                                              ------------------ ----------------- ------------------

     Total                                                         $        635       $       540       $     (1,744)
                                                              =================  ================  ==================

- ------------------------------------------------------------- ------------------ ----------------- ------------------



The effective tax rate differs from the federal tax rate as follows:



YEAR ENDED DECEMBER 31,                                                1999               1998              1997
- ------------------------------------------------------------- ------------------ ----------------- ------------------
                                                                                          
Federal tax                                                   $     1,004        $         7       $   (11,568)
State tax, net of federal benefit                                     192                 79                98
Impact of international operations                                  1,647             (3,785)            6,485
Non-deductible acquisition costs                                    4,536              6,080                --
Other, net                                                         (6,744)            (1,841)            3,241
                                                              -----------------  ----------------- -----------

     Provision (benefit) for income taxes                     $       635        $       540       $    (1,744)
                                                              =================  ================  ============

- ------------------------------------------------------------- ------------------ ----------------- ------------------




The significant components of deferred income tax expense are as follows:



YEAR ENDED DECEMBER 31,                                                1999               1998              1997
- ------------------------------------------------------------- ------------------ ----------------- ------------------
                                                                                               
Net changes in deferred tax assets and liabilities                 $       (473)      $       362       $    (14,800)
Increase (decrease) in beginning-of-year balance
     of the valuation allowance for deferred tax assets                  (4,670)           (2,585)             6,366
                                                              ------------------ ----------------- -----------------

     Total                                                         $     (5,143)      $    (2,223)      $     (8,434)
                                                              ================== ================= ==================

- ------------------------------------------------------------- ------------------ ----------------- ------------------



                                                                              25



The tax effects of temporary differences and carryforwards which gave rise to
significant portions of deferred tax assets and liabilities were as follows:



AS OF DECEMBER 31,                                                                        1999              1998
- -------------------------------------------------------------------------------- ----------------- ------------------
                                                                                                   
Deferred tax assets:
     Depreciation of property and equipment                                            $    1,230        $     1,859
     Reserves and allowances                                                                3,077              2,436
     Accrued expenses not currently deductible                                              5,346              5,906
     Net operating loss carryforwards                                                      26,400             31,384
     Tax credit carryforwards                                                              22,799             20,549
     Purchased technology                                                                   3,775              1,858
     Other, net                                                                             7,211              5,373
                                                                                 ----------------  -----------------

         Total gross deferred tax assets                                                   69,838             69,365
         Less valuation allowance                                                         (47,633)           (52,303)
                                                                                 ----------------  -----------------

         Net deferred tax asset                                                        $   22,205        $    17,062
                                                                                 ================  =================

- -------------------------------------------------------------------------------- ----------------- ------------------


The Company has established a valuation allowance for certain deferred tax
assets, including those for net operating loss and tax credit carryforwards.
Such a valuation allowance is recorded when it is more likely than not that some
portion of the deferred tax assets will not be realized. The portion of the
valuation allowance for deferred tax assets for which subsequently recognized
tax benefits will be applied directly to contributed capital is $13,098 as of
December 31, 1999. This amount is attributable to differences between financial
and tax reporting of employee stock option transactions.

As of December 31, 1999, the Company, for federal income tax purposes, has net
operating loss carryforwards of approximately $42,216, research and
experimentation credit carryforwards of $15,216. For state income tax purposes,
as of December 31, 1999 the Company has net operating loss carryforwards
totaling $100,477 from multiple jurisdictions, research and experimentation
credits of $4,890 and child care and facility credits of $921. If not used by
the Company to reduce income taxes payable in future periods, net operating loss
carryforwards will expire between 2002 through 2011, and research and
experimentation credit carryforwards between 2000 through 2012.

The Company has not provided for Federal income taxes on approximately $197,275
of undistributed earnings of foreign subsidiaries at December 31, 1999, since
these earnings have been invested indefinitely in subsidiary operations. Upon
repatriation, some of these earnings would generate foreign tax credits which
will reduce the Federal tax liability associated with any future foreign
dividend.

The Company has settled its Federal income tax obligations through 1991. The
Company believes the provisions for income taxes for years since 1991 are
adequate.


5.   PROPERTY, PLANT AND EQUIPMENT

A summary of property, plant and equipment follows:



AS OF DECEMBER 31,                                                1999              1998
- -------------------------------------------------------- ----------------- ------------------
                                                                          
Computer equipment and furniture                              $   138,415       $    146,683
Buildings and building equipment                                   50,156             49,555
Land and improvements                                              15,560             15,560
Leasehold improvements                                             16,662             17,786
                                                         ----------------  -----------------

                                                                  220,793            229,584
Less accumulated depreciation and amortization                   (136,823)          (134,370)
                                                         ----------------- ------------------

     Property, plant and equipment, net                       $    83,970       $     95,214
                                                         ================  =================

- -------------------------------------------------------- ----------------- ------------------



6.   SHORT-TERM BORROWINGS

Short-term borrowings from time to time include drawings by subsidiaries under
multi-currency unsecured credit agreements. Interest rates are generally based
on the applicable country's prime lending rate depending on the currency
borrowed. The weighted average interest rate on short-term borrowings during
1999 and 1998 was approximately 6%. The Company has available lines of credit of
approximately $13,906 as of December 31, 1999. Certain agreements require
compensatory balances, which the Company has met. No borrowings were


                                                                              26



outstanding under these agreements at December 31, 1999.

In 1998, the Company entered into a committed revolving loan with a bank that
remains in effect until 2001, which gives the Company the ability to borrow up
to $100,000 and is available for general operating purposes. As of December 31,
1999 the Company had no outstanding borrowings on this revolving loan. As of
December 31, 1998 the Company had short-term borrowings of $24,000 outstanding
on this revolving loan, which were paid in full during the first quarter of
1999. The revolving loan has a variable rate, which is calculated based on the
Company's financial position and operating performance and is subject to certain
loan covenants. The Company paid underwriting fees of $600 for this agreement,
which will be amortized over its life.

In 1998, the Company entered into a committed revolving loan with a bank that
gave the Company the ability to borrow up to $200,000 and was available
primarily for the unsolicited tender offer of Quickturn Design Systems Inc.
(Quickturn). In connection with this arrangement the Company paid underwriting
fees of $1,250, which were capitalized as acquisition costs as of December 31,
1998. The revolving loan had a variable rate, which was calculated based on the
Company's financial position and operating performance and was subject to
certain loan covenants. The Company terminated this credit facility and expensed
the capitalized underwriting fees in the first quarter of 1999.

