Good afternoon and welcome to today's conference call. Copies of the Lattice Semiconductor 2005 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 Relation site: www.lscc.com At this time, I'd like the turn the call over to Chief Financial Officer, Jan Johannessen. Please, go ahead.

Thank you. I'm good afternoon, everyone. Joining me on the call today is Steve Skaggs, our President and CEO. Before we begin, I'd like to read the Safe Harbor statement and then give a financial review of the fourth quarter. And then Steve will provide a business review followed by our first quarter outlook. We will then hold a question and answer session. I will now read the Safe Harbor statements. This conference call may contain forward-looking statements within the meaning of the Federal Security's laws, including statements about the expected impact and timing of the restructuring of our business and financial results, 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 higher percentage of quarterly terms business. Investors are cautioned that actual events and results could differ materially from the statements as a result of a number of factors, including the ability of the Company to successfully complete its restructuring without destruction of its business, the ability of the Company to realize the anticipated benefits from the restructuring and the timing of those benefits, the impact of the special litigation committee's investigation and the SEC informal inquiry and any resulting action, development in our pending security's class action litigation, overall semi-conductor market conditions, market acceptance and demand for the Company's new products, the Company's dependencies on its silicon wafer suppliers, the impact of competitive products and pricing, technological and product development risks, and the other risks described from time to time in the filings with the SEC. The Company does not intend to update or revise any forward-looking statements whether it's the results or circumstances after the date here of or to reflect the occurrence of unanticipated events. Now the financial review.…

Thanks, and good afternoon, everyone. Last quarter we posted sequential revenue growth for the fourth consecutive quarter as we experienced growth from our new products and also, from the consumer end market. Geographically, during the quarter, the Americas made up 28% of revenue, Europe, 23%, and Asia, 49%. North America declined to 8% sequentially. Europe was essentially flat while Asia grew at 8% sequentially. Growth in Asia was led by Japan, although we experienced positive business conditions across the entire region from both transfer business and consumption to support local design. Revenue by end market for the quarter was as follows. Communication, 49%. Computing 18%. And all other markets, 33%. We had a strong quarter in the other markets primarily as I said, due to a surge in consumer business which came from Asia. Although I will get to later, this had a negative impact on the gross margin percentage. The communication end market was down slightly, well while on the other hand the computing end market posted slight sequential growth. During the fourth quarter FPGA product revenue was $9.9 million or 18% of total revenue and declined to 3% sequentially. This decline was entirely due to our older ORCA products, these products declined at double digit sequential rate and now account for only approximately $2 million of quarterly revenue. PLD product revenue accounted for 44.1 million or 82% of revenue and grew 2% sequentially. This growth was primarily grown by the MACH 4000 CPLD products introduced into the 2002-2003 time frame. We posted another strong quarter of revenue from our new products as historic customer designs to into volume production. During the fourth quarter new products grew 5% sequentially and 66% on a year-over-year basis, and now make up 38% of total revenue. As several of these new product…

Thanks, guys. Can you just go through why the margins are, I guess, at 1% below where they used to be where you expect them to transact that 56% level and then, also, go through your expectations for operating expense for the rest of the year or some kind of target?

Sure. I think I discussed in some detail why margin was different from where it was last quarter. It's obviously a very difficult to predict with the mixed situations and we didn't do a good job of forecasting that last quarter. Therein lies the large range. As we mentioned in the past we priced our new product for penetration but we expect with yield and wafer price projections to earn corporate margin targets which remain at 55 to 60% on those products. Our margin has the potential to increase with scale or revenue growth. And we expect to operate divisions on the targets that we gave. Your second question, I didn't get, Chris.

For the rest of the year how do you expect it to trend?

We expect our R&D to be, you know, again, relatively flat at the new level. Plus or minus 500K or so depending on product development activity, mainly mass. And SG&A should trend up slightly with revenue growth, but there should be operating leverage there. And, you know, the stock option compensation expense, we've done our best job in providing that estimate for the first quarter and Jan mentioned there could be volatility around that depending on stock prices. So that's basically our current outlook for operating expenses through the year.

That's great. My last question, can you give us what the book to bill was during the quarter and is backlog up or down versus last quarter?

Sure. Book to bill was slightly below one. Backlog was slightly down. And that's not a surprise given, you know, the nature of the typical seasonal pattern for the fourth quarter and as I mentioned, we did net some ship commits at the end of the quarter because o lead time issues in the back end of our process that we have to correct this quarter. So, the turns last quarter were about 46% to achieve guidance that I gave. And the turns need to be in the low 50s. We think that's, you know, a reasonable number for what typically is a seasonally strong quarter, the first quarter.

