Good morning and welcome to today's Conference Call. Copies of the Lattice Semiconductor Third Quarter ending September 30, 2006, earnings press release may be 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 would like to turn the call over to Chief Financial Officer, Mr. Jan Johannessen. Please go ahead.

Thank you, and good afternoon, everyone. Joining me on the call today is Steve Skaggs our President and Chief Executive Officer. Before we begin, I would like to read a Safe Harbor statement and then give a financial review of our third quarter. Then Steve will provide a business review, followed by our fourth 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, revenue, gross margins, customers, product offerings and the company's ability to compete. Estimates of future revenue are inherently uncertain due to a high percentage of quarterly turns business. In addition, the revenue is affected by such factors as pricing pressures, competitive actions, the demand for our products, and the abilities to supply products to customers in a timely manner. The potential impact of the signing activity on the future revenue is inherently uncertain, because it is unknown whether or when any particular defining may ultimately result in sales for the significant volume. Actual gross margin percentage and operating expenses could vary from estimates due to changes in revenue levels, product pricing and mix wafer assembly and test costs, manufacturing yields, stock based compensation charges and other factors. In addition to the foregoing, actual results may differ materially from our forward-looking statements due to the company's dependencies on its silicon wafer supplies, technological and product development risks and other risks that are described in our files with SEC. The company does not intend to update or revise any forward-looking statements, whether as a result of events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Now the financial review. We had good performance…

Thanks Jan. Last quarter, as Jan mentioned, we posted sequential revenue growth for the seventh consecutive quarter. This overall revenue growth was once again driven by strong new product revenue growth. We're pleased to report growth in what I suspect once all competitive results have been reported will turn out to be a down quarter for the programmable logic industry. On the whole, it was an interesting and somewhat challenging quarter, as we experienced some very dramatic changes in our business mix on a geographic end market and channel basis. Geographically, during the quarter, Asia made up 53% of revenue, the Americas 26% and Europe 21%. Asia grew 15% sequentially, while North America declined 11% and Europe declined 10%. Europe was impacted by seasonality and the decline was relatively broad based. Conversely, the North America decline is directly attributable to five major customers, four in the communications end market and one in the computing end market. About half the North America decline was due to the transfer of consumption to Asia for those specific customers I mentioned, and the other half of the North America decline is attributable to inventory rebalancing of those customers. The strong sequential growth in Asia was due to a combination of three factors. First, very strong sequential growth in the consumer end markets from Asian customers. Second, the North American transfer business I just discussed; and third, local demand increases in both, the communication and computing end markets. Revenue by end market for the quarter was as follows; communication 52% of revenue, computing 15%, and other 33% of revenue. Revenue from the communications end market grew slightly on a sequential basis. To be clear for those of you who keep track of our results on a quarter by quarter basis, I want to point out…

Thank you. Today's question-and-answer session will be conducted electronically. (Operator Instructions). Let's take our first question from Shawn Webster with J.P. Morgan. Mr. Webster, please go ahead. Your line is open.

Oh, yes, sorry. This is Shawn Webster for Chris Danely. Could you please comment a little bit more on your gross margins, what drove them down in the quarter? I understand it was mix, but maybe you could give us a better sense on the sensitivity, maybe looking into Q4 in the first half of next year on where your margins could go and how sensitive they are to the new product mix? And then I have a follow-up, please.

Well, we've said for some time now that our new products are priced for penetration. We expect with yield and wafer price cost projections to earn corporate margin targets on those products over time, which is 55 to 60%. But really, in terms of the way we think about managing our business, our new products are lower than the corporate margin target and the mature products are higher than the corporate margin target and the mainstream products tend to be at the corporate margin target. We've continued to make good progress with regard to cost reductions and are satisfied with where we are in that regard. It's very difficult for us to project mix at a very fine level, so last quarter, we had good growth in new products, but also growth in the consumer market segment and those products also tend to carry lower margin and more than anticipated shrinkage in the mature products, which tended to drive the margin down a little bit. So, that's basically the additional granularity I can give you on looking backwards.

Okay.