7.   INCENTIVE STOCK

The Board of Directors has the authority to issue incentive stock in one or more
series and to determine the relative rights and preferences of the incentive
stock. On February 10, 1999, the Company adopted a Shareholder Rights Plan and
declared a dividend distribution of one Right for each outstanding share of
Common Stock, payable to holders of record on March 5, 1999. Under certain
conditions, each Right may be exercised to purchase 1/100 of a share of Series A
Junior Participating Incentive Stock at a purchase price of $95, subject to
adjustment. The Rights are not presently exercisable and will only become
exercisable if a person or group acquires or commences a tender offer to acquire
15% of the Common Stock. If a person or group acquires 15% of the Common Stock,
each Right will be adjusted to entitle its holder to receive, upon exercise,
Common Stock (or, in certain circumstances, other assets of the Company) having
a value equal to two times the exercise price of the Right or each Right will be
adjusted to entitle its holder to receive, upon exercise, common stock of the
acquiring company having a value equal to two times the exercise price of the
Right, depending on the circumstances. The Rights expire on February 10, 2009
and may be redeemed by the Company for $0.01 per Right. The Rights do not have
voting or dividend rights, and until they become exercisable, have no dilutive
effect on the earnings of the Company.


8.    EMPLOYEE STOCK AND SAVINGS PLANS

The Company has three common stock option plans which provide for the granting
of incentive and nonqualified stock options to key employees, officers, and
non-employee directors of the Company and its subsidiaries. The three stock
option plans are administered by the Compensation Committee of the Board of
Directors, and permit accelerated vesting of outstanding options upon the
occurrence of certain changes in control of the Company.

The Company also has a stock plan that provides for the sale of common stock to
key employees of the Company and its subsidiaries. Shares can be awarded under
the plan at no purchase price as a stock bonus and the stock plan also provides
for the granting of nonqualified stock options.

SFAS No. 123 "Accounting for Stock-Based Compensation" defines a fair value
based method of accounting for an employee stock option and similar equity
instrument. As is permitted under SFAS No. 123, the Company has elected to
continue to account for its stock-based compensation plans under APB Opinion No.
25. The Company has computed, for pro forma disclosure purposes, the value of
all options granted during 1999, 1998 and 1997 using the Black-Scholes option
pricing model as prescribed by SFAS No. 123 using the following weighted average
assumptions for grants:




YEAR ENDED DECEMBER 31,                                               1999               1998               1997
- ------------------------------------------------------------- ------------------ ----------------- ------------------
                                                                                                   
Risk-free interest rate                                                 5.5%               5.5%              6.25%
Expected dividend yield                                                 0%                 0%                0%
Expected life (in years)                                                5.5                5.5               5.5
Expected volatility                                                    78%                61%               46%

- ------------------------------------------------------------- ------------------ ----------------- ------------------


Using the Black-Scholes methodology, the total value of options granted during
1999, 1998 and 1997 was $61,547, $29,797 and $17,862, respectively, which would
be amortized on a pro forma basis over the vesting period of the options. The
weighted average fair value of options granted during 1999, 1998 and 1997 was
$10.40, $10.23 and $6.43 per share, respectively. If the Company had accounted
for its stock-based compensation plans in accordance with SFAS No. 123, the
Company's net income (loss) and net income (loss) per share would approximate
the pro forma disclosures below:


                                                                              27





YEAR ENDED DECEMBER 31,                                                1999               1998              1997
- ------------------------------------------------------------- ------------------ ----------------- ------------------
                                                                                               
Net loss                                                           $    (10,550)      $    (7,915)      $    (37,663)
Net loss per share, basic and diluted                              $    (0.15)        $    (0.12)       $    (0.58)
- ------------------------------------------------------------- ------------------ ----------------- ------------------


The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards prior to
January 1, 1995, and additional awards are anticipated in future years.

The following table summarizes information about options outstanding and
exercisable at December 31, 1999:



- ----------------------------------------------------------------------------------------------------------------

                                          OUTSTANDING                                    EXERCISABLE
                      --------------------------------------------------    ------------------------------------
     RANGE OF                              REMAINING          WEIGHTED                             WEIGHTED
     EXERCISE           NUMBER OF      CONTRACTUAL LIFE       AVERAGE           NUMBER OF          AVERAGE
      PRICES              SHARES            (YEARS)            PRICE             SHARES             PRICE
- -------------------- ----------------- ------------------ ----------------- ------------------ -----------------
                                                                                    
$  0.04 -   7.50          1,288              5.89             $  4.10               824            $  4.56
$  7.56 -   7.75          1,828              6.82             $  7.75             1,193            $  7.75
$  8.06 -   8.06          2,036              9.84             $  8.06                --                 --
$  8.09 -   9.00          1,721              8.07             $  8.82               554            $  8.96
$  9.13 - 10.00             909              7.19             $  9.73               516            $  9.67
$10.06 - 10.06            1,575              8.15             $ 10.06               393            $ 10.06
$10.13 - 12.50              828              4.97             $ 11.51               649            $ 11.58
$12.56 - 12.56            1,793              9.15             $ 12.56                 3            $ 12.56
$12.63 - 18.25              535              6.37             $ 14.07               218            $ 15.16
$19.76 - 19.76               32              0.36             $ 19.76                32            $ 19.76
                      --------------   ----------------   --------------    ----------------   -----------
$  0.04 - 19.76          12,545              7.75             $  9.24             4,382            $  8.76
                     ===============   ================   ================  ================   ===========

- -------------------- ----------------- ------------------ ----------------- ------------------ -----------------



Options under all four plans generally become exercisable over a four to
five-year period from the date of grant or from the commencement of employment
at prices generally not less than the fair market value at the date of grant.
The excess of the fair market value of the shares at the date of grant over the
option price, if any, is charged to operations ratably over the vesting period.
At December 31, 1999, 3,378 shares were available for future grant. Stock
options outstanding, the weighted average exercise price and transactions
involving the stock option plans are summarized as follows:




                                            SHARES             PRICE
- -------------------------------------- ----------------- ------------------
                                                        
BALANCE AT DECEMBER 31, 1996                 6,850               8.23

     Granted                                 2,832               9.23
     Exercised                                (620)              5.69
     Canceled                                 (957)              9.25
                                       ------------------------------

