Document:

Prepared by R.R. Donnelley Financial -- Employment Agreement

  
 Exhibit 10.01 
  
 EMPLOYMENT AGREEMENT 
  
 THIS EMPLOYMENT AGREEMENT (this “Agreement”) is
made as of January 22, 2002 by and between Expedia, Inc., a Washington corporation (the “Company”), and Ronald M. Letterman (“Executive”). 
  
 WHEREAS, pursuant to that certain Asset Purchase Agreement, dated as of January 22, 2002 (the “Purchase Agreement”), among Classic Vacation Group, Inc. (the
“Seller”), Classic Custom Vacations, Inc. (“Classic”) and the Company, Seller will sell to the Company the Business (as such term is defined in the Purchase Agreement); and 
  
 WHEREAS, subject to the consummation of the transactions contemplated by the Purchase Agreement, the Company desires to secure Executive’s
employment in the manner hereinafter specified and to make provision for payment of reasonable compensation to Executive for such services, and Executive is willing to be employed by the Company to perform the duties incident to such employment upon
the terms and conditions hereinafter set forth; and 
  
 WHEREAS, the terms of the Purchase Agreement contemplate the entering into
this Agreement contemporaneously with the execution of the Purchase Agreement; and 
  
 WHEREAS, the parties desire to enter into
this Agreement setting forth the terms and conditions of the employment relationship of Executive with the Company. 
  
 NOW,
THEREFORE, in consideration of the foregoing and the covenants contained herein, and intending to be legally bound hereby, the Company and Executive agree as follows: 
  
 1.    Employment Period; Effectiveness of Agreement.    The Company hereby agrees to employ Executive, and Executive hereby agrees to be
employed by the Company, subject to the terms and conditions of this Agreement, for the period commencing on the Closing Date, as defined in the Purchase Agreement (the “Effective Date”), and ending as provided in Section 3(a)
hereof (the “Employment Period”). In the event that the transactions contemplated by the Purchase Agreement are not consummated or are abandoned, this Agreement shall be null and void ab initio and of no force and effect.

  
 2.    Terms of Employment. 
  
 (a)    Position and Duties.    During the Employment Period, the Company shall employ Executive as President of the
Classic Custom Vacations Division of the Company. During the Employment Period, Executive shall report to the Chief Executive Officer, President, Chief Operating Officer or similarly ranked senior executive officer of the Company (the
“Reporting Officer”). Executive shall have such powers and duties as may be assigned to Executive by the Reporting Officer and shall perform all services and acts necessary or advisable to fulfill such duties and responsibilities.
During the Employment Period, Executive shall devote substantially all of his business attention and time to the business and affairs of the Company and its affiliates. During the Employment Period, it shall not be a violation of this Agreement for
Executive to (A) serve on civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions, and (C) manage personal investments, in each case so long as such activities do not
significantly interfere with the performance of Executive’s responsibilities as an employee of the Company in accordance with this Agreement. 
  
 (b)    Compensation. 
  
 (i)    Base Salary.    During the Employment Period, Executive shall receive a base salary (“Base Salary”) at an annual rate at least equal to $225,000,
payable at the Company’s normal salary interval and otherwise in accordance with the Company’s standard payroll practices as in effect from time to time, provided that for purposes of calendar 2002, Executive shall be paid his Base Salary
retroactive to January 1, 2002. 

  
 (ii)    Annual Cash
Bonuses.    The Company shall pay Executive a guaranteed bonus of $150,000 for each of calendar 2002 and 2003 (the “Guaranteed Bonus”), payable on January 1, 2003 and 2004, respectively, provided the
Employment Period has not been terminated for Cause, pursuant to Sections 3(a)(i) or 3(a)(ii), or as a result of Executive’s resignation without Good Reason prior to the date a Guaranteed Bonus becomes payable. In addition to the Guaranteed
Bonus described in the foregoing sentence, during the Employment Period, Executive shall be entitled to earn an annual incentive award (an “Annual Incentive”) under the Company’s Annual Incentive Plan based upon the achievement
of such performance criteria as may from time to time be determined by the Company. In general, under the Company’s Annual Incentive Plan: (A) the target amount of the Annual Incentive for 2002 shall be equal to 40% of the Base Salary actually
earned during 2002; (B) the amount of the Annual Incentive actually awarded and payable to Executive shall range from a minimum of 0% to a maximum amount equal to 200% of the target amount; (C) the Annual Incentive shall be payable at the end of the
applicable plan year; and (D) the effective date of Executive’s participation in the Annual Incentive Plan shall be January 1, 2002. 
  
 (iii)    Sign-on Bonus.    Executive shall receive a sign-on bonus equal to $6,000. 
  
 (iv)    Stock Options.    Subject to approval of the Board of Directors of the Company (the “Board”),
the Company shall grant Executive an option to purchase 10,000 shares of Common Stock of the Company, pursuant to and subject to the terms and conditions of the Company’s stock option plan and any stock option agreement entered into between
Executive and the Company. 
  
