In certain instances our GAAP results of operations may not be profitable when our corresponding non-GAAP results are profitable or vice versa. The number of shares on which our non-GAAP earnings per share is calculated may therefore differ from the GAAP presentation due to the anti-dilutive effect of stock options in a loss situation.

Non-GAAP gross margin, operating margin, and net income (loss) are supplemental measures of our performance that are not required by, or presented in accordance with, GAAP. Moreover, they should not be considered as an alternative to any performance measure derived in accordance with GAAP, or as an alternative to cash flow from operating activities as a measure of our liquidity. We present non-GAAP gross margin, operating margin, and net income (loss) because we consider them to be important supplemental measures of our operating performance and profitability trends, and because we believe they give investors useful information on period-to-period performance as evaluated by management. Non-GAAP net income (loss) also facilitates comparison with other companies in our industry, which use similar financial measures to supplement their GAAP results. Non-GAAP net income (loss) has limitations as an analytical tool, and therefore should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. In the future we expect to continue to incur expenses similar to the non-GAAP adjustments described above and exclusion of these items in our non-GAAP presentation should not be construed as an inference that these costs are unusual, infrequent or non-recurring. Some of the limitations in relying on non-GAAP net income (loss) are:

• Amortization of intangibles represents the loss in value as the technology in our industry evolves, is advanced, or is replaced over time. The expense associated with this loss in value is not included in the non-GAAP net income (loss) presentation and therefore does not reflect the full economic effect of the ongoing cost of maintaining our current technological position in our competitive industry, which is addressed through our research and development program.
• We regularly engage in acquisition and assimilation activities as part of our ongoing business and regularly evaluate our businesses to determine whether any operations should be eliminated or curtailed. We therefore will continue to experience special charges on a regular basis. These costs also directly impact our available funds.
• We perform impairment analyses on cost method investments when triggering events occur and adjust the carrying value of assets when we determine it to be necessary. Impairment charges could therefore be incurred in any period.
• Our stock option and stock purchase plans are important components of our incentive compensation arrangements and will be reflected as expenses in our GAAP results.
• Our income tax expense (benefit) will be ultimately based on our GAAP taxable income and actual tax rates in effect, which often differ significantly from the 17% rate assumed in our non-GAAP presentation. In addition, if we have a GAAP loss and non-GAAP net income, our non-GAAP results will not reflect any projected GAAP tax benefits. Similarly, in the event we were to have GAAP net income and a non-GAAP loss, our GAAP tax expense would be replaced by a credit in our non-GAAP presentation.
• Other companies, including other companies in our industry, calculate non-GAAP net income (loss) differently than we do, limiting its usefulness as a comparative measure.

MENTOR GRAPHICS CORPORATION
RECONCILIATION OF NON-GAAP ADJUSTMENTS
(In thousands, except earnings per share data)
									Year Ended January 31,
									2011				2010
GAAP net income (loss)									$	28,584			$	(21,889	)
Non-GAAP adjustments:
Equity plan-related compensation: (1)
Cost of revenues										888				1,618
Research and development										7,785				10,931
Marketing and selling										6,112				8,406
General and administration										5,726				5,204
Acquisition - related items:
Amortization of purchased assets
Cost of revenues (2)										13,771				12,012
Amortization of intangible assets (3)										7,347				11,184
Frontline purchased technology and intangible assets (4)										4,347				-
Special charges (5)										10,257				21,334
Other income (expense), net (6)										938				1,108
Interest expense (7)										3,326				2,410
Non-GAAP income tax effects (8)										(12,298	)			(7,028	)
Total of non-GAAP adjustments										48,199				67,179
Non-GAAP net income									$	76,783			$	45,290
GAAP weighted average shares (diluted)										109,861				96,474
Non-GAAP adjustment										-				1,901
Non-GAAP weighted average shares (diluted) a										109,861				98,375
GAAP net income (loss) per share (diluted)									$	0.26			$	(0.23	)
Non-GAAP adjustments detailed above										0.44				0.70
Non-GAAP net income per share (diluted) a									$	0.70			$	0.47
a			Diluted non-GAAP net income per share for the twelve months ended January 31, 2010 includes $633 of convertible debt interest, net of tax, added back to non-GAAP net income and 1,415 of corresponding dilutive shares added to the diluted weighted average number of shares outstanding.
(1	)		Equity plan-related compensation expense.
(2	)		Amount represents amortization of purchased technology resulting from acquisitions. Purchased intangible assets are amortized over two to five years.
(3	)		Other identified intangible assets are amortized to other operating expense over two to five years. Other identified intangible assets include trade names, employment agreements, customer relationships, and deferred compensation which are the result of acquisition transactions.
(4	)		Amount represents amortization of purchased technology and other identified intangible assets identified as part of the fair value of the Frontline P.C.B. Solutions Limited Partnership (Frontline) investment. Mentor Graphics acquired a 50% joint venture in Frontline as a result of the Valor Computerized Systems, Ltd. acquisition in the first quarter of fiscal 2011. The purchased technology will be amortized over three years, other identified intangible assets will be amortized over three to four years, and are reflected in the income statement in the equity in earnings of Frontline results. This expense is the same type as being adjusted for in notes (3) and (4) above.
(5	)		Twelve months ended January 31, 2011: Special charges consist of (i) $6,114 of costs incurred for employee rebalances which includes severance benefits, notice pay, and outplacement services, (ii) $2,083 in advisory fees, (iii) $1,432 in lease restoration costs, (iv) $900 related to the abandonment of excess leased facility space, (v) $(566) related to a casualty loss, (vi) $360 related to an asset abandonment, (vii) $(231) in acquisition costs, and (viii) $165 in other costs.
			Twelve months ended January 31, 2010: Special charges consist of (i) $10,713 of costs incurred for employee rebalances which includes severance benefits, notice pay, and outplacement services, (ii) $4,700 in advisory fees, (iii) $2,530 related to the abandonment of excess leased facility space, (iv) $2,067 in acquisition costs, (v) $566 related to a casualty loss, (vi) $405 related to an asset abandonment, (vii) $302 in lease restoration costs, and (viii) $51 in other costs.
(6	)		Twelve months ended January 31, 2011 : Loss of $938 on investment accounted for under the equity method of accounting.
			Twelve months ended January 31, 2010 : Other income (expense), net consists of: (i) loss of $995 on investment accounted for under the equity method of accounting and (ii) an impairment of $113 for an investment accounted for under the cost method.
(7	)		Twelve months ended January 31, 2011 : $2,981 in amortization of original issuance debt discount and premiums and $345 in premium on partial redemption of the $110.0M convertible debt.
			Twelve months ended January 31, 2010 : $2,764 in amortization of original issuance debt discount and $(354) in discounts and unamortized debt costs related to a partial redemption of the $110.0M convertible debt.
(8	)		Non-GAAP income tax expense adjustment reflects the application of our assumed normalized effective 17% tax rate, instead of our GAAP tax rate, to our non-GAAP pre-tax income.

