Mentor Graphics Issues Open Letter to Shareholders

WILSONVILLE, Ore.-- April 25, 2011--Mentor Graphics Corp. (NASDAQ: MENT) today issued the following open letter to the shareholders of Mentor Graphics regarding the company’s Annual Meeting of Shareholders scheduled for May 12, 2011.

The Mentor Graphics Board strongly recommends that Mentor Graphics shareholders vote FOR the company’s director nominees on the WHITE proxy card and discard any proxy materials received from Carl Icahn.

April 25, 2011

Dear Fellow Mentor Graphics Shareholders:

Our Annual Meeting of Shareholders is less than three weeks away. Your Board of Directors urges you to support the team that has delivered excellent results and created value for shareholders.

Carl Icahn is trying to replace three of Mentor Graphics’ nominees with his own, hand-picked nominees. Icahn’s primary aim is to provide himself with liquidity through a public sale process that is risky and is likely to destroy the shareholder value that your company has created.

SUPPORT THE BOARD THAT HAS DELIVERED EXCELLENT RESULTS AND VALUE CREATION BY ELECTING MENTOR GRAPHICS’ NOMINEES

Under the leadership of your current Board, Mentor Graphics has focused on areas of EDA where we have number one positions or the potential to have number one positions and high growth non-traditional EDA markets such as transportation. We are confident that by continuing to execute this strategy, Mentor Graphics’ growth will continue to exceed the underlying growth of traditional EDA. The strength of this strategy is reflected in Mentor Graphics’ stock price, which has outperformed its two closest competitors — Synopsys, Inc. and Cadence Design Automation, Inc. — and general market indices, over the relevant one, three and five year periods.

		Mentor		Synopsys		Cadence		NASDAQ Composite		Mentor Rank
1 Year		51%		15%		35%		12%		#1
3 Years		58%		21%		(9)%		19%		#1
5 Years		27%		22%		(46)%		21%		#1

Our expectations for the current fiscal year are excellent:

• We project higher revenues, greater earnings and improved operating margins in the current fiscal year;
• We expect to generate significant cash flow over the next few years; and
• We intend to use cash flow generated by Mentor Graphics’ growth and increasing margins to return approximately $150 million of capital to shareholders through stock repurchases or dividends over the next three years.

REJECT THE RISKY PLATFORM FOR ICAHN’S NOMINEES OF A PUBLIC SALE PROCESS — IT COULD SERIOUSLY HARM YOUR COMPANY

Although he has recently tried to articulate new plans for his nominees to execute, Icahn’s “Plan A” still remains a risky and potentially destructive public sale process for your company — a process that is designed for Icahn to profitably exit the position he has taken in Mentor Graphics.

• Icahn continues to ignore the regulatory obstacles to any transaction with Synopsys or Cadence, despite knowing that the analysis we recently performed shows that serious regulatory risks to any transaction with Synopsys or Cadence remain.
• Icahn continues to ignore the destruction of value through loss of customers and employees from any failed process to sell the company.

ICAHN’S “PLAN B” IS NOTHING MORE THAN AN ATTEMPT TO USURP THE PLAN YOUR BOARD IS ALREADY EXECUTING

In an implicit acknowledgement that his “Plan A” is not workable, Icahn now touts a “Plan B.” “Plan B” is not truly a plan at all. It is simply an attempt to usurp two elements of your Board’s current strategy as Icahn’s own — SG&A expense reduction and share repurchase — in each case, with no details or new suggestions from Icahn.

• We have recently informed you of our reductions in non-GAAP SG&A expense by over 500 basis points as a percentage of revenue in the last two years. We are on track to reduce non-GAAP SG&A expense by approximately 200 basis points as a percentage of revenue in our current fiscal year.
• The resulting operating margin expansion — which continues our momentum towards achieving our goal of 20% operating margins — should drive improvements in profitability and free cash flow.
• We announced our intention to use this strong free cash flow to return approximately $150 million in capital to shareholders before Icahn came up with his “Plan B.”

In short, there is simply nothing new in Icahn’s “Plan B” that Mentor Graphics is not already doing.