Thanks, guys.

Sure.

The next question comes from Gary Mobley with A.G. Edwards.

Hey, guys, I was hoping that you could walk us through, perhaps, what the benefit was from doing a last-time buy program for the particular product you're referring to. Were there customers vying for a few years of demand, future demand in that product? And will there be any in the first quarter?

Let me just discuss these, the program. Historically it's not something the company has done. We still carry many parts today that we introduced 10, 15 or even 20 years ago. We do this for customer convenience. However, product obsolescence is a standard practice in the industry. Our competitors do it all the time and I believe these programs are well managed and communication, communicated customers accept them. From our standpoint, it becomes prohibitive from both a cost and logistic standpoint to maintain old fab processes, testers and managing multiple mass sets and package combinations while keeping the inventory lean. And as Jan pointed out the inventory is at its lowest level on a turns basis that it's been for quite some time. So for all these reasons, we've changed our business philosophy and plan to review our product line on an annual basis to make obsolescence decisions. We'll be announcing a last-time buy program this month. Under that program customer also have a defined period of time to place orders and take shipments and that will last through the year. We plan to obsolete several very old product lines, including most of the ORCA2 FPGA products, some older low volume CPLD families and certain very, very old proprietary simple PLD products. As Jan mentioned, collectively those products represent less then 2% of the annual revenue so the future revenue will be immaterial. The revenue impact. The inventory reserve we booked in the fourth quarter really represents just a write-down of the on-hand inventory to a level consistent with the expectation to have quantity to support last-time buys through the remainder of 2006.

Related to this, can you in the future, break out what the revenue contribution was from these products there on a last-time buy program and will you break out in the future what the gross margin contribution is from the reserve taken?

Well, we don't plan to as Jan mentioned. It was less then 2% of the revenue last year and that is shrinking. There is inventory that's still valued that our expectation of have amount to be sold this year, the reserve represents the amount that we expect to scrap at the end of the last-time buy program so we don't expect there'll will be, you know, a margin benefit from that reserve.

Okay. All right. I'll jump back in the queue. Thanks.

Thank you. We had a group of questions. First of all, relative to the shipments that, or committed shipments that you was not able to make in the fourth quarter and that slipped into the first quarter, what was the total dollar volume that those represented? And then, that might, to some degree, help explain the second question, which is: Now with the benefit of hindsight, from your perspective, what could cause the revenue to be at the lower end of the range that you had originally set out at the beginning of the quarter?

Sure. It was a few hundred thousand dollars to think about, $350 to $400,000. Essentially the difference in the guidance range, Bill. And hopefully, that answers both questions at once. Typically, we have very little delinquencies but, in the last quarter, it was difficult quarter given some constraints with regard to assembly capacity availability, substrate, supply and also, because the holiday period made it very difficult to expedite things.

Thank you, that is helpful. One additional follow-up. I understand that you don't like to talk about product road map, but given the $2.7 million write-off of the intellectual property, and you mentioned that was due to a change in product strategy, what additional detail, or share with us the additional detailing that about that, please.

Sure. That was an IP license that we previously acquired and paid for several years ago. We planned to incorporate that type of IP in some of our 90 nanometer products, we developed our internal capability for all the IP and we'll use the internal circuits and not the licensed circuits so we made a slight shift in the product plan which really causes that license not to be necessary. Therefore, we won't be using that and it doesn't make sense to amortize it and that's why we've taken that financial decision.

Thank you.

Sure.

Next question from Robert Toomey with EK Riley Advisors.

Hi, good afternoon. Steve, could I ask you about the design, design end, excuse me. You said they were just under a 1000 in the quarter and now, cumulatively they're around $2000. Did I hear that correctly?

You did. Just under is 1000 for the fourth quarter and cumulatively, since we've been disclosing they're now slightly over 2000, so we've been tracking on a pattern where we, in the current quarter generate as many designs cumulatively as we generated in all periods prior. I don't know how long we can keep that up, Robert, but we'll, a good quarter for design.

So, what do you think, why do you think you got such a large number in the fourth quarter?

Really, it was the first full quarter of designs in the XP and XO product family. In the third quarter, we had, you know, the first part sampling in that family. In the fourth quarter, as I mentioned, both those products moved to full production release status so really, that was the first quarter where the entire sales force was engaged in designing and all products in those families for an entire quarter. So really, the acceleration of design ends is, actually, ECP designs grew in the fourth quarter, but the large acceleration was due to the XP and XO product line achieving good success and the customer base in the fourth quarter.

