Item 1. Business
							 General
Mentor Graphics Corporation (Mentor Graphics or Company), an Oregon corporation organized in 1981, is headquartered in Wilsonville, Oregon. The Company's common stock is traded in the NASDAQ National Market System under the symbol MENT.
			 					 Products and Services
The Company designs, manufactures, markets and supports electronic design automation (EDA) software for the integrated circuit (IC) and systems design markets. The Company provides a broad range of EDA tools developed either by the Company or together with third parties to support the entire electronic design process. The Company's software products enable engineers and designers to design, analyze, place and route, and test custom (ASICs), printed circuit boards, multichip modules and other electronic systems and subsystems. The Company's Falcon Framework software provides a common foundation for the Company's EDA software products. Falcon Framework software also allows for the integration of third party software tools developed by other commercial EDA vendors and by customers for their own internal use. The Company's products help customers reduce development time while producing innovative hardware products of high quality. In addition to software products, Mentor Graphics'Professional Services Division offers consulting, support and training services to enhance customers' success in the design and manufacture of hardware products.
							 Platforms
The Company's software runs on UNIX workstations in a broad range of price and performance levels, including workstations manufactured by Hewlett-Packard Company, Sun Microsystems, Inc., Digital Equipment Corporation, NEC Corporation and International Business Machine Corporation (IBM). The above major computer manufacturers have a substantial installed base of workstations, and make frequent introductions of new products with significant price/performance improvements.
The Company has written virtually all of its software in the high level languages C++, C, Pascal, or Fortran to facilitate its portability to other platforms in the future, should availability of the Company's software on such platforms prove desirable.
					 Marketing and Sales
The Company's marketing strategy emphasizes customer support, professional consulting services, a strong direct sales force and large corporate account penetration in the semiconductor, aerospace, computer, telecommunications, automotive and consumer electronics industries. Customers use the Company's products in the design of such diverse products as supercomputers, automotive electronics, missile guidance systems, signal processors, personal computers, gallium arsenide circuits, microprocessors and telecommunication switching systems.
Mentor Graphics sells and licenses its products primarily through its direct sales force in the United States, through the direct sales forces of its wholly-owned subsidiaries in Asia and Europe and through distributors. During the years ending December 31, 1994 and 1993, sales outside of North America accounted for 45 and 46 percent, respectively, of total sales. Additional information relating to foreign and domestic operations is contained in Note 14 of Notes to Consolidated Financial Statements on pages 37-38 of the 1994 Annual Report to Shareholders and is incorporated by this reference. Fluctuating exchange rates and other factors beyond the Company's control, such as tariff and trade policies, domestic and foreign tax and economic policies and the relative stability of international economic and monetary conditions should continue to affect the level and profitability of sales outside the United States.
The Company's OpenDoor program coordinates and supports the integration of third party EDA products, both commercial and internally developed by customers, into the Falcon Framework environment. Under this program, the Company enables OpenDoor participant companies to develop interfaces from their products to the Company's products. OpenDoor participants can select from a range of integration technologies to achieve an optimal degree of integration for their products. There are now approximately 130 OpenDoor participants.
No material portion of the Company's business is dependent on a single customer. The Company has traditionally experienced some seasonal fluctuations in receipt of orders, which are typically stronger in the second and fourth quarters of the year. As is typical of many other companies in the the electronics industry, the Company generally ships its products to customers within 10 to 90 days after receipt of an order, and a substantial portion of quarterly shipments tend to be made in the last month of each quarter.
The Company sells and licenses its products and some third-party products pursuant to purchase orders and master purchase and license agreements. The Company has corporate agreements providing the general terms and conditions of sales and discounts to certain of its customers. Company schedules deliveries only after receipt of purchase orders under these agreements.
					 Manufacturing Operations
The Company's manufacturing operations primarily consist of reproduction of the Company's software and documentation. In North America, manufacturing occurs at the Company's facility in Wilsonville, Oregon. Software and documentation distribution centers in The Netherlands Japan and Singapore serve their respective regions. The Company uses a manufacturing resource planning system which integrates purchasing, inventory control and accounting in all regions.