BALANCE AT DECEMBER 31, 1997                 8,105               8.65

     Granted                                 2,995               8.77
     Exercised                                (665)              5.86
     Canceled                               (1,169)              9.09
                                       ----------------- ------------

BALANCE AT DECEMBER 31, 1998                 9,266            $  8.84
                                       ----------------- ------------

     Granted                                 5,918               8.85
     Exercised                              (1,367)              5.26
     Canceled                               (1,272)              8.65
                                       ----------------- ------------

BALANCE AT DECEMBER 31, 1999                12,545            $  9.25
                                       ================= ============

- -------------------------------------- ----------------- ------------------



In May 1989, the shareholders adopted the 1989 Employee Stock Purchase Plan and
reserved 1,400 shares for issuance. The shareholders have subsequently amended
the plan to reserve an additional 7,000 shares for issuance. Under the plan,
each eligible employee may


                                                                              28



purchase up to six hundred shares of stock per quarter at prices no less than
85% of its fair market value determined at certain specified dates. Employees
purchased 760 and 707 shares under the plan in 1999 and 1998, respectively. At
December 31, 1999, 2,603 shares remain available for future purchase under the
plan. The plan will expire upon either issuance of all shares reserved for
issuance or at the discretion of the Board of Directors. There are no plans to
terminate the plan at this time.

In 1997, the Company repurchased 1,655 shares, approximately 800 of which were
repurchased immediately prior to the Employee Stock Purchase Plan (ESPP)
purchases and then reissued to plan participants. The remaining shares were
repurchased in the fourth quarter of 1997 to be reissued to participants of the
ESPP in 1998. The market value of all repurchases was $15,940. During 1998, the
Company did not repurchase any shares. During 1999 the Company repurchased 3,528
shares at a cost of $33,553 to be reissued to plan participants in 1999 and
future years.

The Company has an employee savings plan (the Savings Plan) that qualifies as a
deferred salary arrangement under Section 401(k) of the Internal Revenue Code.
Under the Savings Plan, participating U.S. employees may defer a portion of
their pretax earnings, up to the Internal Revenue Service annual contribution
limit. The Company currently matches 50% of eligible employee's contributions,
up to a maximum of 6% of the employee's earnings. Employer matching
contributions vest over 5 years, 20% for each year of service completed. The
Company's matching contributions to the Savings Plan were $3,359, $2,765, and
$2,730, in 1999, 1998, and 1997, respectively.

9.   COMMITMENTS

The Company leases a majority of its field office facilities under
non-cancelable operating leases. In addition, the Company leases certain
equipment used in its research and development activities. This equipment is
generally leased on a month-to-month basis after meeting a six-month lease
minimum.

The Company rents its Japanese facilities under two-year cancelable leases
allowing a six-month notice of cancellation. The total remaining commitment
under these cancelable leases, which expire beginning December 2000, is $3,365,
of which the first six months' payments of $1,589 are included in the schedule
below. Future minimum lease payments under all non-cancelable operating leases
are approximately as follows:



ANNUAL PERIODS ENDING
DECEMBER 31,
- ----------------------------------------------------------------------------------------------- --------------------
                                                                                               
2000                                                                                              $    19,511
2001                                                                                                   12,950
2002                                                                                                   10,195
2003                                                                                                    8,954
2004                                                                                                    8,046
Later years                                                                                            16,891
                                                                                                -------------

Total                                                                                             $    76,547
                                                                                                =============

- ----------------------------------------------------------------------------------------------- --------------------


Rent expense under operating leases was $21,366, $21,623, and $19,598 for the
years ended December 31, 1999, 1998, and 1997, respectively.

The Company has entered into agreements to lease portions of its facility sites
in Wilsonville, OR, Santa Clara, CA, and Warren, NJ. Under terms of these
agreements approximately 331 square feet of space was rented to third parties
and are expected to result in rental receipts of $5,614 in 1999.

10.  OTHER INCOME (EXPENSE), NET

Other income (expense) is comprised of the following:



YEAR ENDED DECEMBER 31,                                                1999               1998              1997
- ------------------------------------------------------------- ------------------ ----------------- ------------------
                                                                                                
Interest income                                                     $     7,152        $    7,771        $     7,723
Interest expense                                                           (993)             (768)              (555)
Litigation related costs                                                (15,312)          (10,301)            (4,675)
Minority interest                                                          (778)             (304)                52
Foreign exchange gain (loss)                                             (1,005)              (79)               167
Other, net                                                               (2,075)           (1,040)               607
                                                              ------------------ ----------------- -----------------

         Total                                                      $   (13,011)       $   (4,721)       $     3,319
                                                              ======================================================

- ------------------------------------------------------------- ------------------ ----------------- ------------------



                                                                              29



11.  SUPPLEMENTAL CASH FLOW INFORMATION

The following provides additional information concerning supplemental
disclosures of cash flow activities:



YEAR ENDED DECEMBER 31,                                        1999               1998              1997
- ----------------------------------------------------- ------------------ ----------------- ------------------
                                                                                        
Cash paid for:
     Interest expense                                       $       800        $      599        $       829
     Income taxes                                           $     1,955        $    2,475        $     3,307
Issuance of stock warrant and stock options
   for purchase of  businesses                              $     5,482        $      708                 --

- ----------------------------------------------------- ------------------ ----------------- ------------------


12.   SEGMENT REPORTING

SFAS No. 131 requires disclosures of certain information regarding operating
segments, products and services, geographic areas of operation and major
customers. To determine what information to report under SFAS No. 131, the
Company reviewed the Chief Operating Decision Makers' (CODM) method of analyzing
the operating segments to determine resource allocations and performance
assessments. The Company's CODM's are the Chief Executive Officer and Chief
Operating/Financial Officer.

The Company operates exclusively in the EDA industry. The Company markets its
products primarily to customers in the communications, computer, semiconductor,
consumer electronics, aerospace, and transportation industries. The Company
sells and licenses its products through its direct sales force in North and
South America (Americas), Europe, Japan and Pacific Rim, and through
distributors where a third parties can extend sales reach more effectively or
efficiently. The Company's reportable segments are based on geographic area.

