Good morning and welcome to today's conference call. Copies of the Lattice Semiconductor first quarter ending April 1, 2006, earnings press release maybe obtained from the company's website which is www.lscc.com. This call is being recorded and broadcast live over the internet by CCBN. A live broadcast and replay of the call will be available on the Lattice investor relations website, www.lscc.com. At this time, I'd like to turn the call over to the Chief Financial Officer, Jan Johannessen. Please go ahead sir.

Thank you and good morning everyone. Joining me on the call today is Steve Skaggs, our President and CEO. Before we begin, I'd like the read a Safe Harbor statement and then give you a financial review of the first quarter. Then Steve will provide a business review followed by our second quarter outlook. We will then hold a question-and-answer session. I will now read the Safe Harbor statement. This conference call may contain forward-looking statements within the meaning of the federal securities laws including statements about future quarterly financial results, revenues, gross margins, customers, product offerings and the company's ability to compete. Estimates of future revenue are inherently uncertain due to the high percentage of quarterly turns business. In addition, the revenues affected by such factors as pricing pressures, competitive actions, the demand for our products and the ability to supply products to customers in a timely manner. The potential impact of defining activity on future revenue is inherently uncertain. Actual gross margin percentage and operating expenses could vary from the estimates contained herein. In addition to the foregoing, other factors may cause actual results to differ materially from our forward-looking statements include the Securities & Exchange Commission's informal inquiry and resulting actions, our ability to successfully complete the settlement of our pending class action litigation, the company's dependency on the silicon wafer suppliers, technological and product development risks and other risks that are described from time to time in our filings with the SEC. The company does not intend to update or revise any forward-looking statements. Let me turn to the financial review. We had an excellent start to 2006 and recorded a quarterly profit on a pro forma basis, and a GAAP loss of a mere $807,000. The revenue for the first quarter was $57.5 million, up…

Thanks, Jan, and good morning as well to everyone. Last quarter, we posted sequential revenue growth for the fifth consecutive quarter and accelerating sequential revenue growth from the prior quarter. Three factors really drove this growth in order of magnitudes, positive industry conditions, new product growth and realization of higher margins on distributor resale resulting from the improvements in our information systems that Jan mentioned. Geographically during the quarter the Americas made up 30% of revenue, Europe 27%, and Asia 43%. North America grew 15% sequentially and Europe grew 23% sequentially while Asia declined 6%. Revenue by end market for the quarter was as follows: communications 50% of revenue, computing 18%, and other 32%. All end market segments grew last quarter led by the communications segment. Distribution represented 40% of revenue last quarter while the direct channel accounted for 60% of our revenue. Distribution revenue grew 22% sequentially driven by strong distributor resale growth which accounted for approximately two-thirds of total revenue growth from those channels. Additionally, as I've already mentioned, we also benefited from the realization of higher margins on this resale which accounted for the remainder of the growth in this channel. During the first quarter, FPGA product revenue was $10.8 million or 19% of revenue and grew 9% sequentially. This level of growth marks one of our best quarterly performance in our short history of an FPGA supplier. Looking forward we expect continued strong growth in this product segment and notably I anticipate record FPGA revenues during the second quarter. PLD product revenue accounted for $46.7 million or 81% of revenue and grew 6% sequentially. PLD product revenue benefited from favorable market conditions and growth of both our MACH 4000, 4000Z and ispPAC Power and Clock mixed signal products. Beginning this quarter as you can see in…

Thanks. Steve, in terms of some of the FPGA growth you're seeing and the record growth you're expecting for Q2, can you talk about what types of customers and products are driving that growth and are they legacy customers, new customers, what's the mix, et cetera?

It's -- it's really consistent with the overall end market reach of our business, Ruben, so we're seeing broad based growth in the business, particularly driven by the newer products. I also expect a strong quarter in our FPSC products which are -- are not as new as the ECP and XP products but tend to have reasonably extended design cycles. So, we -- we do continue to make some progress in that and I think that bodes well for the -- the future introduction and release of the SC products. So, the -- the growth we're expecting in the FPGA business I would characterize as relatively broad based and driven by our -- our newer products which we've made large investments in and those are -- are now dragging into -- to volume production.