					 Product Development
The EDA market is competitive and characterized by rapid technological change, which requires continuous high expenditures for the enhancement of existing products and the development of new products. The Company is committed to the creation of new products and intends to continue to enhance its existing products. During the years ended December 1992, the Company expensed approximately $72,484,000, $77,598,000 and $73,947,000 respectively, and capitalized approximately $5,156,000, $3,609,000 and $6,120,000, respectively, related to product development. Substantially all of these costs were related to the development of the Company's proprietary application software.
							 Suppliers
The Company contracts with several suppliers who provide software products which the Company integrates into its product line, allowing the Company to both concentrate its development efforts on its core product line and offer its customers a more complete design solution.
		 Customer Support and Professional Services
The Company has a worldwide organization to meet its customers' needs for software support, training, consulting, custom IC design and documentation. The Company offers support contracts providing software updates and support. Most of the Company's customers are covered by software support contracts. The Company provides technical support for its products through a direct telephone support line and an electronic communications system.
An important component of the total solution provided to customers is professional services offered through the Company's Professional Services Division which provides consulting and training to help the Company's customers improve their design processes and make the most efficient use of their EDA software tools. Professional Services consultants specialize in providing software and services for design data management and electronic parts data creation, co-design of ASICs, ICs, printed circuit boards and multichip modules and EDA network and design environment management and software integration.
				Competition
The EDA industry is competitive and has been characterized by rapid technological advances in application software, operating systems and hardware. The Company's principal competitors are Cadence Design Systems Inc., Synopsys Inc., Viewlogic Systems, Inc., COMPASS Design Automation, Inc., Zuken Incorporated and Intergraph Corporation. The Company believes that other companies may be developing EDA systems.
Some of the Company's competitors and potential competitors may have greater financial and marketing resources than Mentor Graphics. However, the Company believes the main competitive factors in the EDA industry are breadth and quality of application software, product integration, ability to respond to technological change, quality of a company's size of the installed base, level of customer support and value added services. The Company believes that it generally competes favorably in these areas. The Company can give no assurance, however, that it will have the financial resources, marketing, distribution and service capability depth of key personnel or technological knowledge to compete successfully in the EDA market.
				 Employees
The Company and its subsidiaries employed approximately 2,050 persons full time as of December 31, 1994 compared with approximately 2,100 persons at the end of 1993. 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 good employee relations. No Company employees are represented by a collective bargaining unit.
			 Patents and Licenses
The Company owns United States and Canadian patents covering the technology underlying several of its software products. The Company has also filed other patent applications on technology it has developed and intends to file additional patent applications in the future. While the Company believes the pending applications relate to patentable devices, the assurance that any patent will be issued or that any patent can be successfully defended. 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 regards its application software as proprietary and attempts to protect it with copyrights, trade secret laws, and internal non-disclosure safeguards, as well as patents, when appropriate, as noted above. The Company typically incorporates restrictions on usage and transferability into its agreements with customers and other third parties.
Item 2.
Item 2. Properties
The Company's Wilsonville, Oregon facilities are located in six owned buildings of approximately 420,000 total square feet located on about 90 acres. All corporate functions, as well as a majority of research and development and domestic activities, operate from this site.
The Company leases additional space in San Jose, California, and in various locations throughout the United States and in foreign countries, primarily for sales and customer service operations. The Company believes that it will be able to renew or replace its existing leases as they that its current facilities will be adequate through at least 1995.
Item 3.
Item 3. Legal Proceedings
There are no material legal proceedings pending against the Company.
Item 4.
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, 1994.
Executive Officers of Registrant
The following are the executive officers of the Company:
Name Position Age Has Served As 		 					 An Officer 							 of Company Since 						 Walden C.Rhines President, Chief Executive 		 Officer and Director 48 1993
R.Douglas Norby Senior Vice President and 		 Chief Financial Officer 59 1993
Frank S.Delia Vice President, Chief 	 	 Administrative Officer, 		 General Counsel and Secretary 48 1983
Patricia J.O'Connor Vice President, Human 		 Resources 39 1990
James J.Luttenbacher Corporate Controller and 		 Chief Accounting Officer 39 1993
Bob van Leyen Treasurer 51 1994
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
All of the officers named have been employed by Mentor Graphics for the last five years except:
1) Dr. Rhines, who was employed from 1972 to 1993 by Texas 	 Instruments, Incorporated in a variety of technical and management 	 positions and was most recently Executive Vice President of 	 Texas Instruments Semiconductor Group;
2) Mr. Norby, who was employed from 1992 to 1993 by Pharmetrix 	 Corporation as President and Chief Executive Officer and from 1985 	 to 1992 by Lucasfilm, Ltd. where he last held the position of 	 President and Chief Operating Officer;
3) Mr. Luttenbacher, who was employed from 1981-1992 by 	 Hewlett-Packard Company in a variety of accounting positions, 	 the most recent of which was Manager of the North American 	 Financial Services Group; and
4) Mr. van Leyen, who has been employed by the Company since 1986 and, 	 before becoming Treasurer, was based in Paris, France with finance 	 and operations responsibilities for the Company's European 	 subsidiaries.
