Good day everyone and welcome to the Altera Third Quarter 2006 Conference Call. Today’s call is being recorded. At this time I would like to turn the call over to Mr. Scott Wylie, Vice President of Investor Relations for Altera Corporation. Please go ahead, sir.

Good afternoon. Thank you for joining this conference call, which will be available for replay telephonically and on Altera's website shortly after we conclude this afternoon. To listen to the webcast replay, please visit Altera's Investor Relations web page where you will find complete instructions. The telephone replay will be available at 719-457-0820 and use code 258712. During today's call, we will be making some forward-looking statements, and in light of the Private Securities Litigation Reform Act, I would like to remind you that these statements must be considered in conjunction with the cautionary warnings that appear in our SEC filings. Investors are cautioned that all forward-looking statements in this call involve risks and uncertainty and that future events may differ from the statements made. For additional information, please refer to the company's Securities and Exchange Commission filings, which are posted on our website or available from the company without charge. With me today are John Daane, our CEO and Jim Callas, acting CFO. Jim will open the call with a financial overview before turning the call over to John. After John concludes his remarks, we will take your questions. Prior to the Q&A session, the operator will be giving instructions on how you can access the conference call with your questions. I’d now like to turn the call over to Jim Callas.

Thank you, Scott. Third quarter revenues of $341.2 million increased 2% sequentially towards the higher end of our guidance. During the quarter, we returned to targeted lead times for the remaining members of our high-density FPGA families, previously on allocation. FPGA sales were up 5% and CPLDs were down sequentially as we had anticipated. In terms of our top 18 accounts, sales were down nominally from the second quarter, although the bulk of the customers, 11, were actually -- turns were in the low 50s. Operating income as a percent of revenues improved from the second quarter largely due to a bounce back in our gross margins to 67.6% driven by customer mix and cost reductions. GAAP R&D spending was $63.6 million and SG&A was $80.8 million. These numbers include equity compensation costs of $6.1 million and $8.5 million respectively. Setting aside these costs as well as the effects of the non-qualified deferred compensation plan, R&D spending was flat with Q2. SG&A spending was up $4 million on higher incremental support costs associated with the stock option review and restatement. Other income was up from Q2 due to better returns from a higher cash balance with more favorable rates and a non-qualified deferred compensation plan booked a $2.1 million gain in the quarter versus the prior quarter's $1 million loss. Net income for the third quarter was $87.4 million, $0.24 per diluted share or if you exclude stock-based compensation charges, it was $97.8 million or $0.27 per share. Cash increased $100 million to nearly $1.6 billion at quarter's end. As a result of the option review, we suspended our repurchase program in early May until the conclusion of our investigation, and as a consequence, we did not repurchase any shares during Q3. Accounts receivable and DSO declined from the previous quarter due to the second quarter shipments to distribution being more back-end weighted. We had no significant passed new accounts at the end of either quarter. Pipeline inventory months supply on hand was 3.8 months, up slightly from the second quarter's 3.6 months and within our targeted three to four months range. Altera MSOH increased from 2.1 to 2.5 offset by a reduction in distribution MSOH of two-tenths. The build in Altera inventories is new product driven. Turning to Q4, we expect a sequential revenue decline of 2% to 5%. Turns required to achieve this guidance is in the low to mid-50s. Quarter-to-date, the order-to-resale ratio is below one. A year-to-date order-to-resale ratio remains above one. Q4 GAAP gross margins will be in the range of 65% to 67%. In terms of Q4 spending guidance and relative to Q3, the following numbers do not include the effects of the non-qualified deferred compensation plan. R&D spending will be approximately $61 million and SG&A will be approximately $76 million. Total equity compensation will be approximately $15 million, flat with Q3 and to get the non-GAAP numbers, assume that R&D equity compensation is $6 million, SG&A is $8 million and cost of sales is approximately $500,000. R&D is expected to decrease sequentially as fewer products are rolled out in Q4 than in Q3. SG&A is expected to decrease from Q3 primarily on lower stock option review and restatement support costs. In Q4, we expect to spend $2 million to $3 million in support costs. We are guiding to $16 million of interest income and a diluted share count of approximately 370 million shares. Total pipeline inventories are expected to remain relatively flat and within our range from three to four months. We expect to release our Q4 and 2006 results in the first half of February 2007. This release date is later than usual due to the push out of the 2006 financial statement audit timeline due to the recent restatement audit work. In short, we are getting started later than usual. As we move into January, we will provide you with a more exact Q4 earnings release date. We expect to return to a more usual earnings release timetable starting with Q1 2007. Now, let me turn the call over to John.