 (c)    Expenses.    During the
Employment Period, the Company shall reimburse Executive for reasonable out-of-pocket expenses actually incurred by Executive in performing his duties and responsibilities hereunder (including travel expenses, food, and lodging while away from home)
in accordance with such policies, practices and procedures as the Company may from time to time establish. 
  
 (d)    Benefits. 
  
 (i)    During the Employment Period
Executive shall be entitled to participate, to the extent of his eligibility, in the “fringe benefits” made available by the Company to its executives; 
  
 (ii)    During the Employment Period Executive shall be entitled to participate in welfare benefit programs available to the Company’s
executives generally; 
  
 (iii)    During the Employment Period Executive shall be entitled
to five weeks paid vacation annually at such times as do not materially interfere with the performance of Executive’s duties hereunder. 
  
 (iv)    Commencing on the Effective Date and continuing through the last day of December 2002, Executive shall be entitled to a car allowance of $1,500 per month; 
  
 (v)    For calendar 2002, Executive shall be entitled to an aggregate amount of up to $20,000 in face value of
airline tickets or rental car credits received by the Company in “soft dollar” transactions. 
  
 3.    Termination of Employment. 
  
 (a)    Term.    The Employment Period, and Executive’s employment hereunder, shall terminate on the second anniversary of the Effective Date, provided that the Employment Period,
and Executive’s employment hereunder, shall be terminated prior to such date (i) automatically on the date of Executive’s death; (ii) if Executive should fail to perform his duties hereunder on account of illness or other incapacity that
the Board shall in good faith determine renders Executive incapable of performing his duties hereunder and such illness or other incapacity continues for a period of more than 90 days, on the date the Company so notifies Executive in writing; (iii)
by the Company for Cause (as defined below) or without Cause, on the date the Company so notifies Executive in writing; or (iv) upon Executive’s resignation with or without Good Reason (as defined below). Executive shall notify the Company in
writing at least 60 days prior to his resignation with or without Good Reason. 
 

 2 

  
 (b)    Termination Without Cause; Resignation
with Good Reason.    If, during the Employment Period, the Company terminates Executive’s employment for any reason other than as a result of Executive’s death, his disability in accordance with 3(a)(ii), other than
for Cause or if Executive resigns with Good Reason: (i) Executive shall be entitled to receive his Base Salary through the second anniversary of the Effective Date or a twelve month period following the termination of the Employment Period pursuant
to this Section 3(b), whichever period is longer, payable in monthly installments on the last day of each month following the termination of the Employment Period; (ii) Executive shall be entitled to receive payment of each Guaranteed Bonus, to the
extent not already paid, payable at such time(s) as the Guaranteed Bonus would become payable had the Employment Period not been terminated; and (iii) Executive shall continue to receive the benefits specified in Sections 2(d)(ii) during the twelve
month period following the termination of the Employment Period, but only if and to the extent Executive does not receive any such benefits from a subsequent employer during such period. The payment and provision of benefits described in this
Section 3(b) shall be subject to Executive’s compliance with the provisions of Sections 4, 5 and 6 and to Executive’s execution and non-revocation of a general release of the Company and its affiliates in a form substantially similar to
that used for similarly situated executives of the Company and its subsidiaries. 
  
 (c)    Termination for Cause, due to Death or Disability; Resignation without Good Reason.    If Executive’s employment is terminated by the Company for Cause, by Executive without Good
Reason or is terminated pursuant to clause (a)(i) or (ii) of this Section 3, Executive shall be entitled to receive his Base Salary through the date of termination. For purposes of this Agreement, “Cause” means (i) any act of
personal dishonesty taken by Executive in connection with his responsibilities as an employee; (ii) the plea of guilty or nolo contendere to, or conviction for, the commission of a misdemeanor involving moral turpitude or a felony offense by
Executive; (iii) the willful or gross neglect by Executive to perform his duties hereunder or in such other capacity as directed by the Board, and which failure is not promptly remedied; (iv) a material breach by Executive of a fiduciary duty owed
to the Company; or (v) a material breach by Executive of any of the covenants made by Executive in Sections 4, 5 and 6. For purposes of this Agreement, “Good Reason” means (A) a significant reduction in Executive’s level of
responsibility; (B) the relocation of Executive’s work location to an office that is more than fifty miles from One North First Street, San Jose, California, without Executive’s consent; or (C) a change in Executive’s reporting
obligations, without Executive’s consent, resulting in a breach by the Company of the first sentence of Section 2(a). 
  
 (d)    Termination of Compensation and Benefits.    Except as otherwise provided in Section 3(b), upon termination of the Employment Period, all of Executive’s
rights under Section 2 shall cease upon such termination. 
  