Looking forward, really, we believe that the margin will continue to be hard to predict, hence the wide range. We do anticipate continued cost reduction and yield improvements on our own 130 nanometer products and we also have negotiated cost reductions on our older processes that will impact positively the fourth quarter. That's something we do on a regular basis and we've made very good progress there with our cost structure on our older products. On the other hand, the consumer market is very strong and it tends to be seasonally strong in the fourth quarter, so we anticipate a big growth in revenue in the consumer market in the fourth quarter, so that's going to depress the margin some what. And additionally, we're running additional engineering and risk production wafers on our the 90 nanometer products in order to meet our aggressive release schedules and what frankly is very strong early prototyping demand for those products, like at the early stage of production, the cost structure is higher on those products and that's to be expected. So really, we expect margin to be flat, but there may be a wider variability depending on how each of those factors play out during the quarter.

Okay, thank you very much. And could you expand a little bit on what kind of end market in terms of your backlog and your guidance for Q4, give us some end market color there, please?

We don't break out -- I don't break out the backlog by the end market, but I can give some color on the end market trends that we saw last quarter and we expect to see going forward. Communications last quarter was essentially a mixed bag. Generally, the wireless segment was up, the wireline segment was stable and the data networking market was down. However, things varied quite a bit on a customer by customer basis, and I think it's very fair to say that the business trends in this end market, in the communication end market were much more customer specific than application or subsegment dependent. Going forward, I do think there is potential for some continued inventory rebounds in the communication markets, but on the whole, my view of consumption is that it's reasonably healthy and, therefore, we believe that markets will be reasonably flat for us in the fourth quarter. On the other hand, the consumer market was very strong for us in the third quarter, particularly in Asia. We saw good growth in the kind of handheld appliance, GPS, PDA, multi-function mobile phone market, and also in LCD TV applications, and we see that continuing into this quarter as a strength for the business. So, really that's the input I can give you on, kind of, end markets for the fourth quarter outlook.

Okay, thank you very much.

We'll go next to David Duley with Merriman.

Good afternoon. This is actually Jennifer West in for Dave. Can you maybe talk to or give some more color on your design win funnel -- design wins that were captured during the quarter and how the FPGA wins are tracking?

Sure. We had a good quarter with respect to new product designs, and when I speak of new product designs, we're pretty much focused on 130 nanometer and 90 nanometer product designs for our newest products. Those designs continue to grow very nicely and establish a new overall high last quarter. Overall, design-ins of those products collectively grew about 12% sequentially, but we also saw very dramatic increase in 90 nanometer designs, which are relatively small at this point, but they grew very rapidly. At this point, we have about 6,000 total design-ins for 130 nanometer products. New design-ins are spread relatively evenly across our three 130 nanometer family; the LatticeECP, the LatticeXP, the MachXO. And half those designs are coming from customers who are new to Lattice. To remind everybody that these products have not been in volume production for very long. For the ECP, our first new FPGA family to release, has been in volume production since the second quarter of '05, or about six quarters; the LatticeXP since the last quarter of '05, or about four quarters; and the MachXO three quarters. As many of you are aware, in our industry there's a reasonably long time lag between any customer design and the actual receipt of production revenue orders from that design. So, based on the relatively recent release dates for these products, we are only now starting to receive production orders, and based on history of other product families, I don't expect these new products to reach peak levels until perhaps five or six years from the volume production release. However, I know that many of you are interested in understanding better how these designs will turn into revenue over the short-term. Let me assure you, I share your interest and, therefore, I recently undertook complete review of all our existing 130 nanometer customer design-ins, all 6,000. Let me provide some key results of that review with you on this forum. At this time, only approximately 20% of our historic 130 nanometer customer designs have entered production in any form, and most of these entered production recently. About 55% of the designs are just in the prototyping phase, while the remaining 20% or so have been cancelled, and that's primarily because the customer has chosen not to go ahead with the program that the chip was designed into. I view those statistics to be actually very positive, and during our review, we also were able to formulate a detailed design driven revenue forecast, which I don't plan on sharing with you on this call. However, I will say that the bottom line is, I was pleasantly surprised by the analysis and look forward to strong future revenue growth from these product families.

So from that, you're basically from the design wins that are still active and probably going to revenue that's about 4,800?

Well, some more designs will fall out, because the 20% is just a snapshot in time. But, that's the current state and we'll continue to track that on a periodic basis, but I am confident about where the designs are in their prototyping and production phase and the revenue that we can aspire to achieve in the future from those designs will be much higher than we've been able to report at this quarter.

Okay. And have you talked to design wins -- collective design wins for your 90 nanometer products?

I haven't. This is just the second quarter of design wins. We had a handful in the -- this is the second quarter that we've been able to report design wins. We just started in the second calendar quarter. We had a handful, the design wins grew exponentially, but I don't want to start to providing design win data by product family. But they are ahead of plan and we're pleased with the design results for the 90 nanometer products.