When you say achieving good success, are you saying that you are seeing the design ends being implements in actual, you know, products and customers are going to sell? Is that……

That's, yes. Again, to reiterate the definition of design end, a customer, we have what we believe to be a rigorous definition. A customer needs to implement a design of the software and take delivery of a physical sample of our chips. Solder it under a PCB board and, I guess, in some case, socket it, but build a prototype board with our device. And that the vast majority of designs are intended for production systems.

Okay. And so, Steve, would you say that if you look back over 2005, the design ends or the program for your new products are, you feel you achieved your goals or exceeded your goals for '05?

We, of course, have a design end plan and we're actually running slightly ahead of that. And you know, I said I think in this forum last quarter, that the design end pace of these next generation products dramatically exceeding the pace at which our first generation FPGA tracked to. What I've been a little hesitant to provide information on is the revenue potential because we don't have a lot of experience with the time to revenue and the revenue design for FPGA products but I did disclose some data in my prepared comments because we're beginning to see some material revenue from these products.

Okay. One last question, if I might. There was a substrate supply issue, is that continuing and, can you comment on what that looks like here in the first quarter?

We believe that issue is behind us and if the first quarter, we don't anticipate the type of constraints that I talked about in the fourth quarter.

Thank you.

Right.

It was a little over $2 million.

Okay.

Yes.

And Steve, you mentioned that the ORCA product for FPGA down double digit. Can you share, share with us, if we take out the older ORCA products what kind of growth rate on the FPGA product actually in the fourth quarter?

We don't disclose, you know, specific product growth rates, but suffice it to say, with the double digit decline, the rest of the business grew. And, you know, that's the ORCA products have been in a decline mode for some time, depending on the specific state of customer, no new design activity with though, we're really just fulfilling business and those product will wind down. They're at a level now where hopefully, it won't have a downward impact and as I mentioned we do plan to obsolete most of the ORCA2 products because they're at a level where they'll really don't have any material revenue at this point.

Okay. Also, you mentioned about the consumer product. Was that driven by the EC product line?

It's really CPLD type products. Really, we had some strong ramps on two customer programs, one was in LCDTV and the other was basically a portable MP3 player where there was, you know, strong consumption of devices in the quarter and as I mentioned, as is necessary in the consumer market, those price points were pretty aggressive

And do you think that the consumer sector will be strong again going into the March quarter?

Typically, that's a seasonably slow quarter for the consumer product but the big driver that I've found is, I'm not sure of the overall market, but it's the ramp of an individual design, because those designs can consume hundreds of thousands or million of units fairly quickly. I don't expect to have such a strong growth quarter in consumer in the first quarter but, you know, that kind of remains to be seen.

So that's why you kind of expecting a gross margin to kind of go back to the……

I think there's, I mentioned that from an assembly cost increase. We mitigate that with a qualification of a new supplier so cost will go down. The yield issue we experienced with costs some additional costs has been resolved but don't expect to incur those. We also have achieved reasonable wafer price quarters which kicked in during the first quarter. So regardless to have mix change in the business there's a number of positive things that I expect to impact the gross margin in the first quarter.

Thank you.

Right.

Next question is from Mark Edelstone with Morgan Stanley.

Hi, this is actually Sonya Kometsigy for Mark. I had a couple of follow-up questions, just, you mentioned that inventories were at the lowest levels you've seen in many years, I was wondering if you could give guidance as to where you think that should trend next quarter? In addition, if you could make comments on your current lead time and finally, give some tax guidance for '06 and '07.

Sure. I'll address the first two points and I'll let Jan address the last point. Inventory is within our target range and we're actively ramping the wafers, particularly for the new products. So, I would expect inventory to plateau. It might shrink a little bit in the last quarter because there's a very long pipeline. We do plan to ramp our wafer starts and carry more inventory in the package form. Traditionally, we carry 70 to 75% of our inventory in die bank and we'll be modifying that because of some of the constraints I talked about. Lead times, we typically like to have our lead time in the two to four-week period. Some parts are in the four to six week period and we believe will be back to the two to four week period by the end of the quarter. And our new products lead times are not at the level yet because of the demand situation, we plan to drive those down during the quarter, to that level. That's our corporate goal, two to four weeks. Jan, you want to talk about that?

Yes. You refer for your planning, you can, we plan on basically booking a provisional about $200,000 a quarter in taxes for the next couple of years. We don't anticipate paying any income taxes in that period. Those are mostly foreign taxes.