ICAHN IS DISTORTING HIS NOMINEES’ QUALIFICATIONS AND THEIR RELEVANCE TO MENTOR GRAPHICS

• José Maria Alapont. While Alapont may have demonstrated leadership as the CEO of Federal Mogul, controlled by Icahn when it came out of bankruptcy and now 76% owned by Icahn, Icahn’s assertion that Alapont’s industry knowledge is applicable to Mentor Graphics demonstrates how poorly Icahn understands our business.
  
  Mentor Graphics provides solutions to companies that design systems and subsystems involving complex layouts and electrical circuitry, such as wire harnesses within airplanes and cars. In contrast, Mr. Alapont’s company is focused on components such as piston rings, bearings, and brake pads, none of which use any of our products.
  
  In fact, in 2010 we asked Icahn to introduce us to his portfolio companies, and we met with Federal Mogul’s engineering team. We are open to help from Icahn or anyone else, but we were unable to find any fit with our products, and to date, Federal Mogul is not a customer.
• Gary Meyers. Icahn states that Meyers is “uniquely qualified” through his experience as a CEO of Synplicity, a small-cap EDA company with approximately 330 employees that generated less than $75 million of annual revenues.
  
  Icahn seeks to disguise Meyers’ real track record, stating only that Synplicity received a significant premium in the sale to Synopsys. Icahn conveniently ignores the poor performance of Synplicity. For example, Synplicity’s average SG&A expense as a percentage of revenue as a public company was 53%, considerably higher than the figures Icahn complains about at Mentor Graphics.
  
  Icahn also fails to recognize that, despite the significant premium, Synplicity’s sale price of $8.00 per share was exactly the same price at which it began trading on its IPO eight years earlier. Meyers was an officer of the company during this entire period.
  
  We do not understand how Mr. Meyers’ experience in EDA can even be compared to the experience of Dr. Fontaine Richardson, a pioneer of the EDA software industry and one of the directors whom Icahn seeks to replace.
• David Schechter. Icahn tries to give Schechter credit for his service as a director of Hain Celestial Group, Inc. What Icahn fails to mention is the significant shareholder value destruction at WCI Communities, shares of which declined 97% during Schechter’s tenure as a director, or BKF Capital, where the company generated a negative shareholder return prior to Schechter's resignation only six months after joining the Board.
  
  Icahn also touts Schechter’s connection to Icahn Sourcing but fails to disclose that Mentor Graphics asked Icahn and Schechter to help evaluate potential cost savings through Icahn Sourcing in 2010. Ultimately, Icahn Sourcing was unable to provide any significant cost savings solutions to Mentor Graphics.

ICAHN IS DISTORTING MENTOR GRAPHICS’ CORPORATE GOVERNANCE TRACK RECORD

• Cadence’s Unsuccessful Bid for Mentor Graphics. Icahn cites Cadence’s June 2008 letter withdrawing its acquisition proposal as somehow indicative of Mentor Graphics’ failure of corporate governance. The facts are that immediately prior to the withdrawal Cadence: (1) announced that it significantly reduced its revenue and earnings guidance and suffered an immediate 31% drop in its stock price; (2) received a second request from the FTC regarding the antitrust implications of its proposal for Mentor Graphics; and (3) lost the support of its commercial bankers to finance its proposal for Mentor Graphics. Within sixty days of the withdrawal of Cadence’s offer, the CEO and four of the five other officers named in Cadence’s prior proxy left the company.
  
  Icahn’s suggestion that Cadence’s withdrawal resulted from Mentor Graphics’ governance practices simply defies logic.
• Shareholder Rights Plan. Icahn states that Mentor Graphics implemented a rights plan shortly after the disclosure of his accumulation of Mentor Graphics shares. In truth, the rights plan was adopted approximately one month after Icahn filed his first 13D on May 27, 2010, disclosing 6.86% ownership, and only after he twice reported increases in his stake.
  
  Icahn’s history of creeping accumulations of stock at LionsGate Entertainment and other companies shows why your Board’s action was a prudent step to prevent Icahn from taking control of the company without paying Mentor Graphics’ other shareholders a control premium.
• Meeting Date.Icahn’s criticism of the meeting date for the Annual Meeting of Shareholders is misplaced on a number of scores. The May 12^th meeting date is consistent with Mentor Graphics’ historical practice. Moreover, the timing of our Annual Meeting clearly did not impede the nomination of directors by shareholders; we received notice of a total of six nominees from two different shareholders within 10 days of announcing our meeting date.