Thank you, Jim. Q3 rolled out as forecasted with revenues increasing 2% sequentially driven by strong unit product growth. FPGA growth was higher than true market demand with catch up from the remittance of allocation and CPLDs declined significantly as expected due to inventory reductions. Our product classification, we typically expect both new and mainstream categories to grow and mature products to decline. New products grew 26% sequentially and 142% year-over-year. Each of our new product families grew sequentially and reached new revenue records with Cyclone II, up 66%; Stratix II and Stratix II GX, up 9%; MAX II, up 25%; and HardCopy, up 50%. Mainstream products grew 1% sequentially and 10% year-over-year. Stratix and Stratix GX grew 12% sequentially. Cyclone declined 7% to some high volume consumer designs transitioned to Cyclone II. Material products declined 6% sequentially due to the CPLD inventory reduction. A few specific product highlights to emphasize for the quarter. MAX II is now 14% of CPLD revenues and I expected Altera will gain CPLD market share this year. Stratix II is now our second largest product family. 130 nanometer products introduced in 2002 and 2003 are over 35% of revenues. New products basically those introduced in 2004 are now over 20% of revenues. Revenues from products introduced since 2002 is over 50% of total revenue. And last but not least, we will be introducing our 65 nanometer product shortly including Stratix III which along with many differentiated features will have significantly higher performance and lower power consumption than any previous or current generation FPGA. By vertical market with the exception of industrial where we expected to decline due to CPLD inventory adjustments, we expected normal seasonality with communications to decline, computer and storage and consumer to increase. This is exactly what occurred communications declined 3%. Inside communications, telecom uncharacteristically grew in the quarter as several customers pulled in orders from Q4. Wireless declined substantially primarily in Japan probably by a slow down in operator purchases and partly by an expected program transition. Industrial decline 2% with the CPLD inventory burn-off. Consumer increased 11% with the growth in set-top decoder boxes offsetting weakness in flat panels, and the segment growth as a whole emanating primarily from broadcast accounts, computer and storage increased 27%, a very strong growth across computers, office automation, and storage equipment. Book-to-bill was below 1 for the quarter but stronger than expected. With lead times returning to normal levels late in Q2 and early in Q3, I had expected significant order cancellations to eliminate the extra backlog from double ordering. Instead we saw only minor cancellations and the book-to-bill for year-to-date is above 1. Nevertheless, we did see some push-outs and I believe there are some natural inventory accumulation of FPGA products across all of our market segments associated with the extended lead times that will need to be worked off in Q4. Consumer should be flattish with seasonal declines and consumer equipment offset by growth in broadcast. Computer and storage should be down, industrial should be flat. Additionally, I expect communications to decline with continued weakness in wireless combined with the decline in telecom due to the Q3 pull-ins. All in all, I expect our Q4 revenue will be down 2% to 5% sequentially and then resume growth in Q1. To assist with models for 2007, I would like to provide some preliminary information. At a high level, R&D will increase associated with the surge in mask and wafer spending with a rapid rollout of 65 nanometer products. I have said that we need to reduce SG&A as a percentage of revenues and this will begin in 2007. Now the following numbers do not include the effects of the non-qualified deferred compensation program. On a GAAP basis, we expect SG&A to decrease from 2006 spending to $300 million, but as usual slightly more front half loaded due to payroll tax and fringe accruals. SG&A equity compensation will be approximately $30 million and therefore on a pro forma basis, 2007 SG&A spending will be approximately $270 million, flat with pro forma 2006 SG&A spending. On a GAAP basis, we expect R&D to be approximately $300 million. R&D equity spending will be approximately $25 million and therefore pro forma R&D spending for 2007 will be approximately $275 million. With 65 nanometer tape-out starting in Q1, and peaking in Q3, the spending curve should approximate 22% in Q1, 25% in Q2, 28% in Q3 and reducing to 25% in Q4. And again those are all R&D guidance figures. Gross margins should be approximately 65% to 67%. Other income should be approximately $65 million, but could fluctuate with interest rates and share repurchases. We expect the tax rate to be roughly 14% to 16% GAAP, 16% to 18% non-GAAP. Share count should increase over time to approximately 380 million shares by year-end, but many factors including share price and share repurchases affect this number. As usual, moving forward, we will provide guidance one quarter at a time. Scott?