Okay. And you also mentioned in terms of the new 90-nanometer products that you did secure your first design wins and you expect some revenues to come in later this year. Is that late like Q4 time frame or second half and how material can that be? Can that start to look like a million or so dollars later on this year or how does that work?

We have shipped samples. We have secured a modest number of design wins. It's very early in the introduction of those products. We're actively selling those. So -- so there will be some revenue this year that will be immaterial, and I did mention that we expect a normal time lag from design to volume production which tends to be upwards of 18 months and therefore I don't expect any material revenue from these products until the first half of 2007. So, really this year will be driven by -- by the growth that's predicated upon the design activity that we talked about in our 130-nanometer products. Those will be moving into volume production this calendar year.

Okay. And you did mention in your press release that you do -- you're planning a cost reduction path called freedom chip. Can you comment at all on that? Is that a structured ASIC that you're working with Fujitsu on or -- or any -- any further color on that?

I can comment a little. We -- we haven't formally announced the capability and we'd expect to do that later. But I will say that customers expect some form of cost reduction path for high density FPGAs, particularly those that cost hundreds of dollars. And so we -- we intend to provide an easy, relatively seamless path that will allow our customers to achieve significant cost reduction by migrating to a pin compatible device with an ASIC level of test coverage. Really that -- that's all I'm willing to say at this point because we haven't formally announced the capability and rolled it out. So we do intend to provide a migration path for -- for our customers who adopt our -- our higher end 90-nanometer technology.

Okay. And then I just have one for Jan and then I'll get off. With regard to your inventory, Jan, in the channel, is there any risk with regards to rose compliance and the mix of non-lead free products out there?

No, I don't think so.

All right. Thanks, guys.

We'll go next to Chris Danely of JP Morgan.

Thanks, guys. Nice job on -- on starting to turn things around. Hey, Steve, could you just talk about the -- the longer-term business models say over the next year, year-and-a-half to two years. Where you expect your -- your gross margins to go, what will be the drivers there and also what's the -- what do you think does the -- does the OpEx do particularly on the R&D side, do you intend to hold the R&D flat or do you have to start taking it up a little bit?

Sure. Chris, I mean with the restructuring one of the lower operating costs while also improving our operating efficiency, but we didn't want to sacrifice the future. So, we are looking at 2006 as a transition year. We still believe it's prudent to continue our heavy investment in R&D to push forward into the FPGA markets. It's a difficult balance to achieve but I'm -- I'm optimistic about doing so and we're off to a -- to a good start. With regard to a business model longer term, which again we would view 2006 as a transition year to migrate towards that. We feel that gross margin, and I've said this many times, that 55% to 60% is a good target to operate in. We do price our new products for penetration. We expect with EOs and wafer price projections to earn corporate margin targets on those new products. Margin can increase with -- with scale or revenue growth because there's a certain amount of -- of -- of cost of sales that is fixed and we did see that as we grow more rapidly than -- than perhaps our forecast or we accelerate the rate of sequential growth there is some margin benefit, but essentially we're comfortable operating within that range. So that's gross margin. R&D, we're looking to migrate down to a 25% to 30% range, and we would do that by holding R&D relatively flat through -- through the current year. We feel that we have reasonable head count to execute on our product plans. I've said many times that R&D will fluctuate depending on the exact mask and wafer expenses to support new product launches during the quarter. So, there will be some fluctuations in R&D, but it will be at that kind of level. And again if revenue grows, as is our intention, the R&D percentage as a percent of revenue would -- would trend down towards that business model. SG&A would be kind of at a 17% to 20% level, and there is operating leverage in SG&A as the revenue grows, so that's -- that's kind of the business model we're working towards as we exit 2006.

So -- so on the R&D you expect it to -- to trend up slowly in terms of an absolute dollar basis but less than sales?

Correct. Much less than sales.