All intercompany revenues and expenses are eliminated in computing revenues and
operating income. The corporate component of operating income represents
research and development, corporate marketing and selling, corporate general and
administration, special, and merger and acquisitions related charges. Corporate
capital expenditures and depreciation and amortization are generated from assets
allotted to research and development, corporate marketing and selling, and
corporate general and administration. Reportable segment information is as
follows:


                                                                              30





YEAR ENDED DECEMBER 31,                           1999               1998              1997
- ---------------------------------------- ------------------ ----------------- ------------------
                                                                          
REVENUES:
     Americas                                 $    249,968       $   271,159       $    250,236
     Europe                                        150,833           146,559            119,501
     Japan                                          82,736            54,582             65,662
     Pacific Rim                                    27,597            18,093             19,328
                                         -----------------  ----------------  -----------------
Total                                         $    511,134       $   490,393       $    454,727
                                         =================  ================  =================

OPERATING INCOME (LOSS):
     Americas                                 $    135,404       $   174,245       $    130,673
     Europe                                         50,324            42,631             24,132
     Japan                                          41,635            16,697             21,575
     Pacific Rim                                    15,657             8,209              5,377
     Corporate                                    (227,140)         (237,040)          (218,127)
                                         ------------------ ----------------- ------------------
Total                                         $     15,880       $     4,742       $    (36,370)
                                         =================  ================  ==================

DEPRECIATION AND AMORTIZATION:
     Americas                                 $      1,581       $     1,943       $      2,198
     Europe                                          6,147             7,887              8,283
     Japan                                           1,033             1,044              1,019
     Pacific Rim                                       612             1,385                833
     Corporate                                      12,344            18,479             26,787
                                         -----------------  ----------------  -----------------
Total                                         $     21,717       $    30,738       $     39,120
                                         =================  ================  =================

CAPITAL EXPENDITURES:
     Americas                                 $      1,426       $     4,886       $      4,309
     Europe                                          1,189            10,469              8,707
     Japan                                           1,313               803              1,317
     Pacific Rim                                       267               503              1,541
     Corporate                                      11,370             4,966             16,740
                                         -----------------  ----------------  -----------------
Total                                         $     15,565       $    21,627       $     32,614
                                         =================  ================  =================

IDENTIFIABLE ASSETS:
     Americas                                 $    254,456       $   251,709       $    259,417
     Europe                                        122,093           136,851             71,868
     Japan                                          47,108            36,447             34,860
     Pacific Rim                                    25,682            39,116             36,157
                                         -----------------  ----------------  -----------------
Total                                         $    449,339       $   464,123       $    402,302
                                         =================  ================  =================

- ---------------------------------------- ------------------ ----------------- ------------------



                                                                              31



13.  QUARTERLY FINANCIAL INFORMATION - UNAUDITED

A summary of quarterly financial information follows:




QUARTER ENDED                                         MARCH 31         JUNE 30        SEPTEMBER 30      DECEMBER 31
- -------------------------------------------------- ---------------- --------------- ---------------- ----------------
                                                                                           

1999
- -------------------------------------------------- ---------------- --------------- ---------------- ----------------

Total revenues                                       $  122,573       $  119,507      $  114,081       $  154,973
Gross margin                                         $   92,745       $   90,579      $   86,158       $  123,598
Operating income (loss)                              $   (7,910)      $    5,281      $    8,133       $   10,376
Net income (loss)                                    $   (8,370)      $     (317)     $    5,866       $    5,055
Net income (loss) per share, diluted and basic       $    (0.13)      $    (0.00)     $     0.09       $     0.08

1998
- -------------------------------------------------- ---------------- --------------- ---------------- ----------------

Total revenues                                       $  108,008       $  119,117      $  117,933       $  145,335
Gross margin                                         $   77,205       $   86,058      $   88,605       $  115,028
Operating income (loss)                              $   (6,434)      $    1,121      $   10,179       $     (124)
Net income (loss)                                    $   (7,454)      $      804      $    7,703       $   (1,572)
Net income (loss) per share, diluted and basic       $    (0.12)      $     0.01      $     0.12       $    (0.02)

- -------------------------------------------------- ---------------- --------------- ---------------- ----------------



                                                                              32



REPORTS OF MANAGEMENT

REPORT OF MANAGEMENT

Management of Mentor Graphics Corporation is responsible for the preparation of
the accompanying consolidated financial statements. The consolidated financial
statements have been prepared in conformity with generally accepted accounting
principles appropriate in the circumstances and necessarily include some amounts
which represent the best estimates and judgments of management. The consolidated
financial statements have been audited by KPMG LLP, independent auditors, whose
report is included below.

The Audit Committee of the Board of Directors is comprised of three directors
who are not officers or employees of Mentor Graphics Corporation or its
subsidiaries. These directors meet with management and the independent auditors
in connection with their review of matters relating to the Company's annual
financial statements, the Company's system of internal accounting controls, and
the services of the independent auditors. The Committee meets with the
independent auditors, without management present, to discuss appropriate
matters. The Committee reports its findings to the Board of Directors and also
recommends the selection and engagement of independent auditors.



Gregory K. Hinckley
Executive Vice President
and Chief Operating Officer/Chief Financial Officer



Walden Rhines
President and Chief Executive Officer


INDEPENDENT AUDITORS' REPORT

To the Stockholders and Board of Directors
Mentor Graphics Corporation:

We have audited the accompanying consolidated balance sheets of Mentor Graphics
Corporation and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Mentor Graphics
Corporation and subsidiaries as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999 in conformity with generally accepted accounting
principles.


KPMG LLP

Portland, Oregon
January 31, 2000


                                                                              33



Item 9. Changes in and Disagreements with Accountants on Accounting and
        Financial Disclosure

None.

Part III

Item 10. Directors and Executive Officers of Registrant

The information required by this item concerning the Company's Directors is
included under "Election of Directors" in the Company's 2000 Proxy Statement and
is incorporated herein by reference. The information concerning the Company's
Executive Officers is included herein on page 6 under the caption "Executive
Officers of the Registrant." The information required by Item 405 of Regulation
S-K is included under "Section 16(a) Beneficial Ownership Reporting Compliance"
in the Company's 2000 Proxy Statement and is incorporated herein by reference.



Item 11. Executive Compensation

The information required by this item is included under "Compensation of
Directors," and "Information Regarding Executive Officer Compensation" in the
Company's 2000 Proxy Statement and is incorporated herein by reference.



