Mentor Graphics Provides Outlook for 2003

WILSONVILLE, Ore.--(BUSINESS WIRE)--Dec. 3, 2002--Mentor Graphics Corporation (Nasdaq:MENT) today provided guidance for 2003.

The following guidance reflects the addition of all acquisitions done in 2002. Guidance gross margin and expense numbers exclude amortization of intangibles and special charges.

Outlook for 2003

Mentor bookings are expected to grow almost 20 percent in 2003. Half of that growth is expected to be a result of acquisitions made in 2002, IKOS® emulation in particular, and the other half organic growth, led by the Calibre® product family. We expect to build significant backlog in 2003 and anticipate closing the year with a very healthy book-to-bill. As a result, revenue growth should once again be less than bookings growth as we seek to improve business predictability.

Revenues are anticipated to reach approximately $660 million, split 23-24 percent in Q1, 24-25 percent in Q2, approximately 24 percent in Q3, and the balance in Q4. Revenue strength is expected to be greatest in emulation and customer support as the strength in software is taken to backlog.

Gross margin before amortization of intangibles is expected to average 83.5 percent, across the entire year, benefiting from reduced emulation inventory reserves and a substantial improvement in Mentor Consulting. Consulting is targeted to breakeven, up from a large loss in 2002. We expect gross margin to be in the range of 82 percent in Q1, 83-84 percent in Q2 and 83 percent in Q3.

Operating expense before amortization of intangibles is expected to increase proportionately to revenues, up 10 percent, of which about half should relate to 2002 acquisitions and half relate to variable employee compensation. Headcount at the end of 2003 should be modestly less than 3,500 compared to a peak at Q2'02 of 3,730. We enter the year with first quarter operating expense of $120 million which is expected to increase sequentially at between 2 to 3 percent a quarter.

Other income and expense (OI&E) is expected to be an expense of about $10 million due primarily to interest paid on outstanding convertible debt. The projected tax rate remains at 20 percent and diluted shares should increase slightly to 69 million.

Outlook for the fourth quarter of 2002 revenues and operating expense remains unchanged. We would like to supplement our previous statement regarding the fourth quarter tax provision. Our expected tax provision for Q4 on a GAAP basis remains $2.4 million, but on an earnings before goodwill (EBG) basis we believe a 20% tax rate, consistent with our GAAP tax rate in 2001 and anticipated for 2003, is appropriate.

Mentor Graphics Corporation (Nasdaq:MENT) is a world leader in electronic hardware and software design solutions, providing products, consulting services and award-winning support for the world's most successful electronics and semiconductor companies. Established in 1981, the company reported revenues over the last 12 months of about $600 million and employs approximately 3,700 people worldwide. Corporate headquarters are located at 8005 S.W. Boeckman Road, Wilsonville, Oregon 97070-7777; Silicon Valley headquarters are located at 1001 Ridder Park Drive, San Jose, California 95131-2314. World Wide Web site: www.mentor.com.

Statements in this press release regarding the Company's outlook for future periods constitute "forward-looking" statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company or industry results to be materially different from any results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: (i) the Company's ability to continue selling products and services during the current very severe slowdown in the electronics industry, particularly in the telecommunications, semiconductor and personal computer segments; (ii) the overall instability of diverse economies, including changes in regional or worldwide economic or political conditions, government trade restrictions, changes in accounting or reporting rules or interpretations, changes in the tax environment worldwide, limitations on repatriation of earnings, licensing and intellectual property rights protection; (iii) the completion of customer contracts and the terms of delivery of software, hardware and other services; (iv) the Company's ability to successfully integrate and manage its recent and future acquisitions; (v) the Company's ability to manage expenses during the current very severe slowdown in the electronics industry; (vi) the Company's ability to successfully offer products and services that compete in the highly competitive and dynamic EDA industry including the risk that the Company's technology, products or inventory become obsolete; (vii) possible material adverse impact from the Company's emulation litigation with Cadence Design Systems or other third parties; (viii) effects of the increasing volatility of foreign currency fluctuations on the Company's business and operating results, and (ix) effects of unanticipated shifts in product mix on gross margin and unanticipated shifts in geographic mix on the overall tax rate, all as may be discussed in more detail under the heading "Factors That May Affect Future Results and Financial Condition" in the Company's most recent Form 10-K or Form 10-Q. Given these uncertainties, prospective investors are cautioned not to place undue reliance on such forward-looking statements. In addition, statements regarding outlook do not reflect potential impacts of mergers or acquisitions that have not been announced or closed as of the time the statements are made. Mentor Graphics disclaims any obligation to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements to reflect future events or developments.

Mentor Graphics, IKOS, and Calibre are registered trademarks of Mentor Graphics Corporation. All other company or product names are the registered trademarks or trademarks of their respective owners.

     Mentor Graphics Corporation
     Ryerson Schwark, 503/685-1462
     ry_schwark@mentor.com