 4.    Confidential
Information.    Executive acknowledges that the information, observations and data obtained by him while employed by the Company and its affiliates (including those obtained while employed by the Seller, Classic and their
predecessors prior to the date of this Agreement) concerning the Business and the business or affairs of the Company or any of its affiliates (“Confidential Information”) are the property of the Company and such affiliate.
Therefore, Executive agrees that he shall not disclose to any unauthorized person or use for his own purposes any Confidential Information without the prior written consent of the Board, unless and to the extent that the aforementioned matters
become generally known to and available for use by the public other than as a result of Executive’s acts or omissions. Executive shall deliver to the Company at the termination of the Employment Period, or at any other time the Company may
request, all memoranda, notes, plans, records, reports, computer tapes, printouts and software and other documents and data (and copies thereof) relating to Confidential Information, Work Product (as defined below) the Business, or the business of
the Company or any of its affiliates which he may then possess or have under his control. 
  
 5.    Inventions and Patents.    Executive acknowledges that all inventions, innovations, improvements, developments, methods, designs, analyses, drawings, reports and all similar or related
information (whether or not patentable) that relate to the Company or any of its affiliates’ actual or anticipated business, research and development or existing or future products or services and which are conceived, developed or made by
Executive, either individually or jointly in collaboration with others, while employed by the Company or its
 
 

 3 

 
affiliates (“Work Product”), whether or not conceived during regular working hours and whether or not conceived prior to the commencement of the Employment Period, belong to and
are the sole and exclusive property of the Company or such affiliate. Executive shall promptly disclose such Work Product to the Company and perform all actions reasonably requested by the Company (whether during or after the Employment Period) to
establish and confirm such ownership (including, without limitation, assignments, consents, powers of attorney and other instruments). This Section 5 does not apply to an invention that qualifies fully under the provisions of California Labor Code
Section 2870.(1) 
  
 6.    Protection of Trade Secrets, Non-Solicitation. 
  
 (a)    In further consideration of the compensation and other benefits to be provided to Executive hereunder,
Executive acknowledges that in the course of his employment with Classic and Seller, he has and will in the course of his employment with the Company he will become familiar with the trade secrets of the Company and its affiliates and with other
Confidential Information concerning the Business, the Company, and the Company’s affiliates and that his services have been and will be of special, and unique and extraordinary value to the Company and its affiliates. Therefore, Executive
agrees that, during the Employment Period, and for one year thereafter (the “Restricted Period”), he shall not directly or indirectly use trade secrets (as such term is defined in Section 3426(1)(d) of the Uniform Trade Secrets Act)
of the Company or its affiliates, Confidential Information or proprietary materials of the Company or its affiliates or otherwise engage in unfair competition against the Company or any of its affiliates. 
  
 (b)    During the Restricted Period, Executive shall not directly or indirectly through another person or entity
(i) induce or attempt to induce any employee of the Company or any of its affiliates to leave the employ of the Company or such affiliate, or in any way interfere with the relationship between the Company or any such affiliate and any employee
thereof, (ii) hire any person who was an employee of the Company or any such affiliate at any time during the Employment Period or (iii) induce or attempt to induce any customer, supplier, licensee, licensor, franchisee or other business relation of
the Company or any such affiliate that is within any geographical area in which the Company or its affiliates engage or plan to engage in such businesses to cease doing business with the Company or such affiliate or in any way interfere with the
relationship between any such customer, supplier, licensee or business relation and the Company or any such affiliate. 
  
 7.    Enforcement.    If, at the time of enforcement of Section 4, 5 or 6 of this Agreement, a court holds that the restrictions stated therein are unreasonable or unenforceable under
circumstances then existing, the parties hereto agree that the maximum period, scope or geographical area reasonable or enforceable under such circumstances shall be substituted for the stated period, scope or area. Because Executive’s services
are unique and because Executive has access to Confidential Information and Work Product, the parties hereto agree that money damages would not be an adequate remedy for any breach of this Agreement. Therefore, in the event a breach or threatened
breach of this Agreement, the Company or its successors or assigns may, in addition to other 
 

	(1)
	 
	California Labor Code § 2870 provides as follows: 
 

  
 (a)    Any provision in an employment agreement which provides that an employee shall assign, or offer to assign, any of his or her rights in an
invention to his or her employer shall not apply to an invention that the employee developed entirely on his or her own time without using the employer’s equipment, supplies, facilities, or trade secret information except for those inventions
that either: 
  
 (1)    Relate at the time of conception or reduction to practice of the
invention to the employer’s business, or actual or demonstrably anticipated research or development of the employer. 
  
 (2)    Result from any work performed by the employee for the employer. 
  
 (b)    To the extent a provision in an employment agreement purports to require an employee to assign an invention otherwise excluded from being required to be assigned under subdivision (a), the
provision is against public policy of this state and is unenforceable. 
 