Okay. Great. And then can you just comment on -- on how much the backlog was up or what the book-to-bill was and the turns percentage is?

Yeah -- we're not in the habit of disclosing those specifically. But I -- book-to-bill was -- was over 1. Backlog was up double digits. And the turns last quarter were 53% in order to achieve the guidance that I gave, the turns don't need to be as high as 53%. They need to be kind of in the low to mid 40 range.

Great. Thanks, guys.

We'll go next to Mark Edelstone of Morgan Stanley.

Good morning, guys. Nice job. A couple of questions I guess. First off, Steve or Jan, can you just kind of walk through the change that you had in distribution and I guess what sort of the driver behind it and then going forward, would you expect the inventory and the reserves that you take there to be effectively growing in line with the -- with the revenues that go through the channel?

Which change in distribution are you talking about?

Just the -- Jan had basically walked through the charge that you took to -- sounded like changing the way you were basically handling inventory going through the channel.

No, really what we implemented what's, what is what's called a phantom inventory program. We believe that our larger competitors operate on this basis with our distributors, and we believe it's an important program to have in place to work effectively with our distributors, particularly in the FPGA market, to have them support the design of our products in the broader marketplace. What a phantom inventory program is, is as you know, and I think other people on the call know, when semiconductor suppliers sells its product to the distribution channel, you typically sell it at a reasonably high list price. Then when the distributor resells the products, you provide a credit to sell those parts at a, at a negotiated margin, which is typically allows the distributors to sell it at a lower price than the list price. So, really without a phantom inventory program the distributor pays a very high list price for the products and ends up carrying a lot of the financing burden on the inventory they carry. So, what a phantom inventory program does is it really gives the -- the credit for, for those price adjustments in advance and places the financing burden of the inventory back onto the manufacturer. We have historically not had that type of program. We've implemented that type of program now in order to implement that that required the $5.9 million essentially credit to be implemented in the balance sheet as go beyond I spoke about. So I don't know if that fully answers your questions, but that's what we have.

That's perfect. Thanks a lot, Steve. I guess on the guidance you've got here for Q2 on the comments that the turns necessary to reach the guidance would be down 5 to 10 points or so, just given the environment, given what should be a recovery in Asia since we won't have lunar new year to contend with, is there a reason why you would expect that turns percentage to come down, is there something else going on in terms of just operations or constraints or something that would prevent you from having a similar type of turns outlook for the quarter?

You know, nothing that I would point to uniquely. There were a number of pull-ins by customers expediting their business last quarter. We were getting in a better position operationally to accommodate that. And to have the same number of turns this quarter as last quarter we would basically assume that the same kind of thing's going to happen this quarter. It remains to be seen, but it's possible to turn business at a higher rate than, than the low 40's.

Okay. Just two other very quick questions. One, Jan, you had said you had given some tax guidance I think you said 200,000 to 250,000 of incremental expense. Was that per quarter or is that for just the full year tax burden? And then lastly, is your, are you having the payments to Fujitsu both here still expected in Q2 and Q3?

Okay, on the tax side, we expect this is for foreign taxes, about $200,000 to $225,000 per quarter for the rest of this year in foreign taxes. So that's the taxes we would show. On the Fujitsu payments, currently we expect those payments to happen in Q3 and Q4. Two payments of 75, $37.5 million each. That's the current expectation.

Great. Thanks a lot, guys.

We'll go next to David Duley of Merriman.

Morning, it's actually Jennifer West for Dave. Can you just talk about it looked like your mature products were up in the March quarter. Can you talk about what was driving that and do you expect growth in from those products to continue?

The mature products were up in the quarter. They were up due to what I would classify as general positive trends in the marketplace. So, we saw good consumption of some of the older products that are in volume production and many customers as those customers ship more end systems and there's really not a lot of inventory left in the supply chain, so that benefited the mature products. We also had a slight rebound in the ORCA product lines which -- one of which is classified as mature and we now change the other one to be classified as mature. It's really coming out of a very negative quarter in those product lines in Q4, so that was a modest rebound. Going forward, I would not expect and I do not plan to have a continued strong performance in mature products. They are on the secular decline. That's why they're mature products, and really that's why I answered the last question the way I did because I don't think one can anticipate continued growth out of the mature segment of the business.