Thank you.

Next question comes from Alex Woodward, Madonna Capital.

Good afternoon.

Hi, Alex.

Just wanted to ask, real quickly, what were turns during the quarter and what kind of turns do you have factored in for your Q1 guidance.

The turns are 46% and factored in as turns to be in the low 50s.

What were returns last year in Q1?

I don't have that number offhand. Perhaps we can get it for you and give it to you offline if that's okay?

That's cool. It sounded as though, if I got this right, you did about a million dollars just under that from the new product families in Q4?

Yes. Two things happened. That's, you heard that correctly. And second, during the quarter at some point, I didn't keep track because we were pretty focused on the restructuring. The ECP product family passed a million dollars in revenue on its own, cumulatively. We would have done a press release but we were busy restructuring the company, I thought that was more important but I wanted to make sure people heard that in this call.

And the guidance for Q1 is roughly a double or almost $2 million?

Yes.

So is it a good way to think of that is you're going to get 2% sequential growth from the new products and then the rest of the business is kind of zero to 3% growth in Q1?

That would be how the math works. That's so, I would concur.

How many, to get to 2 million, how many different design wins is that going into production?

I don't have that quantified but, that's essentially if you look at the backlog for this part you look at the field forecast, that's what I suggested.

So, I guess, let me ask the question this way. How many of the new designs wins you guys have up to 2,000, have many of those have gone into production?

A handful.

Like a dozen?

I don't have the exact number, Alex, and I don't plan on generating it in this forum. If you look at the 2000 designs, some percentage won't go into production so there will be some yield fallout because the customer cancelled their product plans or they do a redesign for performance or some other future issue. We expect the majority of those will go into production. If you look today, the revenues being generated by a handful of designs that have moved into the production phase. That's really as granular as I can parse it at this point.

Okay. The last question I had is, do you have any updates that you might be able to us on the programmable analog products that you have?

Sure. We introduced two parts last quarter. One was basically, a cost reduced power management part. We feel we can expand the markets for power management circuits by reducing the cost points. And so that's, the Power Manager II. And then we've introduced a extension to our clock management products. So those were introduced last quarter. Fortunately, unlike the FPGA business the cost of introducing and designs those products was fairly low. At this point we've seen a lot of good design activity on those parts, but the revenue is, you know, reasonably immaterial but we do anticipate some growth out of that business as well.

Thank you.

Sure.

Gary Mobley of AG Edwards.

Jan, do you plan on making out the breaking out the FAS-122R option out of expense out of the, in the non-GAAP numbers in the future quarters?

No.

And going back to the topic of the IP write-off. Does that relate to a change in strategy to using an internally-developed soft process core as opposed to externally developed?

No.

Okay. Great, thanks, guys.

Next question from Bill Dezellem with Tieton Capital Management.

Thank you. Following up on the 2 to 5% sequential growth, Alex dialed into the question I was initially thinking about. However, it's been so long since we had what we would consider normal seasonality. Would you please remind us, the March quarter relative to the December quarter, how you would characterize normal seasonality there and, are you anticipating normal seasonality this year?

Kind of a loaded question, but yes, we are anticipating normal seasonality. You know, we can, what's normal and it seems like we haven't had one for some time and particularly, as the PLD market diversifies and the application states were subject to the whole host of, you know, new market pressures. For example, the consumer market has a different seasonal pattern then, perhaps, the communications or computing markets. But in general, the summer quarter is a slow quarter because of vacations and holidays, particularly in Europe. And the winter quarter, in my experience, tends to be a slower quarter because of holidays, but also because there tends some inventory squeezing that occurs as people dress up their year end balance sheets, in my opinion. Typically, if you look at the sequential growth rates, I would characterize as the normal year as the Q1 and Q2 growth rates being approximately double the year Q3 and Q4 growth rates, as I mentioned, people's exposure to different markets, new products cycles, customer issues and all that, can definitely skew that type of statement. So, that's how I would answer your question, Bill.

Not to get ahead of ourselves here, but if things come together as we would hope and since we've got almost 2% sequential growth built in simply from the new product families, really decent opportunity to be towards the high end of your sequential revenue guidance?

We'll have to see. I gave you the data I gave you and that's, you know, we see what we see.

Thank you.

Sure.

At this time, there are no further questions. I'll turn the conference back over to you for any additional or closing remarks.

We have none. Thanks for attending. And as always, feel free to call the Company for any follow-up questions. Thank you.

This concludes today's conference call, you may now disconnect.