Item 12. Security Ownership of Certain Beneficial Owners and Management

The information required by this item is included under "Election of Directors"
and "Information Regarding Beneficial Ownership of Principal Shareholders and
Management" in the Company's 2000 Proxy Statement and is incorporated herein by
reference.



Item 13. Certain Relationships and Related Transactions

The information required by this item is not applicable to the Company.



Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K


(a) 1    Financial Statements:
The following consolidated financial statements are included in Item 8:



                                                          Page
- -------------------------------------------------------------------------------
                                                          
Consolidated Statements of Operations
for the years ended December 31, 1999,
1998 and 1997                                                17

Consolidated Balance Sheets as of
December 31, 1999 and 1998                                   18

Consolidated Statements of Cash Flows
for the years ended December 31, 1999,
1998 and 1997                                                19

Consolidated Statements of Stockholders'
Equity for the years ended December 31,
1999, 1998 and 1997                                          20


                                                                              34



Notes to Consolidated Financial Statements                   21

Independent Auditors' Report                                 33



(a) 2    Financial Statement Schedule:
The schedule and report listed below are filed as part of this report on the
pages indicated:



Schedule                                                               Page
- -------------------------------------------------------------------------------
                                                                    
II  Valuation and Qualifying Accounts                                  37

Independent Auditors' Report on Financial
Statement Schedule                                                     37


All other financial statement schedules have been omitted since they are not
required, not applicable or the information is included in the Consolidated
Financial Statements or Notes.


(a) 3    Exhibits
3.  A.  1987 Restated Articles of Incorporation. Incorporated by reference to
        Exhibit 4A to the Company's Registration Statement on Form S-3
        (Registration No. 33-23024).

    B.  Articles of Amendment of 1987 Restated Articles of Incorporation.
        Incorporated by reference to Exhibit 3.B to the Company's Annual Report
        on Form 10-K for the fiscal year ended December 31, 1998 (1998 10-K).

    C.  Bylaws of the Company. Incorporated by reference to Exhibit 3.C to the
        Company's 1998 10-K.

4.  A.  Rights Agreement, dated as of February 10, 1999, between the Company and
        American Stock, Transfer & Trust Co. Incorporated by reference to
        Exhibit 4.1 to the Company's Current Report on Form 8-K filed on
        February 19, 1999.

10.*A.  1982 Stock Option Plan.

   *B.  Nonqualified Stock Option Plan.  Incorporated by reference to Exhibit
        10.C to the Company's Annual Report on Form 10-K for the fiscal year
        ended December 31, 1989.

   *C.  1986 Stock Plan.  Incorporated by reference to Exhibit 10.C to the
        Company's Annual Report on Form 10-K for the fiscal year ended December
        31, 1997 (1997 10-K).

   *D.  1987 Non-Employee Directors' Stock Option Plan. Incorporated by
        reference to Exhibit 10.A to the Company's Annual Report on Form 10-K
        for the fiscal year ended December 31, 1994 (1994 10-K).

   *E.  Form of Indemnity Agreement entered into between the Company and each of
        its executive officers and directors. Incorporated by reference to
        Exhibit 10.E to the Company's 1998 10-K.

   *F.  Form of Severance Agreement entered into between the Company and each of
        its executive officers. Incorporated by reference to Exhibit 10.F to the
        Company's 1998 10-K.

    G.  Lease dated November 20, 1991, for 999 Ridder Park Drive and 1051 Ridder
        Park Drive, San Jose, California. Incorporated by reference to Exhibit
        10.M to the Company's Form SE dated March 25, 1992.

    H.  Credit Agreement between Mentor Graphics Corporation and Bank of America
        National Trust and Savings Association, dated February 6, 1998.
        Incorporated by reference to Exhibit 10.G to the Company's 1997 10-K.

21.     List of Subsidiaries of the Company.

23.     Consent of Accountants.

27.     Financial Data Schedule.

* Management contract or compensatory plan or arrangement

(b)  Reports on Form 8-KOn November 15, 1999, the Company filed a Current Report
     on Form 8-K to report under Item 2 the acquisition of substantially all the
     assets of VeriBest, Inc., a subsidiary of Intergraph Corporation.


                                                                              35



SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on March 20, 2000.

                                               MENTOR GRAPHICS CORPORATION

                                               By /s/WALDEN C. RHINES
- --------------------------------------------------------------------------------

                                               Walden C. Rhines
                                               President and Chief Executive
                                               Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant on March
20, 2000, in the capacities indicated.





     Signature                                 Title
- -------------------------------------------------------------------------------
                                            
(1)  Principal Executive Officer:
                                               President, Chief Executive
     /s/WALDEN C. RHINES                       Officer and Director
- -------------------------------------------------------------------------------
     Walden C. Rhines

(2)  Principal Financial Officer:
                                               Executive Vice President, Chief
     /s/GREGORY K. HINCKLEY                    Operating Officer
- -------------------------------------------------------------------------------
     Gregory K. Hinckley                       and Chief Financial Officer


(3)  Principal Accounting Officer:
                                               Vice President, Corporate
     /s/ANTHONY B. ADRIAN                      Controller
- -------------------------------------------------------------------------------
     Anthony B. Adrian


(4)  Directors:

     /s/JON A. SHIRLEY                         Chairman of the Board
- -------------------------------------------------------------------------------
     Jon A. Shirley

     /s/MARSHA B. CONGDON                      Director
- -------------------------------------------------------------------------------
     Marsha B. Congdon

     /s/JAMES R. FIEBIGER                      Director
- -------------------------------------------------------------------------------
     James R. Fiebiger

     /s/DAVID A. HODGES                        Director
- -------------------------------------------------------------------------------
     David A. Hodges

     /s/KEVIN C. MCDONOUGH                     Director
- -------------------------------------------------------------------------------
     Kevin C. McDonough
- -------------------------------------------------------------------------------

     /s/FONTAINE K. RICHARDSON                 Director
- -------------------------------------------------------------------------------
         Fontaine K. Richardson



                                                                              36



                                   SCHEDULE II

                  MENTOR GRAPHICS CORPORATION AND SUBSIDIARIES

                        VALUATION AND QUALIFYING ACCOUNTS
                                 (In Thousands)




DESCRIPTION                                    BEGINNING               ADDITIONS        DEDUCTIONS             ENDING
                                                   BALANCE                                                    BALANCE
- ---------------------------------------------- ------------ --------------------- ----------------- ------------------
                                                                                                   
YEAR ENDED DECEMBER 31, 1997
    Allowance for doubtful accounts(1)              $3,163                $1,220            $1,957             $2,426
    Allowance for obsolete inventory(2)             $  405                $4,626            $  500             $4,531
YEAR ENDED DECEMBER 31, 1998
    Allowance for doubtful accounts(1)              $2,426                $2,578            $2,017             $2,987
    Allowance for obsolete inventory(2)             $4,531                    --            $  162             $4,369
YEAR ENDED DECEMBER 31, 1999
    Allowance for doubtful accounts(1)              $2,987                $1,132            $1,315             $2,804
    Allowance for obsolete inventory(2)             $4,369                $  426            $  985             $3,810
- ---------------------------------------------- ------------ --------------------- ----------------- ------------------


(1) Deductions primarily represent accounts written off during the period

(2) Deductions primarily represent inventory scrapped during the period.


INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Mentor Graphics Corporation:

Under date of January 31, 2000, we reported on the consolidated balance sheets
of Mentor Graphics Corporation and subsidiaries as of December 31, 1999 and
1998, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1999, which are included in the annual report on Form 10-K for the
year 1999. In connection with our audits of the aforementioned consolidated
financial statements, we also have audited the related consolidated financial
statement schedule as listed in the accompanying index. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement schedule based on our
audits.

In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.


KPMG LLP

Portland, Oregon
January 31, 2000


                                                                              37

EX-10.A

                           MENTOR GRAPHICS CORPORATION

                             1982 STOCK OPTION PLAN

Mentor Graphics recognizes that its continuing success depends upon the
initiative, ability and significant contributions of officers and key employees.
Mentor Graphics believes that by affording such employees the opportunity to
purchase shares in Mentor Graphics it will enhance its ability to attract and
retain such employees and will provide an incentive for them to exert their best
efforts on its behalf.

         The Plan is as follows:

1.       SHARES SUBJECT TO OPTION.

         1.1 Options granted under this Plan shall be for authorized but
unissued or reacquired common stock of Mentor Graphics.

         1.2 Options may be granted under paragraph 4 of the Plan and stock
appreciation rights may be granted under paragraph 8.2 of the Plan for a total
of not more than 21,670,000 shares of common stock, subject to adjustment under
paragraph 9. Shares subject to options and to stock appreciation rights granted
under paragraph 8.2 that are terminated or expire without being exercised, other
than options that are surrendered on exercise of a stock appreciation right
granted under paragraph 8.1, shall be added to the shares remaining for future
options and stock appreciation rights.

         1.3 No employee may be granted options or stock appreciation rights
under the Plan for more than an aggregate of 500,000 shares of Common Stock in
any calendar year.

2.       EFFECTIVE DATE; DURATION.

         This Plan shall be effective January 1, 1982 and shall continue until
all shares available for issuance under the Plan have been issued, unless sooner
terminated by the Board of Directors of Mentor Graphics (Board of Directors).
Expiration or termination of the Plan shall not affect outstanding options,
bonus rights or stock appreciation rights.

3.       ADMINISTRATION.

         3.1 The Plan shall be administered by a compensation committee
appointed by the Board of Directors (Committee). The Committee may delegate any
of its administrative duties to one or more agents and may retain advisors to
assist it.

         3.2 The Committee shall have general responsibility to interpret and
administer the Plan. Any decision by the Committee shall be final and bind all
parties. Notwithstanding the foregoing, the Committee's exclusive power to make
final and binding interpretations of the Plan shall immediately terminate upon
the occurrence of a Change in Control (as defined in paragraph 7.2). The
Committee shall keep adequate records of options, bonus rights and stock
appreciation rights granted under the Plan and shall be responsible for
communication with optionees.

         3.3 No Committee member shall participate in the decision of any
question relating exclusively to an option, bonus right or stock appreciation
right granted to the member.

4.       GRANT OF OPTIONS.

         4.1 Options granted under the Plan may be either incentive stock
options within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended (the Code), or options other than incentive stock options
(nonqualified stock options). No incentive stock options may be granted under
the Plan on or after the tenth anniversary of the last action by the Board of
Directors approving an increase in the number of shares available for issuance
under the Plan, which action was subsequently approved within 12 months by the
shareholders.

         4.2 Options may be granted to any officer or key employee of Mentor
Graphics and any subsidiary of Mentor Graphics and may be granted in
substitution for outstanding options of another corporation by reason of merger,
consolidation, acquisition of property or stock, or other reorganization between
such other corporation and Mentor Graphics or any subsidiary of Mentor Graphics.
Additional options may be granted to existing optionees and may be granted in
exchange for outstanding options.



         4.3 The Committee shall designate persons to receive grants, and as to
each option shall specify the number of shares, the option price and term, the
time or times at which the option may be exercised, whether the option is an
incentive stock option or a nonqualified stock option and all other terms and
conditions of the option.

         4.4 No employee may be granted incentive stock options under the Plan
such that the aggregate fair market value, on the date of grant, of the shares
with regard to which incentive stock options are exercisable for the first time
by that employee during any calendar year under the Plan and under any other
stock option plan of Mentor Graphics or any parent or subsidiary of Mentor
Graphics exceeds $100,000. Fair market value shall be determined under
subparagraph 5.1(c) as of the date of each grant.

5.       OPTION TERMS.

         5.1 The option price shall be fixed by the Committee as follows:

                  (a) Subject to (b) the option price for an incentive stock
option shall be not less than the fair market value of the shares on the date of
grant. The option price for a nonqualified stock option shall be not less than
50% of the fair market value of the shares on the date of grant.

                  (b) If the optionee at the time of grant owns stock possessing
more than 10 percent of the combined voting power of all classes of stock of
Mentor Graphics, the option price for an incentive stock option shall be not
less than 110 percent of the fair market value of the shares on the date of
grant. Stock owned by the optionee shall include for this purpose, and for
purposes of paragraph 5.2, stock attributed to the optionee pursuant to
applicable provisions of the Code.

                  (c) "Fair market value" means an amount determined by, or in
an manner approved by, the Committee. The Committee may appoint and rely on one
or more qualified independent appraisers to value the stock or use such other
evaluation as it considers appropriate.

         5.2 The Committee shall fix a time limit of not over 10 years after the
date of grant for exercise of an incentive stock option. The Committee shall fix
a time limit of not over 10 years plus seven days after the date of grant for
exercise of a nonqualified stock option. For a more than 10 percent shareholder
the maximum limit for exercise of an incentive stock option shall be 5 years.
The Committee may make the option exercisable in full immediately or in
graduated amounts over the option term.