All right. And then can you talk about maybe your expectations by end market going forward? Is communication supposed to continue driving or strength across all three?

Sure. If you look last quarter, we had the strongest growth in the communication segments, generally the strength was very broad based. However, we did see relative strength in the wire line segment, both from domestic and European suppliers. We also had a strong quarter in the satellite and set top box segments which we classify as communications. I think some of our competitors put that in the consumer segment. But that was also a bright spot. We are going forward I do see continued growth in the communication segment, and really I think we've talked about it before, but that end market is probably the healthiest it's been since prior to the bubble bursting. Last quarter computing grew slightly with no notable trends. Going forward we believe that the server segment can be a source of growth for us. And the other markets last quarter consumer was seasonally weak, and also due to the absence of two programs I discussed last quarter I forecasted those would be down, and they were. That was in LCD, TV and MP3 player that were large designs for us that were going away. Those all drove the consumer market down. I expect other programs over time to drive growth in the consumer segments because it's a secular growth area for us. All other markets last quarter were very strong in the other segments, particularly the industrial, military and automotive segments. I can see those as growing going forward, so just to summarize kind of driving the growth forward communication, computing in the server area, a rebound in the consumer market and kind of continued secular growth in the other markets, so again reasonably broad based growth in the business, at least for the limited part of the future that I can see.

Great. Thank you.

Sure.

We'll go next to Gary Mobley of AG Edwards.

Good morning. Congrats on good execution and a good quarter. Last quarter you mentioned that you were ending the life of several products, and just wondering what the benefit from lifetime programs may have been in the quarter, and was that the primary reason why ORCA rebounded sharply in the -- in Q1?

We did announce that. We provided a very long period for last time orders, 12 months, and then another period for last time deliveries, so there is no benefits I believe in the current quarter because we haven't even reached the end of the period of last-time orders. So there's really no incentive for customers to hold those on their shelf at this point. So there was limited, I would suggest, benefit from the last time buy program. So it didn't really drive the mature product growth. I attribute that to -- to sort of just general market trends and a lack of inventory of those products in the supply chain.

Gotcha. And then the first quarter products from the 130-nanometer new products, about a million and a half, was that primarily XP?

I'm not going to break it down by products. It is really the ECP, the XP and the XO altogether, they're all products which I believe are ultimately going to be very successful for us.

Okay. And I know you guys don't recognize revenue through other distribution channel but that's only 40% of the mix. Are you concerned at all about maybe some end customers building inventory levels at abnormally high levels and just wanted to get your opinion there on that?

I think it's always a concern when the market grows at a healthy rate particularly as customers are scrambling to expedite and to make their own quarter and products are in a short supply. One of the ways we really try to control that is to ensure our lead times are within the realm of the requirements for customers. If you look last quarter going into the quarter, some of our products the lead times have stretched out to kind of four to eight weeks primarily because there were a lot of constraints in the back end of the -- of our supply chain, particularly in the assembly houses and particularly with getting substrate availability for higher end packages. We work diligently to kind of manage those, and we've built some extra inventory in finished goods to try to alleviate some of those problems. We've also in certain cases tried to build buffer inventory for some of our higher volume product lines. But net, net most of our lead times have now come down to the range where we would like to be which is kind of in the two to four week area. So really if lead times can be in the two to four weeks area, there's not a lot of incentive for customers to build inventory and -- and double order. So, I won't discount that that some of that goes on when the industry heats up, but -- but really the thing we try to do to manage that is to keep our lead times in a reasonable sense and we've made big strides in the last quarter to -- to move to that level.

Okay. All right. Thank you. Very helpful.

Sure.

We'll go next to Bill Dezellem of Tieton Capital.