 4 

 rights and remedies existing in their favor, apply to any court of competent jurisdiction for specific performance and/or injunctive or other relief in order to
enforce, or prevent any violations of, the provisions hereof (without posting a bond or other security). Executive agrees that the restrictions contained in Sections 4, 5 and 6 are reasonable. 
  

8.    Survival.    Sections 4, 5, 6, 8 and 9 shall survive and continue in full force in accordance with their terms notwithstanding
any termination of the Employment Period. 
  
 9.    Assignability; Successors and
Mergers.    Except as otherwise provided herein, this Agreement shall bind and inure to the benefit of and be enforceable by Executive, the Company and their respective successors and assigns, provided that the rights and
obligations of Executive under this Agreement shall not be assignable. 
  
 10.    General. 

 
 (a)    Governing Law.    The validity, performance, and all other matters
pertaining to this Agreement shall be governed by the laws of the State of California, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of California or any other jurisdiction) that would cause
the application of the laws of any other jurisdiction other than the State of California. 
  
 (b)    Modification.    Except as otherwise provided in Section 9, this Agreement may be modified only by a writing signed by Executive and an officer duly authorized by the Board to execute
such an amendment. 
  
 (c)    Nonwaiver.    The waiver or failure
of any party to enforce at any time any of the provisions hereof shall not be construed to be a waiver of the right of such party thereafter to enforce any such provision. 
  
 (d)    Severability.    If any covenant, agreement, term or provision of this Agreement or the application thereof to any
situation or circumstance shall be invalid or unenforceable, the remainder of this Agreement or the application of such covenant, agreement, term or provision to situations or circumstances other than those as to which it is invalid or unenforceable
shall not be affected; and each covenant, agreement, term or provision of this Agreement shall be valid and enforceable to the fullest extent permitted by applicable law. Except as otherwise provided in Section 7 hereof, in such event, the parties
agree to negotiate in good faith to substitute for any such invalid or unenforceable provision a valid and enforceable provision which most nearly effects the parties’ original intent in entering into this Agreement. 
  
 (e)    Notices.    All notices, requests, claims, demands and other communications
hereunder shall be in writing and shall be given or made (and shall be deemed to have been duly given or made upon receipt) by delivery in person, by courier service, by cable, by facsimile, by telegram or by registered or certified mail (postage
prepaid, return receipt requested) to the respective parties at the following address (or at such other address for a party as shall be specified in a notice given in accordance with this Section 10(e)): 
  
 
	 If to Executive:
 	  	 Ronald M. Letterman
 114 Nina Court
 Los Gatos, CA
95030
 
	 
	 If to the Company:
 	  	 Expedia, Inc.
 13810 SE Eastgate Way, Suite 400
 Bellevue, WA 98005
 Facsimile: (425) 564-7240
 Attention: General Counsel
 
	 
	  	  	 with a copy to:
 
	 
	  	  	 Sheannan & Sterling
 555 California Street, Suite 2000
 San
Francisco, CA 94104
 Facsimile: (415) 616-1199
 Attention: Peter D. Lyons, Esq.
 

 
 

 5 

  
 (f)    Entire
Agreement.    This Agreement constitutes the entire agreement of the parties and supersedes all proposals, oral or written, all negotiations, conversations or discussions between or among the parties relating to this
Agreement and all past course of dealing or industry custom including, without limitation, that Employment Agreement dated as of April 20, 1998 between Executive and the Seller. Executive hereby acknowledges and represents that (i) he has consulted
with independent legal counsel regarding his rights and obligations under this Agreement and that he fully understands the terms and conditions contained herein and (ii) that he has not entered into this Agreement or any employment relationship with
the Company or any of its affiliates in reliance on any representations other than those contained herein. 
  
 (g)    Withholding.    The Company may withhold from any amounts payable under this Agreement such federal, state, local or foreign taxes as shall be required to be withheld pursuant to any
applicable law or regulation. 
  
 (h)    Counterparts.    This
Agreement may be executed in separate counterparts, each of which is deemed to be an original and all of which taken together constitute one and the same agreement. 
  
 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. 
  
  
 
	  	 	  	 	 Executive
 
	 
	  	 	  	 	 /s/    RONALD M. LETTERMAN      
 
	 	 	 	
	

	  	 	  	 	 Ronald M. Letterman
 

 
 
	 
	  	 	 EXPEDIA, INC.
 