         5.3 The option shall be evidenced by a stock option agreement executed
by Mentor Graphics and the optionee in a form prescribed by the Committee.

         5.4 The option may not be assigned or transferred except on death, by
will or operation of law, or pursuant to a qualified domestic relations order as
defined under the Code or Title I of the Employee Retirement Income Security
Act. The option may be exercised only by the optionee or by a successor or
representative after death.

         5.5 Unless otherwise determined by the Committee, if an officer of
Mentor Graphics subject to Section 16 of the Securities Exchange Act of 1934
(1934 Act) exercises an option within six months of the grant of the option, the
shares acquired upon exercise of the option may not be sold until six months
after the date of grant of the option.

6.       BONUS RIGHTS.

         6.1 The Committee may grant bonus rights in connection with
nonqualified stock options granted under the Plan. Bonus rights may be granted
with the related option or at a later time. A bonus right may not be assigned or
transferred except on death, by will or operation of law, or pursuant to a
qualified domestic relations order as defined under the Code or Title I of the
Employee Retirement Income Security Act. Bonus rights will be subject to such
rules, terms, and conditions as the Committee may prescribe.

         6.2 A bonus right will entitle an optionee to a cash bonus in
connection with the exercise in whole or in part of the related option. Subject
to paragraph 6.3, the amount of the bonus shall be determined by multiplying the
applicable bonus percentage by the amount by which the fair market value, on the
exercise date, of the shares received on exercise of the related option exceeds
the option price. The cash bonus will be payable within 30 days following the
date as of which its amount is determined. For the purpose of this paragraph,
fair market value shall be determined according to subparagraph 5.1(c). The
bonus percentage applicable to a bonus right shall be determined by the
Committee, but shall in no event exceed 100 percent.

         6.3 The Committee may set a maximum dollar limit on the amount of cash
to be paid under any bonus right.

7.       ACCELERATION UPON CHANGE IN CONTROL.



         7.1 The Committee may grant acceleration rights to holders of options
or stock appreciation rights which will provide that the options or stock
appreciation rights will become exercisable in full for the remainder of their
terms upon the occurrence of a Change in Control. Acceleration rights may be
granted with an option or stock appreciation right or at a later time by
amendment of outstanding options or stock appreciation rights.

         7.2 "Change in Control" means the occurrence of any of the following
events, unless prior to the occurrence of the event, the Committee determines
that the specific event shall not be considered a Change in Control:

                  (a)      the shareholders of Mentor Graphics shall approve:

                           (i) any consolidation, merger or plan of share
         exchange involving Mentor Graphics (Merger) in which Mentor Graphics is
         not the continuing or surviving corporation or pursuant to which shares
         of common stock would be converted into cash, securities or other
         property, other than a Merger involving Mentor Graphics in which the
         holders of Mentor Graphics' common stock immediately prior to the
         Merger have the same proportionate ownership of common stock of the
         surviving corporation immediately after the Merger;

                           (ii) any sale, lease, exchange or other transfer (in
         one transaction or a series of related transactions) of all, or
         substantially all, the assets of Mentor Graphics; or

                           (iii) the adoption of any plan or proposal for the
         liquidation or dissolution of Mentor Graphics;

                  (b) at any time during a period of two consecutive years,
individuals who at the beginning of such period constituted the Board of
Directors (Incumbent Directors) shall cease for any reason to constitute at
least a majority thereof, unless each new director elected during such two-year
period was nominated or elected by two-thirds of the Incumbent Directors then in
office and voting (new directors nominated or elected by two-thirds of the
Incumbent Directors shall also be deemed to be Incumbent Directors); or

                  (c) any person (as such term is used in Section 13(d) of the
1934 Act) shall, as a result of a tender or exchange offer, open market
purchases, privately negotiated purchases or otherwise, have become the
beneficial owner (within the meaning of Rule 13d-3 under the 1934 Act), directly
or indirectly, of securities of Mentor Graphics ordinarily having the right to
vote in the election of directors (Voting Securities) representing twenty
percent (20%) or more of the combined voting power of the then outstanding
Voting Securities.

8.       STOCK APPRECIATION RIGHTS.

         8.1      (a) The Committee, in its sole discretion, may grant both
"general" and "limited" stock appreciation rights with all or any part of an
incentive stock option or a nonqualified stock option granted under the Plan.
Stock appreciation rights may be granted with the related option or at any later
time during the term of the option.

                  (b) A general stock appreciation right granted with all or any
part of an option shall be exercisable only at the time or times established by
the Committee and only to the extent that the related option could be exercised.
A limited stock appreciation right shall be exercisable only during the 60
calendar days immediately following a Change in Control and only if the
immediate resale of shares acquired upon exercise of the related option would
subject the optionee to liability under Section 16(b) of the 1934 Act; provided,
however, that a limited stock appreciation right may not be exercised within six
months of its date of grant. Upon exercise of a stock appreciation right, the
option or portion thereof to which the stock appreciation right relates must be
surrendered. The shares subject to an option or portion thereof that is
surrendered upon exercise of a stock appreciation right shall not be available
for future option or stock appreciation right grants under the Plan.

                  (c) Each stock appreciation right granted with all or any part
of an option shall entitle the holder to receive from Mentor Graphics an amount
equal to the excess of the fair market value at the time of exercise of one
share of Mentor Graphics common stock over the option price per share under the
related option, multiplied by the number of shares covered by the related option
or portion of the related option.

                  (d) The terms of a limited stock appreciation right granted
with a nonqualified stock option may provide, if so determined by the Committee,
that the fair market value of the common stock for purposes of subparagraph
8.1(c) shall be equal to the higher of:

                           (i) the highest reported sales price of the common
         stock during the 60-day period ending on the date the limited stock
         appreciation right is exercised;

                           (ii) the highest per share price paid for shares of
         common stock purchased in any tender or exchange offer during the 60
         calendar days preceding the exercise of the limited stock appreciation
         right;



                           (iii) the fixed or formula price to be received by
         holders of shares of common stock in or as a result of any transaction
         described in subparagraph 7.2(a) if such price is determinable on the
         date of exercise, provided that any securities or other property that
         are part of the fixed or formula price shall be valued at the highest
         valuation placed on the securities or property in any communication to
         the shareholders of Mentor Graphics by any party to the transaction;
         and

                           (iv) the highest price per share shown on a Schedule
         13D, or any amendment thereto, filed by the holder or holders of the
         specified percentage of common stock whose acquisition gives rise to
         the exercisability of the limited stock appreciation right.