Thank you. We had a couple of questions. First of all, relative to the newer products achieving the gross margins that would actually help raise the overall corporate gross margins what's the time frame that you would anticipate when that begins to happen? And then the second question circling back to the turns, historically what is a normal level of turns that the company had experienced?

Sure. New products really from the time of first sample shipments I'm thinking of kind of a three-year time frame, to get then into full volume production and to shake out yields that wafer costs down to our projected levels, so I think it's a relatively long-term process still, so three years is the time frame I would put on that.

And Steve, would you say that we are a year-and-a-half into that process right now with many of the products?

The ECP came out earlier than the XP and the XO. So on average -- well the ECP came out really at the -- the last part of 2004, so that's five quarters into -- to that process. ECP and XO came out kind of in mid 2005, so they're a bit earlier. I don't know if a year-and-a-half is probably longer, I'd say maybe a year on average. With regard to your question on turns, it's really a wide range. But the company historically has operated in a range between say 30% and 70% turns in its history, so it's a large fluctuation, and that's the nature of the business of the operator.

Thank you.

Sure.

We'll go next to Aalok Shah of D.A. Davidson. And Mr. Shah, your line is open.

Hi, Steve. A couple of quick questions. If you can talk about the communications business a little bit more, I mean kind of specifically kind of cite where you're seeing the strength in that business is it wireless, wireline and -- and maybe give us a little bit of color on that? And then I have a follow-up for Jan.

Sure. I did mention that in the other question but I'll do it again. We saw broad based growth in the communication market that's consistent with the thesis that that market is relatively healthy and for the first time since I think the beginning of the decade. Notable were the strength in the wireline segments from both domestic and European suppliers. We also saw strength in the satellite and set-top box segment which we classify in the communication arena. So, those were kind of the bright spots that I would point out, but I would emphasize that the growth was generally broad based.

And, Steve, we look -- if I delve a little bit more into -- in to the set top box area, how much of your -- I mean, is there a way to quantify how much revenues you're doing in the consumer area today?

We -- no. And -- and it's difficult for us to do that, and we don't do that.

Okay. And Jan, just --you might have already talked about this as well, but in terms of your deferred income to -- to -- to sales to distributors, went down about what 2.8 million roughly sequentially. Is there a level that we should be considering on that going forward? Is this a healthy level in terms of sell -- in terms of -- in terms of that line?

Well, the -- we instituted the phantom inventory program that we talked about earlier. The -- the inventory at distributors increased and we expect depending on the inventory level going forward at distributors that the deferred income level will -- will go up in --in line with the increase in our business. So -- so we expect some increases there.

Okay. Great. Thank you.

Steve, Jan, nice quarter. I'm curious about the -- and I know you didn't really want to talk about this as much, but I'm curious about the 130-nanometer design -- design win activity in the quarter and also maybe contrasted against the 90-nanometer products.

Yeah, the -- the 130-nanometer design, Peter, went up and are now well over 1,000. And again, I'm going to start talking a lot more about hopefully revenue from those products as opposed to designs. We feel that's a very healthy level of design activity across the board. I prefer to focus more on the quality of designs than just the sheer magnitude but really those designs are coming from a broad base of customers. A very healthy mix of repeats and -- and new customers, and we feel that the design activity is -- is good. The 90-nanometer designs, you know, we just started sampling the products and since we -- we -- we report the designs based upon a customer actually doing a prototype board is really no -- no -- no large numbers to talk about at this point.

When would you expect to see that start to be a number you could talk about in the 90-nanometer area?

I think we'll see more designs every quarter and it's just depending upon rolling out the product which we're doing, we have one member of each product family sampling today and over time we'll have more.

All right. And then Jan, are you going to tailor or cut back the -- the -- the debt buyback as you put more money to Fujitsu?

We're looking at that on a quarterly basis. We have opportunistically in the past bought back -- bought back the convertible notes. Because it's been a -- we've bought back the notes at the -- at the large discounts, and it was $200 million a couple of years ago and now we have $123.5 million less. We're looking at this on a quarterly basis, and depending on our cash flow and situation, we may or may not back -- or buy back any more. So, that's really all I can say.