PART II
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters
The Company paid a quarterly dividend of $0.06 per share during the first three quarters of 1993. The Company ceased payment of the dividend in the fourth quarter of 1993 and does not intend to pay dividends in the foreseeable future. Additional information required by this item under "Quarterly Financial Information" on page 39 and under the shareholder information included on page 41 of the Company's 1994 Annual Report to Shareholders.
Item 6.
Item 6. Selected Financial Data
The information required by this item is included under "Selected Consolidated Financial Data" on page 16 of the Company's 1994 Annual Report to Shareholders.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The information required by this item is included under "Management's Discussion and Analysis of Results of Operations and Financial Condition" on pages 17-24 of the Company's 1994 Annual Report to Shareholders.
Item 8.
Item 8. Financial Statements and Supplementary Data
The financial statements are included in the Company's 1994 Annual Report to Shareholders on pages 25-40 and are indexed here under Item 14(a)(1). The supplementary data required by this item is included under "Quarterly Financial Information" on page 39 of the Company's 1994 Annual Report to Shareholders. See also the financial statement schedule appearing here as indexed under Item 14(a)(2).
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
Item 10.
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 1995 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." No information response to Item 405 of Regulation S-K.
Item 11.
Item 11. Executive Compensation
The information required by this item is included under "Compensation of Directors," "Information Regarding Executive Officer Compensation" in the Company's 1995 Proxy Statement and is incorporated herein by reference.
Item 12.
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 1995 Proxy Statement and is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions
The information required by this item is included under "Certain Transactions" in the Company's 1995 Proxy Statement and is incorporated herein by reference.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The documents listed are included on pages indicated in the Company's 1994 Annual Report to Shareholders:
								Page (1) Financial Statements
Consolidated Statements of Operations 25 Consolidated Balance Sheets 26 Consolidated Statements of Cash Flows 27 Consolidated Statements of Stockholders' Equity 28 Notes to Consolidated Financial Statements 29-38 Independent Auditors' Report 40
(2) Financial Statement Schedules
The documents and schedule listed below are filed as part of this report on the pages indicated:
Schedule Page
II Valuation and Qualifying Accounts 11
Independent Auditors' Report on Financial Statement Schedule 12
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.
(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. Bylaws of the Company. Incorporated by reference to 	 Exhibit 4B to the Company's Registration Statement on Form S-3 	 (Registration No. 33-56759).
	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 		 (1989 10-K).
	 *C 1986 Stock Plan. Incorporated by reference to 		 Exhibit 10.D to the Company's 1989 10-K.
	 *D. 1987 Non-Employee Directors' Stock Option Plan.
	 *E. Stock Option Agreement under the 1986 Stock Plan dated 		 October 15, 1993 between the Company and Walden C. 		 Rhines. Incorporated by reference to Exhibit 10.E to 		 the Company's Annual Report on Form 10-K for the fiscal 		 year ended December 31, 1993.
	 *F. Employment Agreement dated July 7, 1993, as amended 		 July 5, 1994, between the Company and R. Douglas Norby.
	 *G. Form of Indemnity Agreement entered into between the 		 Registrant and each of its officers and directors. 		 Incorporated by reference to Exhibit B to the Company's 		 1987 Proxy Statement.
	 H. 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.
	 I. Amended and Restated Loan Agreement between Mentor Graphics 		 Corporation and First Interstate Bank of Oregon, N.A. dated 		 December 31, 1992 as amended. Incorporated by reference 		 to Exhibit 10.J to the Company's Form SE dated March 25,1993.