We would now like to take questions. Please limit your questions to one at a time, so that we give as many callers as possible the opportunity to ask questions during the call. Operator, would you please provide instructions and poll for questions.

Thank you. The question-and-answer session will be conducted electronically. (Operator Instructions). We will go first to Glen Yeung with Citigroup. Mr. Young, your line is open, please check your mute button. We will move on to Adam Parker with Stanford Bernstein.

Yeah hi, couple of questions. What was your book-to-bill for this quarter?

Book to bill for Q3 was under one.

Yes, you said that, but was it 0.9 or under 0.9 point.

We don’t provide Adam, specific guidance on numbers for book-to-bill to between quarter, we just said about one below one.

Okay.

Now with that for the year in total, which kind of encompasses the period of time for which allocation started really in March for the CPLDs and then through FPGAs in the summer period of time, it has been and is to date about one.

Alright. Then to follow-up on that would just be, I just want to make sure, I heard this right, you don’t really need much of a change in turns business this quarter versus last to get the mid point of your revenue guidance?

That’s correct.

Okay. So, then I guess I can figure that out. The other question is, your inventory I guess was about 20% sequentially in dollars, and then with the lower revenue guidance; I am just trying to figure out how comfortable you are with your internal inventory here or you think it will exit Q4.

We are comfortable with the inventory staying within the range that we have typically wanted to operate on, which is about three to four months supply on hand so and that number does include both ourselves as well as distribution because as you know we don’t recognize sales or revenues until distributions ships it to an end customer. So, we’re comfortable that we did do a very good job of managing the inventories both to ensure that we got over allocation as quickly as possible, but also to make sure that we didn’t overshoot, because as you know sometimes during those periods, backlog is not real.

Yes, I am just trying to figure out when the last time you guys grew 20% sequentially that it didn’t impede things at quarter two out. But is that part of what you guide to that year, I guess?

We believe that we have managed the inventories to stay within the range. I mean if you go back a couple of years, we did have, I think it was two years ago, we had a very strong Q1, Q2, did result in Q3, I think temporarily our inventories got slightly above four months supply in hand and then within one or two quarters got back under. Generally, as far as I can remember, we have always managed inventories well with in that band.

Alright, thanks John.

Thank you very much, Adam.

We will take our next question from Michael Masdea with Credit Suisse.

Yes, thanks. I guess the question I have is, can you gives us a little bit of more color on what lead times you are doing. I know you said they are back to normal. Where are they now and what gives you the comfort that this is just a 4Q event and doesn't bleed into next year, given what lead times have been doing, and swinging around.

Yes, so, just to provide a quick color on the lead times. Lead times generally from us are anywhere from off the shelf, because we have components on distributor's shelf, so they are available immediately to -- if they are not available through distribution, anywhere between two to six weeks for us to build the product. Most of the inventory that we keep ourselves, is kept in wafer form, and therefore we can respond very quickly to orders through the backend build cycle in order to satisfy demand. So that has been our general policy and I would say for the most part all of our products are at those inventory -- at those lead times. In terms of second question --

Just a comfort on why isn’t this a sort of one quarter event, especially as you've talked about your spending in the next -- it sounds like you have some confidence that you've got things stable now on the supply chain and there won't be too much more than just this quarter?

Yeah. So I think we have expected that part of what we've seen throughout this time is some inventory accumulation by our end customers. We did think that we saw that in Q2, we called that well before we've seen any correction from customers. In other words, by the time that we had the Q2 revenue call, actually orders for CPLDs were so strong, we believe that people had accumulated inventory that we would see a correction in Q3 as you see from our CPLD numbers in Q3 that certainly did happen. We are assuming that there is a component of that for our high-end FPGA products both in the new and mainstream category because those were the products that were on allocation, for the most part some in the mature product area as well. And that effect will happen in this quarter. But we don’t see that effect going out over time. We are in contact with our major customers looking at their inventory levels. We are quite sure those that have inventory are working those down this quarter. And in general, we think the end markets will see some continued growth, particularly since Altera has done very, very well in achieving design wins with our new and mainstream products, and in particular, our new products are still in the prototyping phase, and we do expect to see some continued ramps as those move into production.

Alright. Thank you.

Thank you very much.

And we'll take our next question from Tim Luke with Lehman Brothers.