	  	 	  
	 By:
 	 	 /s/    KATHY DELLPLAIN
 
	 	
	

	  	 	 Name:  Kathy Dellplain
 
	  	 	 Title:    SVP, Human Resources
 

 
 

 6<PAGE>

                                                                    EXHIBIT 10.A

                                                               EXECUTION VERSION

                       FIRST AMENDMENT TO CREDIT AGREEMENT

          This FIRST AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is entered
                                                          ---------
into as of January 24, 2002, among Mentor Graphics Corporation, an Oregon
corporation (the "Company"), the several financial institutions party to the
                  -------
Credit Agreement referred to below (each a "Bank" and, collectively, the
                                            ----
"Banks"), The Bank of Nova Scotia, as documentation agent, Fleet National Bank,
 -----
N.A., as syndication agent, and Bank of America, n.a., as administrative agent
for the Banks (in such capacity, the "Agent" ).
                                      -----

          WHEREAS, the Company, the Banks and the Agent entered into a Credit
Agreement dated as of January 10, 2001 (the "Credit Agreement"); and
                                             ----------------

          WHEREAS, the Company has requested that the Majority Banks agree to
certain amendments to the Credit Agreement, and the Majority Banks have agreed
to such request, subject to the terms and conditions of this Amendment;

          NOW, THEREFORE, the parties hereto agree as follows:

1.   Definitions; References; Interpretation.
     ---------------------------------------

     (a) Unless otherwise specifically defined herein, each term used herein
which is defined in the Credit Agreement shall have the meaning assigned to such
term in the Credit Agreement.

     (b) Each reference to "this Amendment", "hereof", "hereunder", "herein" and
"hereby" and each other similar reference contained in the Credit Agreement, and
each reference to "the Credit Agreement" and each other similar reference in the
other Loan Documents, shall from and after the Effective Date refer to the
Credit Agreement as amended hereby.

     (c) The rules of interpretation set forth in Section 1.02 of the Credit
Agreement shall be applicable to this Amendment.

2. Amendments to Credit Agreement. Subject to the terms and conditions hereof,
   ------------------------------
the Credit Agreement is amended as follows, effective as of the date of
satisfaction of the conditions set forth in Section 4 hereof (the "Effective
                                                                   ---------
Date"):
----

     (a) a new defined term "IKOS" shall be added to Section 1.01 in proper
                             ----
alphabetical order as follows:

               "IKOS" means IKOS Systems, Inc."
                ----

     (b) a new defined term "IKOS Acquisition Date" shall be added to Section
                             ---------------------
1.01 in proper alphabetical order as follows:

                                       1.

<PAGE>

               "IKOS Acquisition Date" means the date that the Company or a
                ---------------------
     Wholly-Owned Subsidiary shall have acquired more than 50% of the
     outstanding shares of the capital stock of IKOS."

     (c) a new defined term "IKOS Margin Stock" shall be added to Section 1.01
                             -----------------
in proper alphabetical order as follows:

               "IKOS Margin Stock" means Margin Stock of IKOS."
                -----------------

     (d) a new defined term "Net Cash Consideration" shall be added to Section
                             ----------------------
1.01 in proper alphabetical order as follows:

               "Net Cash Consideration" means, in respect of any Acquisition,
                ----------------------
          the cash consideration paid by the Company or any of its Subsidiaries
          in respect of such Acquisition less the unencumbered cash and Cash
                                         ----
          Equivalents of the target Person (including, without limitation,
          unencumbered cash and Cash Equivalents tendered by holders of options
          to purchase the target Person's capital stock upon the exercise of
          such options), in each case, which are acquired by the Company or any
          of its Subsidiaries as a result of such Acquisition."

     (e) a new Section 6.13 shall be added as follows:

               "6.13 IKOS Acquisition. The Company shall diligently cause IKOS
                     ----------------
          to become a Wholly-Owned Subsidiary on, or within a reasonable period
          of time after, the IKOS Acquisition Date."

     (f) Subsection 7.01(p) of the Credit Agreement is hereby amended to delete
the word "and" at the end of such subsection.

     (g) Subsection 7.01(q) of the Credit Agreement is hereby amended to delete
the period at the end of such subsection and insert therefor "and".

     (h) a new Subsection 7.01(r) shall be added as follows:

               "(r) Liens on IKOS Margin Stock."

     (i) Subsection 7.02(g) of the Credit Agreement is hereby amended to delete
the word "and" at the end of such subsection.

     (j) Subsection 7.02(h) of the Credit Agreement is hereby amended to delete
the period at the end of such subsection and insert therefor "and".

     (k) a new Subsection 7.02(i) shall be added as follows:

               "(i) the sale of IKOS Margin Stock for fair market value (as
          determined in good faith at the time of such sale by the board of
          directors of the Company or the applicable Subsidiary, as the case may
          be)."

                                       2.