MENTOR GRAPHICS CORPORATION
UNAUDITED RECONCILIATION OF GAAP TO NON-GAAP
EARNINGS PER SHARE
The following table reconciles management's estimates of the specific items excluded from GAAP in the calculation of estimated non-GAAP net income (loss) per share for the first quarter of fiscal 2012.
																		Estimated
																		Q1 FY12
Diluted GAAP net income (loss) per share																		$(0.06) - $(0.02)
Non-GAAP Adjustments:
Amortization of purchased intangible assets (1)																		0.03
Amortization of other identified intangible assets (2)																		0.02
Equity plan-related compensation (3)																		0.05
Special charges (4)																		0.03
Other expense, net and interest expense (5)																		0.11
Non-GAAP income tax effects (6)																		(0.00) - (0.02)
Non-GAAP net income (loss) per share																		$ 0.18 - $0.20
(1	)		Excludes amortization of purchased intangible assets resulting from acquisition transactions. Purchased intangible assets are amortized over two to five years.
(2	)		Excludes amortization of other identified intangible assets including trade names, employment agreements, customer relationships, and deferred compensation resulting from acquisition transactions. Other identified intangible assets are amortized over two to five years. This line item also excludes amortization of purchased intangible assets identified as part of the fair value of the Frontline P.C.B. Solutions Limited Partnership investment. The purchased technology will be amortized over three years and other identified intangible assets will be amortized over three to four years.
(3	)		Excludes equity plan-related compensation expense.
(4	)		Excludes special charges consisting primarily of consulting fees associated with our proxy contest, costs incurred for employee rebalances (which includes severance benefits, notice pay and outplacement services), facility closures, and acquisition costs.
(5	)		Adjustment for the first quarter of fiscal 2012, reflects the amortization of original issuance debt discount and premium for our 6.25% Convertible Subordinated Debentures due 2026, the amortization of original issuance debt discount for our 4.00% Convertible Subordinated Debentures due 2031and charges associated with the retirement of our 6.25% Convertible Subordinated Debentures and Term Loan.
(6	)		Non-GAAP income tax expense adjustment reflects the application of our assumed normalized effective 17% tax rate, instead of our GAAP tax rate, to our non-GAAP pre-tax income. The preliminary GAAP income tax provision embedded in these results includes a number of assumptions subject to change in the normal course of the close process.

MENTOR GRAPHICS CORPORATION
UNAUDITED RECONCILIATION OF GAAP FINANCIAL MEASURES TO NON-GAAP FINANCIAL MEASURES
(In thousands, except percentages)
																					Estimated
Three Months Ended April 30, 2011																					Q1 FY12
GAAP operating income																					$	17,394
Reconciling items to non-GAAP operating income:
Amortization of Frontline purchased technology and other																						1,242
identified intangible assets
Equity plan-related compensation																						5,097
Amortization of purchased intangible assets:
	Cost of revenues																					3,357
	Amortization of intangible assets																					1,611
Special Charges																						3,759
Non-GAAP operating income																					$	32,460
Three Months Ended April 30, 2011																					Q1 FY12
GAAP operating income as a percent of total revenues																						8	%
Non-GAAP adjustments detailed above																						6	%
Non-GAAP operating income as a percent of total revenues																						14	%

MENTOR GRAPHICS CORPORATION
UNAUDITED RECONCILIATION OF GAAP FINANCIAL MEASURES TO NON-GAAP FINANCIAL MEASURES
(In thousands, except percentages)
				Estimated
Twelve Months Ended January 31,				FY12				FY11
GAAP operating income				$	110,763			$	52,539
Reconciling items to non-GAAP operating income:
Amortization of Frontline purchased technology and other
identified intangible assets					4,968				4,347
Equity plan-related compensation					19,151				20,511
Amortization of purchased intangible assets:
	Cost of revenues				9,576				13,771
	Amortization of intangible assets				5,217				7,347
Special Charges					3,759				10,257
Non-GAAP operating income				$	153,434			$	108,772
Twelve Months Ended January 31,				FY12				FY11
GAAP operating income as a percent of total revenues					11	%			6	%
Non-GAAP adjustments detailed above					4	%			6	%
Non-GAAP operating income as a percent of total revenues					15	%			12	%

If you have any questions, require assistance in voting your shares, or need