Thanks. John I was wondering if you could provide some color on the wireless segment, kind of a sit down in the quarter, you mentioned Japan, but then you are suggesting that it would again be weaker going forward? And then just with respect to the computing area, it looked like, had a very big quarter up 27% sequentially, can you give us some color on what's going on there and what and what were you looking for going forward?

Yes, Tim. So, we expect that wireless would be down again this quarter, predominantly because of Japan. As we've said starting in Q2, we did see some program transitions in combinations with a slowdown in operator purchases and that is indeed coming to fruition. We expect that this is the last quarter of that and that we will see really growth in wireless again in Q1, simply because a bulk of the correction is happening over the back half of the year and we don’t see it -- any programs from our customers pulling down any further from what would be the bottom in Q4. In computer and storage, as I'd mentioned, we had very strong growth in Q3, really across all three major areas in that office automation, which includes copiers and printers, the server side of your area as well as storage equipment. We do expect it will be down this quarter. We do have a program transition happening in the computer segment combined with a little inventory bleed off we see in a couple of the other segments that will drive that to be down. Don’t have really good visibility in the Q1 yet, but this segment is much smaller than any of our other segments. So, I am going to say generally, industrial and communications really through the end of the day drive a lot of the revenue growth quarter to quarter.

This is follow-up, can you provide some color on the consumer area than -- obviously it has been growing with broadcast, but what's going on elsewhere and maybe is broadcast about half of it?

I think, yeah. Broadcast is about half of the segment as we have said before. I think if you go back to the remarks I had, Tim, a lot of this data is there. Just to reiterate, consumer was up in the quarter that what you would really call the consumer area was flat. We had a decrease in the flat panel area sequentially, but an increase in set-top decoder boxes, those offset each other and then we had growth and really strong growth in this segment because of broadcast equipment. This quarter we do expect seasonal softness in consumer, many of the builds for the holiday season and about half way through the Q4 quarter. Therefore typically this is a lighter quarter for consumer, but that will be offset, we believe, by some growth continuing in the broadcast area predominantly with a continued build out of equipment for high definition. Thank you, Tim.

And we will take our next question from Shawn Webster with JP Morgan.

Hi, this is Shawn calling in for Chris. Couple of quick questions, can we start with gross margin change in Q3, can you give us a little bit more color on that and maybe quantify the various aspects of it first, and then I have a follow-up please?

We really can't provide a lot more detail other than we did say in the second quarter revenue call that we did expected Q2 gross margins would dip and then respond in Q3 with some planned cost reductions that indeed did happen. Additionally, we saw a change in mix for some accounts particularly between market segments that drove the overall number. So, I think pretty much what Jim has said in his script.

Okay. But -- so was it mostly a cost reduction change was that -- what it was?

It was just combination of cost reductions as well as change in business, but again I think if you can go back to the Q2 revenue call, we did sort of predict that we would see cost reductions have a positive impact.

Okay. And then -- okay, sorry and then the moving gross margin is back down into 66 range, what would be driving that?

Predominantly, its our long term model to get down to about 65% as we have said and probably going back several years now, that’s a long term business that we believe is sustainable for Altera. We do trade at times some top-line growth with some lower priced programs and therefore we would like to operate around 65 with some strong top-line growth and so that is sort of a long term business model. In terms of why are we guiding longer term to 65 to 67, seems to be the operating band that we are currently in. Although with all of the numbers that we provided you today, those are way off in the future and of course it could change.

Okay. And then can you give us the mix of your revenues that were the Stratix family, Cyclone family and HardCopy?

I don’t have the revenue breakdowns. We have in the past, I think a couple of quarters ago, may some three or four, Scott, that we gave a revenue breakdown. I've been giving percentage as sense, so you should be able to get approximately to those numbers. It is a good point; we should probably revisit giving specific numbers again. But if you go back to the comments that I had in my script, there are some specific guidance on percentages; note that a 130 nanometer is currently over 35% of the business as an example and the new products which predominantly are 90 nanometer are just over 20% of our revenues.

Great, thank you very much.

Thank you.

And we have our next question from Parag Agarwal with Jefferies & Company.

Hi, this is Parag for John Lau, I had a question about your HardCopy products. In last three quarters, the product has been ramping together very steeply. And I was just wondering what are the particular end markers and applications driving this steep back.