Okay. I like that -- that process. Well, thank you, guys.

Thanks.

We'll go next to Robert Toomey of EK Riley Advisors.

Hi. Good morning. A question pertaining to -- I guess, Steve, can you -- can you talk a little bit about is there any customer reaction to the new 90-nanometer products yet? I mean, I know it's still very early, but are you getting any feedback on that?

It's been good. The ECP2 family really continues and extends the thrust we've started with ECP1, so there's -- there's two basic customers that those products potentially can go to. One is -- is those customers who adopted ECP1, I'll talk about that first. It is very easy sell there. We're doubling the density, enhancing the performance, substantially offering additional features, many of which have been asked for by customers, and halving the costs. So that's kind of a no-brainer to somebody who has already adopted your architecture. It's important to them to have a continuing road map going forward, so that's the -- the first class of customers. Obviously the other interesting class of customers is those that we haven't yet done business with this class of products, and I think the reception there is -- is -- is favorable. We're now competing on an apples to apples basis with our competition at 90-nanometer technology and thus we can offer a product that has a -- a compatible consistent density range, con -- consistent features, in some cases actually better performance, and many more architectural features, so that -- that's kind of the thrust of that product and the reception is -- is favorable and -- and continues the theme we started with. With the SC product we have a lot more differentiating features that I believe customers view in an innovative manner, and that product allows us to engage deeper with customers particularly major customers particularly with architects of systems. There are some very compelling things in that product that can't be had from the alternative products. 2 gigabit I/O, it's nearly twice as fast as competing products. That's useful for people implementing chip to chip interfaces, particularly tying to other components that are high performance, low power…

Thank you. Other question I had, Steve, was you mentioned wafer costs. Any material or wafer costs or supply chain issues that could potentially pressure your -- your cost at all right now?

There are, and we've talked about it, constraints in the back end in the assembly arena both on capacity, particularly in terms of substrates, which are a key component of advanced packaging technology. That's more of a -- of an issue with -- with regard to lead time and product availability in order to ensure that we have full product availability to meet our customer's ordering requirements unless they're a cost issue. That's the only issue I would point out.

Do -- do you see that as a constraint for you at this point?

It's a -- it's a -- it's more of a nuisance than -- than I would say is a constraint. We've taken steps to alleviate the constraints. We've tried to build more finished goods inventory particularly of our most product -- popular products. We're -- we're working with the assembly suppliers to shorten lead times. We're -- we're also qualifying additional -- an addition supplier in order to provide more flexibility. So, I don't anticipate it to be a problem, but you ask the question what are the constraints, that's a constraint.

Okay. And the last question –

I don't really see anything.

Okay. And the last question I had was you mentioned a couple of times earlier that you feel that communications is back to the level of it was in a bubble or the best it's been sense the crash. Can you comment a little bit on how you see the general semiconductor demand environment right now and given decent growth in the global economy, how you see that for the rest of the year?

I think it's healthy. I think it's -- it's definitely a year that feels more normal. The programmable logic and the FPGA market in general is one that benefits from a number of very positive macro trends essentially. We as an industry can compete much more favorably against ASIC technology and clearly that provides an avenue of growth for the industry, all of the suppliers benefit from that. Secondly, as semiconductors broaden into more industries, we can benefit from that as an industry, and I think you see that in all the suppliers growth out of kind of the more of the nontraditional markets, and further there's a large trend in our industry that really impacts the first two -- two things which is providing lower costs to FPGAs and we're clearly driving that with our new products and I think that benefits by allowing customers to -- to use FPGAs more aggressively than they otherwise would have used. So, I think it's going to be a healthy year for the industry, and I think we're positioned well to take advantage of those types of trends that I talked about driving the overall growth of our market.

Great. Thank you.

Actually, guys, my follow-ups have been answered. Thanks.

And gentlemen, at this time there are no further questions in the queue.

Great. Thanks, everyone.

Bye for now.

That concludes today's conference call. We thank you for your participation. You may disconnect at this time.