	13. Portions of the 1994 Annual Report to Shareholders that are 	 incorporated herein by reference.
	21. List of Subsidiaries of the Company.
	23. Consent of Accountants. 						 	* Management contract or compensatory plan or arrangement
(b) No reports on Form 8-K have been filed during the last quarter 	 of the period covered by this Report.
				 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 30, 1995.
				 MENTOR GRAPHICS CORPORATION
				 By _________________________ 				 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 30, 1995 in the capacities indicated.
	 Signature Title
(1) Principal Executive Officer President, Chief Executive Officer 		Walden C. Rhines and Director
(2) Principal Financial Officer: Senior Vice President and Chief 	 R. Douglas Norby Financial Officer 	 (3) Principal Accounting Of Corporate Controller and James J. Luttenbacher Chief Accounting Officer
(4) Directors: 			 															 Chairman of the Board 		Jon A. Shirley
														Director 	 	Marsha B. Congdon
									 						Director 		James R. Fiebiger
															Director 	 David R. Hathaway
															Director 	Fontaine K. Richardson
															Director 	 David N. Strohm
								SCHEDULE II
		MENTOR GRAPHICS CORPORATION AND SUBSIDIARIES
		 VALUATION AND QUALIFYING ACCOUNTS 			 (In Thousands)
					 Additions 								 Charged to 		 		Beginning Cost & Ending 	Description Balance Expenses Deductions Balance Year ended December 31, 1992: 	Allowance for deferred tax assets $ 0 $ 0 $ 0 $ 0 	Allowance for doubtful accounts $ 3,736 $ 1,282 $ 642 (1) $ 4,376 	Allowance for obsolete inventory $15,639 $ 2,665 $ 5,868 (2) $12,436 	Accrued restructure costs $10,233 $14,500 $12,463 (3) $12,270 Year ended December 31, 1993: 	Allowance for deferred tax assets $ 0 $58,495(4) $ 0 $58,495 	Allowance for doubtful accounts $ 4,376 $ 508 $ 956 (1) $ 3,928 	Allowance for obsolete inventory $12,436 $ 1,924 $ 6,346 (2) $ 8,014 	Accrued restructure costs $12,270 $26,200 $10,096 (3) $28,374 Year ended December 31, 1994: 	Allowance for deferred tax assets $58,495 $ 0 $12,282 (4) $46,213 	Allowance for doubtful accounts $ 3,928 $ 478 $ 1,559 (1) $ 2,847 	Allowance for obsolete inventory $ 8,014 $ 0 $ 7,155 (2) $ 859 	Accrued restructure costs $28,374 $ 4,000 $20,477 (3) $11,897
	 	 (1) Deductions primarily represent accounts written off during the period.
(2) Deductions represent inventory scrapped during each period and 	reclassification of demonstration equipment from inventory to 	property plan and equipment in 1994.
(3) Deductions primarily represent payments made to carry out 	restructure plans and reversals of accrued restructure charges due 	to changes in estimates of $10,045, $1,400 and $1,600 	for the years ended December 31, 1994, 1993 and 1992, respectively.
(4) Addition represents adoption of Statement of Financial Accounting 	Standards No. 109, "Accounting for Income Taxes" on January 1, 1993 	and increases to the valuation allowance during the year. As such, 	the Company established a valuation allowance for certain deferred 	tax assets, including net operating loss and tax credit carryforwards. 	statements No. 109 requires that such a valuation allowance be 	recorded when it is more likely than not that some portion of the 	deferred tax assets will not be realized. The deduction in 1994 	primarily represents the realization of net operating loss 	carryforwards for the year.
Independent Auditors' Report
The Board of Directors and Stockholders Mentor Graphics Corporation:
Under date of January 31, 1995, we reported on the consolidated balance sheets of Mentor Graphics Corporation and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of operations, cash flows and stockholders' equity for each of the years in the three-year period ended December 31, 1994, which are included in the 1994 annual report to stockholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 1994. In connection with our audits of the aforementioned consolidated financial statements 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.
As discussed in notes 1 and 4 to the consolidated financial statements, the Company adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities", in 1994 and SFAS No. 109, "Accounting for Income Taxes", in 1993.
																			KPMG PEAT MARWICK LLP
January 31, 1995