This is John Daane. The vertical markets for which we've seen some strength currently include areas like communications and computer and storage, and we should see those markets as well as I would expect over tine some industrial programs and some consumer programs to continue to ramp. We -- it's a smaller piece of our business today, we are continuing to tape out lots of new programs and diversify the hard copy business to more and more customers, and we expected to a see strong growth in the future.

Okay as a follow-up is there any difference in the margin profile between HardCopy and your main stream FPGA Products?

Typically the margin differential for the company is not based on product per se, it's really based on a vertical market. And so, if you we're to look at our end markets, the lowest margin market that we have is consumer obviously there is a lot of concentration around a few companies and a few products, they are in very high volume, and there fore the pricing is more aggressive. We then have the highest margin in the industrial segment that includes areas like military, test medical, all low volume. It also includes just a whole host of broad based accounts, which tend to buy at higher prices and therefore the margin is very high. And then in the middle is the communications and the computer and storage segments, and so as a portfolio, the margins tend to blend themselves towards the rates that you see in the company, although the actual numbers can be quite divergent when you look at the actual data. So, if you look at an end product really than the margin and the end product will depend on which market it predominantly serves. Cyclone may have a little lower margin than some of the other FPGAs because it has a little more revenue in the consumer industry for instance, but other than that it's not really products, it's only driven by the vertical markets.

Thank you.

Thank you.

We will take our next question from Ambrish Srivastava with BMO Capital.

Hi, good afternoon. It's [William Tell] for Ambrish. Just looking at the revenue guidance for your main competitor, your September quarter was actually down and they have got to into December to be up, where you guys are actually the opposite with September up and going down for December. So, I was just wondering like with the product availability problem you had earlier in the year. Is any of the -- is there any catch up, I guess a revenue component in the September quarter that somewhat effects your December guidance to be down during QX, or what would be the actual revenue guidance if you were to strip out, the catch up revenue?

That’s really a good question. It's hard for us to really strip it out and figure out how of it happened in any one quarter, because there are lot of dynamics and lot of accounts in this particular business. And so, I can't really give you a specific answer. We have tried in the past and we haven’t been very accurate when we produce those numbers. I myself really can't and shouldn’t give a direct comparison to any of our competitors, because I really don’t understand bear base business well enough to be able to comment of us versus them. The one thing I would say though is, one of our competitors is seeing strength out of the military segment both in the third and fourth calendar quarters and we had probably commented, that is a segment for which Altera does not have a lot of business in day. We are quite envious actually of the military business that Xilinx has. Our company exited that business about 10 years ago and so, we took our military business down to about zero. It's really a wonderful segment if you look at military in particular, because there is a lot of programs that are moving towards an increase use of electronics and therefore this sector itself is growing a lot today. It's very low volume product and very high complexity and ultimately because of the low volume it tilts towards the programmable side rather than the ASIC side. So, there is a lot of programmable logic growth, and also it’s a very, very, very high-margin market. So, it’s a very profitable market to be in as well. As I'd mentioned, we exited that business, we did reengage about five years ago, but I think it was last year the year before, we did pass Actel and now will be the number two in the market. But we've got ways to go and as you know, the military design cycles are long. We are winning a lot of designs right now, I think due to several different factors including things like operational excellence. We have got lot of differentiated features and our products, HardCopy is another example. Military is growing quite fast as a percentage of our business, but is an area for which we are a distinct number two and an area for which we've got to do better over the next several years. But certainly based on our design wins and based on the market opportunity, I would expect us to continue to catch up in that space. Other than that, I really can't comment much more.

Okay. Thanks. And just a follow up on, in terms of computing segment, it has been growing, you put a very vast in the last three quarters, and I believe you mentioned, it was part -- (inaudible). So I was just wondering when would it start -- for the computer sector when it would start kind of revert back to a sort of more of a normal growth on a sequential basis? Thank you.

Hard to know specifically given any period of time which vertical beyond the quarter is going to be up or down because there is always so much fluctuation in the market and end customers. As we've said, we do expect computer and storage to be down in calendar quarter Q4 and that's about as far as we can forecast at this point. Thank you. Next question please.

We will go next to Mark Edelstone with Morgan Stanley.

Good afternoon, John.

Good afternoon.

First question I had is when you look at the customer base and you try to play a methodology to understand what the inventory levels are like and what the consumption rates are like for their customers. Is there anything unusual you are doing there other than just talking to customers and talking to distributors? And as you try to make a call on the consumption rates and the level of inventory they have how many customers -- what percentage of your business you are actually able to post on a regular basis?