Okay, great. And then is it possible to talk a little bit more into your backlog number? It was up sequentially, that is up single digit, double digit?

It was up low single digits, and book-to-bill was about 1 for the third quarter.

Great. Thank you.

We'll go next to Bill Dezellem with Tieton Capital Management.

Thank you. We had a couple of questions. First of all, relative to capital expenditures, they were down about 2.8 million sequentially. Would you please provide some insight as to the dynamics there? And then secondarily, Steve, you may have opened a can of worms, at least a can of interest, with your last comments relative to the revenue potential of the design win. Would you be able to provide a very broad perspective of the revenue potential of those current design wins that you're looking at and whether that be three years from now or four or five years from now as they get closer to the peak production?

Let me take your first question. So the capital expenditure, really the bulk of that is for testers for our new products and tooling for those testers for new products, in that we had a burst of that activity in the first and second quarter as we geared up for high volume production of those product families and that's behind us at this point, so we're spending less on those activities. With regard to the revenue, I really am going to resist the temptation to lay out kind of a revenue forecast for those products. I didn't want to provide more data, because I've done that review and I know it's important to people, but I would say that I do expect strong annual growth from those products through 2007. That's in the multiple range as opposed to just percentage growth, so well in excess of 1 to 200% growth in those product families for the foreseeable future on a year-over-year basis.

Great. Thank you.

We'll go next to Lawrence Borgman with Jesup and Lamont.

Thank you. Could you just tell me a little bit about how you perceive the inventory situation with the distributors and in general with the customers? There seems to be a little bit of an inventory correction going on in the industry, and maybe if you could compare your experiences with what you see throughout the PLD industry in the third quarter?

Yeah. I do think there is a bit of the inventory correction going on, particularly in the communications end market, and I eluded to that a bit upfront. Larry, distribution inventory is very healthy. Our distributors are carrying about one month of inventory, and for the most part, they very much reduced their billings and demand already, so their inventory is at a very healthy level. As you know, customer inventory is a little harder to gauge. At the beginning of Q2, our lead times and our industry's lead times stretched out a bit due to strong demand and also supply constraints, particularly in the assembly area. And during Q2, as I've talked about in our last conference call, we responded some numerous expedite requests from major communication customers. And for the most part we were able to meet those requirements and ship the requirements during Q2. By the beginning of Q3, we had brought our lead times back to normal, and really in the September timeframe, those same customers started substantially pushing out and reducing their requirements for our products. I believe reaction to the deliveries, perhaps other people were later in fulfilling their requirements than we were, because we were able to respond to the expedited request. And also, I think it's a reaction to the lead times of the industry and to a lesser extent of us. Our lead times are now for the most part -- there's always going to be a select product or two that's extended, but for the most part, our lead times are back to normal; and when I say normal, I mean four weeks or less. So, I do think that happened and I think that's really been reflected in, in some of the more subdued revenue growth numbers that people have reported in the third quarter; and again, hopefully that's worked it's way through in kind of the timeframe I described.

Thank you.

Next question?

We'll go next to Robert Toomey with E.K. Riley Advisors.

Hi, good afternoon. Steve, can I just pick up on that last comment you made. You talked about some kind of delivery push outs in September. Do you think this is a temporary situation or is there some general weakening going on in the industry right now?

I do think it's temporary, because it's focused on a very specific set of customers for us. It wasn't a global situation in the communication market. There were a handful of customers who reduced their demand and these were the same ones who were expediting me in Q2. And literally, it's three customers for us and each of those customers, we have been assured that the issues is an inventory issue, not we've been designed out or not a demand issue for their equipment. Now, obviously things can change over time, but that's the explanation from where we sit.

Okay. Any changes in the competitive situation that you could comment on? Competition?

No. We continue to be able to compete very favorably now across most customer needs. We have a full portfolio of 90 nanometer products out. I'm very happy with how we're competing with those products at those customers who evaluate our 90 nanometer products, so we've had some good competitive successes where our customers have undertaken evaluations of our technology. The key for us is driving up the number of customers who go through that type of evaluation. With the ECP2/M, I talked about that as well and that I think is going to be a very successful product line for us, so I'm feeling reasonably positive about the competitive environments and where we sit with regard to our products and how we can compete.