         8.2      (a) The Committee may grant general stock appreciation rights
without related options under the Plan to any officer or key employee of Mentor
Graphics and any subsidiary of Mentor Graphics. Such stock appreciation rights
may be granted in substitution for outstanding stock appreciation rights of
another corporation by reason of merger, consolidation, acquisition of property
or stock, or other reorganization between such other corporation and Mentor
Graphics or any subsidiary of Mentor Graphics. Additional stock appreciation
rights may be granted to existing holders of stock appreciation rights and may
be granted in exchange for outstanding stock appreciation rights.

                  (b) The Committee shall designate persons to receive grants of
stock appreciation rights, and as to each stock appreciation right shall specify
the number of shares, the stock appreciation right price, the term, the time or
times at which the stock appreciation right may be exercised and all other terms
and conditions of the stock appreciation right. The stock appreciation right
price shall not be less than 50% of the fair market value of the shares on the
date of grant.

                  (c) Each stock appreciation right granted without a related
option shall entitle the holder to receive from Mentor Graphics an amount equal
to the excess of the fair market value at the time of exercise of one share of
Mentor Graphics common stock over the stock appreciation right price, multiplied
by the number of shares covered by the stock appreciation right or portion
thereof that is exercised. The shares subject to a stock appreciation right or
portion thereof that is exercised shall not be available for future option or
stock appreciation right grants under the Plan.

         8.3      (a) Payment upon exercise of a general stock appreciation
right by Mentor Graphics may be made in shares of Mentor Graphics common
stock valued at fair market value, or in cash, or partly in shares and partly
in cash. The Committee shall either specify the form of payment or retain the
power to disapprove any election by a holder to receive cash on exercise of a
stock appreciation right. For the purpose of this paragraph, fair market
value shall be determined according to subparagraph 5.1(c).

                  (b) Payment upon exercise of a limited stock  appreciation
right by Mentor Graphics may be made only in cash.

         8.4       No fractional shares shall be issued upon exercise of a stock
appreciation right. In lieu thereof, cash may be paid in an amount equal to the
value of the fraction or, in the discretion of the Committee, the number of
shares may be rounded to the next whole share.

         8.5       Stock appreciation rights will be subject to such rules,
terms, and conditions, and shall be evidenced by an agreement in such form, as
the Committee may prescribe prior to the occurrence of a Change in Control.

         8.6       Stock appreciation rights may not be assigned or transferred
except on death, by will or operation of law, or pursuant to a qualified
domestic relations order as defined under the Code or Title I of the Employee
Retirement Income Security Act. Stock appreciation rights may be exercised only
by the holder or by a successor or representative after death.

         8.7       Unless otherwise determined by the Committee, no stock
appreciation right may be exercised by an officer of Mentor Graphics subject to
Section 16 of the 1934 Act during the first six months following the date of
grant.

9.       CHANGES IN CAPITAL STRUCTURE.

         If any change is made in the outstanding common stock without Mentor
Graphics' receiving any consideration, such as a stock split, reverse stock
split, stock dividend, or combination or reclassification of the common stock, a
corresponding change shall be made in the number of shares remaining available
for grants of options or stock appreciation rights under paragraph 1,
disregarding fractional shares, without any further approval of the
shareholders. The adjustment shall be made by the Committee whose determination
shall be conclusive.

10.      AMENDMENT OR TERMINATION OF THE PLAN.

         10.1     The Board of Directors may amend or terminate this Plan at any
                  time subject to paragraph 10.2.

         10.2     Unless the amendment is approved by the shareholders, no
                  amendment shall be made in the Plan that would:



                  (a)    Increase the total number of shares available for
                         options or stock appreciation rights;

                  (b)    Increase the maximum option term; or

                  (c)    Modify the requirements for eligibility under the Plan.

EX-21

                                   EXHIBIT 21

                         MENTOR GRAPHICS' SUBSIDIARIES

                            As of December 31, 1999

SUBSIDIARIES

Anacad Electrical Engineering SARL
Exemplar Logic (Europe) Limited
Mentor Graphics (Barbados) Ltd.
Mentor Graphics (Canada) Ltd.
Mentor Graphics (Denmark) A/S
Mentor Graphics (Espana) S.A.
Mentor Graphics (Finland) OY
Mentor Graphics (France) SARL
Mentor Graphics Egypt
Mentor Graphics AG
Mentor Graphics (Singapore) Pte. Ltd.
Mentor Graphics (Taiwan) Co. Ltd.
Mentor Graphics (UK) Ltd.
Mentor Graphics Design S.A. (Spain) SA
Mentor Graphics (Deutschland) GmbH
Mentor Graphics Isreal Ltd.
Mentor Graphics Japan Co. Ltd.
Mentor Graphics (Netherlands) B.V.
Mentor Graphics (Scandinavia) AB
Mentor Graphics EURL
Mentor Graphics (India) Pte. Ltd.
Mentor Graphics (Ireland) Limited
Mentor Graphics Korea Company, Ltd.
Meta Systems SARL
Microtech Research Limited

EX-23

                                    EXHIBIT 23



                               Consent of Accountants




The Board of Directors
Mentor Graphics Corporation:

We consent to incorporation by reference in the Registration Statements on
Form S-8 (Nos. 33-11291, 33-18259, 2-90577, 33-30036, 2-99251, 33-30774,
33-57147, 33-57149, 33-57151, 33-64717, 333-49579, 333-69223, 333-81991, and
333-81993) and on Form S-3 (Nos. 33-52419, 33-56759, 33-60129, 333-277,
333-2883 and 333-11601) of Mentor Graphics Corporation and subsidiaries of
our reports dated January 31, 2000, relating to the consolidated balance
sheets of Mentor Graphics Corporation and subsidiaries as of December 31,
1999 and 1998, and the related consolidated statements of operations, cash
flows and stockholders' equity and related schedule for each of the years in
the three-year period ended December 31, 1999, which reports appear in the
December 31, 1999 annual report on Form 10-K of Mentor Graphics Corporation
and subsidiaries.


Portland Oregon
March 22, 2000

EX-27

 


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