We do direct sales to several 100 customers. Our sales -- we are certainly in direct conversation with those customers. We use distribution to look at a broader set. Also our business on some of the mainstream and mature products tends to be fairly linear, and so we have a good indication as to demand structures in the past, which should point to demand into the future. Some of those products maybe going up, some might be going down, but if you see a large change then it's usually, I think, a sign that there's something going on. So, for instance, a couple of years ago we had a surge in our mature business and at the time, we did not recognize that that was probably just in inventory build. In other words, our mature business should be in a slow steady decline. So when we saw the growth in calendar quarter Q1 and Q2 associated with the CPLD products and especially some of the older CPLD generations that are 15 year plus old, we noted that that again must just be because of inventory accumulation. And so we tend to look again at two factors combined both -- one is customer input, both from the direct customers that we have as well as distribution contacted customers. And then number two, we look at sort of a trend rates. And those have been very good for us. As you would note, I think we have the lowest inventory on days or months basis in our particular sector, and we've been, I think, always noted as the company is having superior operational capability within our sector. So we think the methodology that we have has served us very well.

Agreed. But would you think that you get a direct read on maybe a third to half of your total revenues when you go after the customers?

It'd be hard for me to put a stake on that Mark because I've never really reversed that into a specific split of the customers. But again we are trying to get as much of a look as we can. I would note though that any given customer, their degree of accuracy two months out is very low themselves. So we've been able to call customers, sort of, at an aggregate level, but once you get into a program by program specific level at a customer, it has always been hard for us to get very accurate forecast from them. So we've been good sort of at an aggregate level, but I think if you dived down a couple of levels the detailers' accuracy has been very, very poor. And generally, we do not build to forecast, we build more to our own planning information and trends trying to do more of a reaction than we are trying to build inventory for specific programs, and that again has worked very well for us in the past.

Thanks. I just had a follow-up on R&D. It certainly looks like the 65 nanometer R&D bubble is going to be quite bigger than what you saw with 90. So I guess first up, when you look at the forecast you have for 2007, is it possible that forecast ends up being conservative, because as I recall, I think your 90 nanometer forecast ended up being considered one as all said and done? And then I have got a quick follow-up to that.

So, we always build in to these forecast and assumption that we may have to do some product re-spends due to deign areas or other issue, both in 130 and the 90 nanometer node, we actually came out very clean in those products. And generally we were able to not have to spend the forecast because we did not have to execute any re-spends and generally from the ASIC industry as an example I would note that just about, I think it's 75% of the customers and they need to do a re-spend for one reason or another. So, I think we have been much better than the average industry certainly from getting it right the first time. The other thing I would note about the spending for the 65 nanometer is we are doing a lot of chips very close together. So, we are doing a lot of product roll out at a very close period of time. We're in the 90 nanometer node, some of those products were more spread out. So, I think that concentration is causing a higher spend for a short period of time. Note that also, Mark, as you will know mask costs and wafer costs are certainly going up with every generation of technology, and you are seeing that effect as well.

Just lastly on the guidance that you have for pro forma R&D in Q1, looks like it's something north of $70 million. Is that the right the magnitude?

Pro forma R&D for Q1. I think, if you take the numbers really as a spread sheet, I -- we have given you all the detail components of it. I think, Mark, it's hard for me to dig it out.

Mark, I could probably work with you offline on it. John gave us a wider portion of spending during the year. So, I think if you took that against the total you will end up in the current ball park.

Yeah. We said that the pro forma would be $275 million and that 22% of that would be in Q1.

Okay. Thanks John.

Thank you very much, Mark.

We will go next to David Wu with Global Crown Capital.

Yes John, two quick questions. Number one is, looking back at it, operation problems that we saw early in the years, never been in my memory that Altera had those kind of problems. What went wrong and is this a one-time thing or is the back-end so under invested these days that these kind of problems can reoccur. The second one, I want to have a follow-up is really on, you gave a look on Q1, if all these inventory correction, whether it's CPLD or FPGA is done by Christmas; I would think that your first quarter would be typical Altera seasonal first quarter, March quarter rather. Am I reading the situation correctly?