And as a follow-up to that, I was going to ask you just generally, you gave us some numbers about design wins, that sort of thing. Are you continuing to feel as confident as you have in the past about the ability of these new FPGA products that compete in the marketplace? I guess you just answered that, but --

Yes, I do. I think the products compete nicely. I'd love to have the revenue be ramping as fast as possible, which is why I undertook the review. I think the results of the review lead me to believe that there's a lot coming with regard to production ramps, and as I mentioned the detailed revenue forecast that I did from the bottom up basis on that is consistent with my plan of my expectations for these products. So really, it's unfortunate that the industry goes through these ups and downs, and turns and twists and we need to be nimble to react to those. But I'm not considering changing our long-term strategy or product development plan. We feel good about that and we're going to keep focusing on getting the products out and getting them designed in, because I think that's the right direction for the company.

Great. And then one last question if I might and that is; Jan mentioned operating cash flow was substantially positive in the quarter. Was it positive to about the change in cash, about 5 million did you say?

Yeah. It was 5 million was the change in cash, but we used the 9.1 million to buyback some bonds as well, so -- and we still grew to 5 million, so the operating cash flow was more like 14.

And the reason for that is the receivables went down significantly, we explained why, but also at this point a lot of our wafers were getting free from either Fujitsu or Epson, so there's a big cash flow benefit from that. Obviously, those are prepaid, so the cash went out some time ago, but we're getting the benefit of that kind of on an ongoing basis.

So we should continue to have a strong cash flow going forward this quarter as well as next year.

Great. Thank you.

We'll go next to mark Edelstone with Morgan Stanley.

This is actually [John Aaron] calling in for Mark Edelstone. I have a question regarding your turns target. I know it was 45% last quarter and, I believe, you said it's 40% for this quarter; is that correct?

Our actual turns number or actual turns last quarter were about 44.8%, so you 45% for last quarter and we need to achieve about 40% to be in the guidance range that we gave.

Okay. So I'm kind of curious about the fact that your turns requirements are always so low compared to some of your competitors. I know your backlog coming into the quarter is usually, or you say, is pretty high. Now, is this just a matter of that you guys have a little bit better visibility or your customers have a little bit better visibility than that of your customers -- or your competitors, I am sorry?

I don't know, because I don't know all of the details of the competitors business. So, I can't really answer that question. I would point out that we have a more of a direct channel percentage mix in our competitors who tend to be more heavily reliant on distribution, so that could explain something for us. But those are our numbers and we're happy to disclose them. It's a little bit harder for me to talk about why they need to be different from our competitors, because I don't have perfect information about their business.

Okay, perfect. Thank you.

Sure.

We'll go next to Aalok Shah with D.A. Davidson.

Hi, guys. A couple of quick questions. Steve, you mentioned the communications weakness in North America. I was wondering if you can kind of drill down a little bit more on that. Is it wireless or wireline focus? And then, you said there was a transfer to Japan or somewhere in Asia? And maybe if you can kind of clarify that, is that something that you have seen as a trend over the last few quarters? And then the last question I guess is for Jan. Is there a change in the target model and how should we start to look at '07 for you guys?

So really, the weakness in North America was more data networking driven from a subsegment. The transfer of business occurs all the time and most major customers do a lot of their high volume manufacturing offshore, but they may do some of it in Mexico, so there is always some movement in the business, so I don't look at that as a weakness or a strength. It's just a fact of reality of the business, but I just feel important to provide some color on that so you could understand why we had such high growth in Asia and North America declined. But, as I said, only about half the decline in North America was driven by inventory rebalancing and that was mainly centered in the data networking area.

Okay.

So you want to answer the second question?

Yes. There's not really any change in our long-term model, or in our model for next year. There is -- we expect there's a lot of leverage in the P&L and as we grow the revenue, we expect the numbers to improve on the bottom line, so there's no change from before, Aalok.

Okay. And I apologize, I may have missed this, but you may have answered this in the last question, but in terms of your typical turns business, in the Q4, is turns typically less for you guys?

It does tend to be less because of it's a shorter quarter, and it could always be higher, but we want to be forecasting what we see and what we experience historically. And I think to assume that there will be higher turns in the fourth quarter is not a good assumption for our company.

Okay, great. Thank you.

Sure.

And there are no further questions at this time. I'd like to turn the conference back over to Mr. Skaggs for any additional or closing remarks.

Great. Thanks, everybody. Feel free to call the company if you have further questions. Have a good day. Thanks.

Thank you, everyone. That does conclude today's conference. You may now disconnect.