<PAGE>

     (l) Subsection 7.03(a) of the Credit Agreement is amended and restated in
its entirety as follows:

               "(a) any Subsidiary may merge with the Company (provided that the
                                                               --------
          Company shall be the continuing or surviving corporation) or with any
          one or more Subsidiaries (provided that, if any transaction shall be
                                    --------
          between a Subsidiary and a Wholly-Owned Subsidiary, the continuing or
          surviving corporation shall be a Wholly-Owned Subsidiary);"

     (m) Subsection 7.03(c) of the Credit Agreement is amended and restated in
its entirety as follows:

               "(c) the Company or any Subsidiary may merge with any Person in
          an Acquisition so long as (i) either (A) the surviving entity is the
          Company or such Subsidiary; provided that in any such merger involving
                                      --------
          the Company, the Company shall be the surviving entity; (B) if the
          merger involves a Subsidiary being absorbed into the target Person,
          such target Person shall become a Wholly-Owned Subsidiary of Company
          upon the consummation of the Acquisition; or (C) such merger is
          otherwise permitted pursuant to clause (a) above, (ii) such
          Acquisition is otherwise permitted hereunder and (iii) immediately
          before and after giving effect to such merger no Default or Event of
          Default shall exist; and"

     (n) Subsection 7.04(d) of the Credit Agreement is amended and restated in
its entirety as follows:

               "(d) Investments incurred in order to consummate Acquisitions
          otherwise permitted herein, provided that (i) the Net Cash
                                      --------
          Consideration given for any such Acquisition, together with the Net
          Cash Consideration given for all prior Acquisitions undertaken by the
          Company and its Subsidiaries shall not exceed (A) $175,000,000 in
          fiscal 2002, and (B) $50,000,000 per annum in any other fiscal year,
          (ii) such Acquisitions are undertaken in accordance with all
          applicable Requirements of Law, and (iii) the prior, effective written
          consent or approval to such Acquisition of the board of directors or
          equivalent governing body of the acquiree is obtained;"

     (o) Subsection 7.07(a) of the Credit Agreement is amended and restated in
its entirety as follows:

               "(a) The Company shall not, and shall not suffer or permit any
          Subsidiary to, use any portion of the Loan proceeds, directly or
          indirectly, otherwise than in connection with the purchase of shares
          of its own stock for retirement, (i) to purchase or carry Margin
          Stock, (ii) to repay or otherwise refinance indebtedness of the
          Company or others incurred to purchase or carry Margin Stock, (iii) to
          extend credit for the purpose of purchasing or carrying any Margin
          Stock, in the case of each of the preceding clauses (i) (ii) and
          (iii), in violation of Regulation T, U or X of

                                       3.

<PAGE>

          the FRB, or (iv) to acquire any security (other than IKOS Margin
          Stock) in any transaction that is subject to Section 13(d) or 14(d) of
          the Exchange Act."

     (p) Subsection 7.10(c) of the Credit Agreement is amended by adding a new
sentence at the end of such subsection as follows:

               "Notwithstanding anything to the contrary in this subsection
          7.10(c), the Company may not at any time purchase, redeem or acquire
          shares of its capital stock or warrants or options to acquire any such
          shares unless the Company delivers a duly completed Compliance
          Certificate pursuant to subsection 6.02(a) demonstrating all of the
          following: (A) an adjusted quick ratio under subsection 7.14(a) of not
          less than 1.10 to 1.00; (B) a Leverage Ratio under subsection 7.14(c)
          of not more than 1.10 to 1.00; and (C) a ratio of cash and accounts
          receivable to Loans under subsection 7.14(d) of not less than 1.25 to
          1.00, in each case, measured as of the last day of the fiscal quarter
          most recently ended prior to such purchase, redemption or
          acquisition."

     (q) Subsection 7.14(a) of the Credit Agreement is amended and restated in
its entirety as follows:

               "(a) Adjusted Quick Ratio. The Company shall not as of the end of
                    --------------------
          any fiscal quarter suffer or permit its ratio (determined in respect
          of the Company and its Subsidiaries on a consolidated basis) of (i)
          cash plus the value (valued in accordance with GAAP) of all Cash
               ----
          Equivalents plus net current accounts receivable (valued in accordance
                      ----
          with GAAP), other than cash, Cash Equivalents and net current accounts
          receivable subject to a Lien securing Indebtedness, to (ii)
          Consolidated Current Liabilities (other than liabilities secured by a
          Lien on cash, Cash Equivalents or net current accounts receivable), to
          be less than (A) 0.75 to 1.00 for the first fiscal quarter ending on
          or after the IKOS Acquisition Date, (B) 0.85 to 1.00 for the second
          fiscal quarter ending after the IKOS Acquisition Date, (C) 0.90 to
          1.00 for the third fiscal quarter ending after the IKOS Acquisition
          Date, (D) 0.95 to 1.00 for the fourth fiscal quarter ending after the
          IKOS Acquisition Date, (E) 1.05 to 1.00 for the fifth fiscal quarter
          ending after the IKOS Acquisition Date, and (F) 1.10 to 1.00 for the
          sixth fiscal quarter ending after the IKOS Acquisition Date, and for
          each fiscal quarter ending thereafter."