Okay. So David, just let me answer the first question which was the backend one. You are absolutely right, I think Altera has been very, very good operationally at making sure that we maintain lead times and up not accumulating too much inventory. What transpired this year we think are couple one-off things within our supply chain though we've not seen in the past; certainly since I have been here, I think this was the only period of time for which we have been on allocation and I have been here now for almost six years. So, specifically if you look at the CPLD side, we did have a fab excursion which caused a scrap of a significant amount of material and ultimately that material was restarted but when you scrap product in line that creates a time and distance problem that occurred in Q1. We -- but got over the allocation for the most part in late March, early April, and then for our FPGA products particularly at the high end, we ran into a substrate problem. We have been able to procure substrates and create a inventory in substrate, so we believe going forward that we have adequate supply within the supply chain, locked up and that we have an adequate supply ourselves on hand to be able to service customers. If there is a sudden uptick in business and it goes up 20% sequentially, naturally we will be caught short of something but we think within the motive where we see our business going with the issues that we had this year, really were of the one-time effect and we do not expect to repeat themselves. In terms of Q1 growth, I'm not sure what regular growth is anymore. We've seen sort of different patterns at different years and even if you were to combine them and try to look at an average, there is so much noise around that figure that I'm not sure how to establish what a regular seasonal pattern should be. We do based on what we see, believe there is growth in Q1. It is hard for me though to exactly say today what that will be and I would again caution everybody that if we go back and look at sort of averages over the last five years you'll note that in any given quarter, there is a lot of noise around the center typically because there has been a lot of one-time things that have come up the last few years, allocations certainly made our numbers a little bit different this year. Two years ago, in 2004 we saw a significant decrease at the back half of year due to communication. So, different things affect each quarter and I'm not sure that there is a normal trend line that I could provide you, other than I do expect you want to be up at this point.

Yeah, because communication and industries should have upped March quarters, while consumer and computer, you see the fly were down. That’s typical those kind of end markets behave that way?

That is typical, although I would say that, we maybe off slightly from the end markets themselves only because of the time to manufacture the product. But I don’t disagree with you, I’m just saying that typical was not what we've necessarily seen in the last several years.

I think it's typical these days anyways.

Thank you very much David.

We'll take our next question from David Wong with A. G. Edwards.

Thank you very much. Can you give us some idea of say how some of your new families have been growing, specifically Cyclone and HardCopy, are you able to give us --

I’m sorry, we lost you there, but I think you were asking for the growth of the HardCopy -- the new products and those are in my script. Let me repeat those. New products did grow 26% sequentially and they were up 142% year-over-year. Within that, Cyclone II grew 66%, Stratix II and Stratix II GX were up 9%, MAX II was up 25%, and HardCopy was up 50%. So all of those products achieved also record revenue within the quarter. So we are doing very well, we believe, on our new product growth and ultimately that speaks, I think, very well to long-term market share gains.

I mean, if we look at the full Cyclone family as opposed to Cyclone II for example, can you give us any idea as to how that has been growing?

That's a great question, and I didn’t made a note to do that and I apologize we didn’t do that calculation. Well kind of maybe we could go to another question and if we can figure that out as we are talking maybe we can give you an answer quickly on the phone.

Okay. Great. Thank you.

Thank you. Next question please.

One moment.

So it doesn’t sound like we have any next questions right now. Let me just say that the two Cyclone families combined did grow in the quarter. So if you combine both Cyclones it would grow sequentially.

But you don’t have a year-to-date script number or anything like that?

No. We haven’t given out revenue numbers. I did mention that Cyclone, the original one which is 130 nanometers, did decline 7% sequentially. Some of that is because we saw some of the higher volume consumer designs transition to Cyclone II, which you would expect, but both Cyclones together did climb in the quarter, and I can't -- I'm just adding the numbers up, so I can't give a percentage off the top of my head because I'm doing it by visual on the call. Thank you very much. Next question please.

We'll take our next question from Tim Kellis with the Stanford Group.

Yes. Where were inventory days combined again?

It was 3. -- this is Jim Callas, 3.8 months combined, 2.5 at Altera, and 1.3 in distribution.

That’s all I had. Thank you.

Thank you. Next question please.

And we have a question from Satya Chillara with Pacific Growth Equities.

Yeah. Hi guys. Two questions, John, HardCopy, I remember you guys had a target of either 10% or 15% of the total sales with respect to going into 2007, where are you on the HardCopy? Is there any new set of metrics you're looking at on the HardCopy program?