ICAHN’S ASSERTION THAT OUR ISSUANCE OF SHARES HAS DESTROYED SHAREHOLDER VALUE IS SIMPLY WRONG

Icahn wants you to believe that Mentor Graphics’ share issuances have been destructive to shareholder value. This simply is not the case.

In the past five fiscal years, starting from December 2006, Mentor Graphics has issued incremental shares for two primary purposes: to make bolt-on acquisitions and through the Employee Stock Purchase Plan (ESPP).

• Acquisitions have accounted for 38% of incremental shares and have resulted in the addition of businesses such as LogicVision and Valor.
• These acquisitions have bolstered our competitive position significantly in applications such as Design for Test and Printed Circuit Board.
• The ESPP accounted for 47% of the incremental shares.
• The ESPP is a program in which approximately 65% of our eligible US employees participate.
• Employee stock options and Restricted Stock Units were the smallest component, accounting for approximately 15% of the total.
• In fact, over the last five years, Mentor Graphics’ average annual stock based compensation as a percentage of revenue and our average annual grants of options and awards of Restricted Stock Units as a percentage of our shares, or burn rate, are each lower than those at Cadence and Synopsys.

We believe that these issuances of shares have contributed to an overall increase in shareholder value, helping Mentor Graphics’ stock price performance exceed that of Cadence, Synopsys and the NASDAQ Index in the past one, three and five year periods.

MENTOR GRAPHICS’ NOMINEES ARE PART OF A BOARD AND MANAGEMENT TEAM THAT HAVE THE RIGHT STRATEGY TO DELIVER CONTINUED SHAREHOLDER VALUE CREATION

Your Board unanimously believes that continued execution of our strategic plan offers the greatest value to all Mentor Graphics shareholders and urges shareholders to reject Icahn’s platform and his nominees.

Your management has had numerous conversations and meetings with Icahn’s representatives. They never made suggestions regarding Mentor Graphics’ SG&A expense or stock repurchases — nor did they raise the subject of board representation for Icahn during the period of more than eight months between the time when Icahn took his initial stake in Mentor Graphics and the nomination of his slate. Icahn’s alleged new ideas, borrowed directly from what your Board is already doing, are simply a shallow attempt to find a reason for you to elect his nominees.

Your Board firmly believes that the likely outcome of Icahn’s “Plan A” of a public sale process would result in a failure to sell the company that would seriously harm your company’s relationship with its customers and employees. Icahn’s “Plan B” is nothing more than an attempt by Icahn to recycle two elements of Mentor Graphics’ existing strategy and present them as his own. You do not need new directors to do what your Board is already doing today.

Your vote is important and we urge you to vote for your Board’s nominees TODAY by telephone, Internet or by signing, dating and returning the WHITE proxy card.

On behalf of your Board of Directors, we appreciate your support and continued interest in Mentor Graphics. If you have any questions please contact MacKenzie Partners, Inc., which is assisting us in connection with this year’s Annual Meeting, at (212) 929−5500 or TOLL−FREE at (800) 322−2885.

Sincerely,

/s/

Walden C. Rhines
Chairman of the Board and Chief Executive Officer

MENTOR GRAPHICS CORPORATION UNAUDITED RECONCILIATION OF GAAP FINANCIAL MEASURES TO NON-GAAP FINANCIAL MEASURES (In thousands, except percentages)
Year ended January 31,		2011				2010				2009
GAAP Selling, General, and Administrative (SG&A) expenses		$	421,205			$	395,969			$	412,487
Reconciling items to non-GAAP SG&A expenses
Equity plan-related compensation			(11,838	)			(13,610	)			(14,674	)
Non-GAAP SG&A expenses		$	409,367			$	382,359			$	397,813
Year ended January 31,		2011				2010				2009
GAAP SG&A expenses as a percent of total revenues			46	%			49	%			52	%
Non-GAAP adjustments detailed above			-1	%			-1	%			-2	%
Non-GAAP SG&A expenses as a percent of total values			45	%			48	%			50	%