     (r) Subsection 7.14(c) is amended and restated in its entirety as follows:

               "(c) Leverage Ratio. The Company shall not as of the end of any
                    --------------
          fiscal quarter suffer or permit its Leverage Ratio to be greater than
          (i) 2.25 to 1.00 for the first fiscal quarter ending on or after the
          IKOS Acquisition Date, (ii) 2.00 to 1.00 for the second fiscal quarter
          ending after the IKOS Acquisition Date, (iii) 1.75 to 1.00 for the
          third fiscal quarter ending after the IKOS Acquisition Date,

                                       4.

<PAGE>

          (iv) 1.50 to 1.00 for the fourth fiscal quarter ending after the IKOS
          Acquisition Date, (v) 1.25 to 1.00 for the fifth fiscal quarter ending
          after the IKOS Acquisition Date, and (vi) 1.10 to 1.00 for the sixth
          fiscal quarter ending after the IKOS Acquisition Date, and for each
          fiscal quarter ending thereafter."

     (s) Subsection 7.14(d) is amended and restated in its entirety as follows:

               "(d) Minimum Cash and Accounts Receivable. The Company shall not
                    ------------------------------------
          as of the end of any fiscal quarter suffer or permit its ratio
          (determined on a consolidated basis) of (i) cash plus the value
          (valued in accordance with GAAP) of all Cash Equivalents plus 75% of
          net current accounts receivable (valued in accordance with GAAP) owing
          by account obligors located in the United States, other than cash,
          Cash Equivalents and net current accounts receivable subject to a Lien
          securing Indebtedness, to (ii) the then outstanding principal amount
          of the Loans, to be less than (A) 1.10 to 1.00 for each of the first
          and second fiscal quarters ending on or after the IKOS Acquisition
          Date, and (B) 1.25 to 1.00 for the third fiscal quarter ending after
          the IKOS Acquisition Date, and for each fiscal quarter ending
          thereafter."

3. Representations and Warranties. The Company hereby represents and warrants to
   ------------------------------
the Agent and the Banks as follows:

     (a) No Default or Event of Default has occurred and is continuing (or would
result from the amendment of the Credit Agreement contemplated hereby).

     (b) The execution, delivery and performance by the Company of this
Amendment and the Credit Agreement (as amended by this Amendment) have been duly
authorized by all necessary corporate action and do not and will not require any
registration with, consent or approval of, or notice to or action by, any
Governmental Authority in order to be effective and enforceable.

     (c) This Amendment and the Credit Agreement (as amended by this Amendment)
constitute the legal, valid and binding obligations of the Company, enforceable
against it in accordance with their respective terms, except as enforceability
may be limited by applicable bankruptcy, insolvency or similar laws affecting
the enforcement of creditors' rights generally or by equitable principles
relating to enforceability.

     (d) All representations and warranties of the Company contained in the
Credit Agreement are true and correct in all material respects (except to the
extent such representations and warranties expressly refer to an earlier date,
in which case they shall be true and correct in all material respects as of such
earlier date and except that this subsection (d) shall be deemed instead to
refer to the last day of the most recent quarter and year for which financial
statements have then been delivered in respect of the representation and
warranty made in subsections 5.11(a) and 5.11(b) of the Credit Agreement).

                                       5.

<PAGE>

     (e) The Company is entering into this Amendment on the basis of its own
investigation and for its own reasons, without reliance upon the Agent and the
Banks or any other Person.

4.   Conditions of Effectiveness.
     ---------------------------

     (a) The effectiveness of this Amendment shall be subject to the
satisfaction of each of the following conditions precedent:

          (1) The Agent shall have received from the Company and the Majority
Banks a duly executed original (or, if elected by the Agent, an executed
facsimile copy) of this Amendment.

          (2) The Agent shall have received evidence of payment by the Company
of all fees, costs and expenses arising under or referenced in Section 5 or
Section 6(g) (to the extent invoiced) of this Amendment.

          (3) The representations and warranties in Section 3 of this Amendment
shall be true and correct in all material respects on and as of the Effective
Date with the same effect as if made on and as of the Effective Date (except to
the extent such representations and warranties expressly refer to an earlier
date, in which case they shall be true and correct in all material respects as
of such earlier date).

          (4) The Agent and each of the Majority Banks shall have received
evidence reasonably satisfactory to it that (i) by no later than September 14,
2002, the IKOS Acquisition Date shall have occurred; (ii) there are no legal
prohibitions to the consummation of a merger between the Company or a
Wholly-Owned Subsidiary of the Company and IKOS (with the Company or such
Wholly-Owned Subsidiary being the surviving corporation or IKOS surviving as a
Wholly-Owned Subsidiary of the Company); and (iii) all approvals of any
Governmental Authority and of any other Person necessary in connection with the
Acquisition of IKOS have been obtained by the Company and are in full force and
effect and all applicable waiting periods have expired without any notice of any
action being taken or threatened by any Governmental Authority which would
restrain, prevent or otherwise impose material adverse conditions on the
Acquisition of IKOS by the Company.

          (5) The Agent shall have received a certificate signed by a
Responsible Officer, dated as of the Effective Date, certifying after due
inquiry that the conditions set forth in clauses (i), (ii) and (iii) of the
preceding Section 4(a)(4) are satisfied.

          (6) For purposes of determining compliance with the conditions
specified in this Section 4(a), each Bank that has executed this Amendment shall
be deemed to have consented to, approved or accepted, or to be satisfied with,
each document or other matter either sent, or made available for inspection, by
the Agent to such Bank for consent, approval, acceptance or satisfaction, or
required thereunder to be consented to or approved by or acceptable or
satisfactory to such Bank.

                                       6.

<PAGE>

     (b) From and after the Effective Date, the Credit Agreement is amended as
set forth herein. Except as expressly amended pursuant hereto, the Credit
Agreement shall remain unchanged and in full force and effect and is hereby
ratified and confirmed in all respects.

     (c) The Agent will notify the Company and the Banks of the occurrence of
the Effective Date.

5. Fees. Upon execution by the Agent and the Majority Banks of this Amendment,
   ----
the Company shall immediately pay to the Agent for the benefit of each such
consenting Bank, a non-refundable amendment fee equal to 15 bps multiplied by
the Commitment of such Bank then in effect on such execution date.

6.   Miscellaneous.
     -------------

     (a) The Company acknowledges and agrees that the execution and delivery by
the Agent and the Banks of this Amendment shall not be deemed to create a course
of dealing or an obligation to execute similar waivers or amendments under the
same or similar circumstances in the future.

     (b) This Amendment shall be binding upon and inure to the benefit of the
Company, the Agent and the Banks and their respective successors and assigns.

     (c) This Amendment shall be governed by and construed in accordance with
the law of the State of California, provided that the Agent and the Banks shall
                                    --------
retain all rights arising under Federal law.

     (d) This Amendment may be executed in any number of counterparts, each of
which shall be deemed an original, but all such counterparts together shall
constitute but one and the same instrument. Each of the parties hereto
understands and agrees that this document (and any other document required
herein) may be delivered by any party thereto either in the form of an executed
original or an executed original sent by facsimile transmission to be followed
promptly by mailing of a hard copy original, and that receipt by the Agent of a
facsimile transmitted document purportedly bearing the signature of a Bank or
the Company shall bind such Bank or the Company, respectively, with the same
force and effect as the delivery of a hard copy original. Any failure by the
Agent to receive the hard copy executed original of such document shall not
diminish the binding effect of receipt of the facsimile transmitted executed
original of such document of the party whose hard copy page was not received by
the Agent.

     (e) This Amendment contains the entire and exclusive agreement of the
parties hereto with reference to the matters discussed herein. This Amendment
supersedes all prior drafts and communications with respect hereto or thereto.
This Amendment may not be amended except in accordance with the provisions of
Section 10.01 of the Credit Agreement.

     (f) If any term or provision of this Amendment shall be deemed prohibited
by or invalid under any applicable law, such provision shall be invalidated
without affecting the remaining provisions of this Amendment, the Credit
Agreement or the Loan Documents.

                                       7.

<PAGE>

     (g) The Company agrees to pay or reimburse BofA (including in its capacity
as Agent), upon demand, for all reasonable costs and expenses (including
reasonable Attorney Costs) incurred by BofA (including in its capacity as Agent)
in connection with the development, preparation, negotiation, execution and
delivery of this Amendment.

                                       8.

<PAGE>

          IN WITNESS WHEREOF, the parties hereto have caused this First
Amendment to be duly executed and delivered by their proper and duly authorized
officers as of the day and year first above written.

                                      MENTOR GRAPHICS CORPORATION

                                      By:    /s/ Dean Freed
                                             -----------------------------------
                                      Name:  Dean Freed
                                      Title: Vice President, Secretary & General
                                             Counsel

                                      By:    /s/ Dennis Weldon
                                             -----------------------------------
                                      Name:  Dennis Weldon
                                      Title: Treasurer

                                      BANK OF AMERICA, N.A., as Agent and as a
                                      Bank

                                      By:    /s/ Kevin M. McMahon
                                             -----------------------------------
                                      Name:  Kevin M. McMahon
                                      Title: Managing Director

                                      BNP PARIBAS

                                      By:
                                      Name:
                                      Title:

                                      By:
                                      Name:
                                      Title:

                                      FLEET NATIONAL BANK, N.A.

                                      By:    /s/ John B. Desmond
                                             -----------------------------------
                                      Name:  John B. Desmond
                                      Title: Director

<PAGE>

                                      THE BANK OF NOVA SCOTIA

                                      By:    /s/ Daryl K. Hogge
                                             -----------------------------------
                                      Name:  Daryl K. Hogge
                                      Title: Director

                                      THE FUJI BANK, LIMITED

                                      By:    /s/ Masahito Fukuda
                                             -----------------------------------
                                      Name:  Masahito Fukuda
                                      Title: Senior Vice President

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