So you are right. Our long-term forecast is for HardCopy to reach about 10% to 15% of revenues. That certainly has been over the last couple of years growing quite well. We are diversifying the business over lots of accounts, and actually the last couple of quarters have been really hitting some very, very high design win numbers. So we are hitting into really much more of the ASIC market than when we originally started HardCopy where we were perhaps targeting the FPGA conversion market to ASICs only. So we think we are winning a lot of business that we as a programmable company just never saw this one straight to ASIC companies. I don't have a specific breakout today over the percentage of the business next year. We do expect it will continue to grow. I would note that it also is a technology for which helps us win a lot of FPGA business and continues to differentiate us from both rest of the programmable suppliers who don't have a HardCopy like product to do cost reduction and also against the structured ASIC companies, who don't have a design methodology that allows the initial prototyping in an FPGA and then a seamless conversion to the low cost power. So we think we have a good solid differentiation methodology and technology where they can helps both our FPGA as well as our total revenues and we are looking forward to seeing continued growth.

Great. There is a second question, 90-nanometer and below, what's the percentage of revenue in Q3 please?

I don't have one for 90-nanometer specifically; new products were over 20%, I think they were 21% of revenues. So you can subtract out of that some of the older HardCopy generation that was in 130 and you could subtract out probably also the MAX II product which is a CPLD and 180-nanometer flash and you probably get to a figure around 15% to 16% of revenues.

Okay, great. Thank you.

Thank you very much.

We will take our next question from Tristan Gerra with Robert W. Baird.

Hi guys. Historically, the timing of fixed production for new generation of FPGA tends to have an impact on market shares a couple of years later. What consideration comes into account as you determine the timing of your static relaunch versus performance and in terms of gauging, introducing the product six month late versus the performance advantage you think you can get from that?

Well, Tristan, our development has really being around -- first of all we haven't been the company to announce products really first in any given generation of technology in the last several nodes. We certainly have not been the first to prototype a new product within a new node. It hasn’t being our methodology to even announce products well before they are available. We've announced products when we have release the software and we know that we will be releasing the products very quickly. And our goal really is to work with the technology, to make sure that it is stable, so that we achieve very good yields and are able to produce, mass produce the product very early. So, as examples of that, in both 130 nm and 90 nm both; we were not the first to announce; we were not the first to ship those prototypes. But I do believe we were the first to qualify the family, get all the family members out and reach volume production and that really is our goal. Second goal is to make sure that -- of when I would say, as a consequence of that goal, products like Stratix II as we mentioned in the past, when we first started ramping the product had higher gross margins than the company average, and that again speaks to the fact that we are working by the time we reintroduce the product with a very stable, highly yieldable, very cost efficient vehicle. That second thing that we are trying to do is really differentiate with each product and look at every thing as a blank slide. So, if you look at our 90 nanometer products, we introduced a new FPGA architecture, that was an adoptive look up table, structured. There was higher performance in density than anything that had been done in the past. We also continued with our DSP, MAC based block that we developed in a 130 nanometer. We see competition really catching up and doing those sorts of innovations just now in 65 nanometer. Once again, we've looked at the issues and challenges of programmable logic and for that matter if you look at any programmable technology like microprocessors, power is really the huge concern. And so what we did is once again innovate it within the 65 nanometer node to develop a programmable power approach that is taken care of in the software that allows a dramatic reduction in power consumption even versus our last generation FPGA. And so we believe in 65 nanometer, we will have a higher performance FPGA at a dramatically lower power consumption and dramatically lower, I mean by 25 or 30% lower power than the competition at a minimum. Power is cost because in many systems like communications, the form factor and the cooling are fixed. So, if you can reduce power, you can allow them to pack more componentry within a given rack size. And we think we are going to have a much better product. So, we don’t want to be the first. We want to have the best product and we want to be able to produce it in volume and produce it in volume very quickly, and once again we believe that we have and will achieve both of those things within 65 nanometer. And again I expect to continue to take market share.

Great, thanks for the details here. Just a quick follow-up; are you seeing any signs yet that given the list high-logic no longer supporting rapidshare, that this system thing that is going to benefit you and starting when?

We did see some designs move towards us. I don’t know whether we have seen any significant revenue contribution after that at this point. But certainly when a competitor does go away, it provides more opportunity for us to move into the space and I think generally, we do have the leading structured ASIC product at this point. And I think it's serving us extremely well.

Great. Thank you.

Thank you very much, Tristan. Next call please.

We will take our question from Seogju Lee with Goldman Sachs.

Thanks. John, I missed the tax guidance?

Tax guidance was for --

For Q4 for GAAP its 15% and for non-GAAP its 17%.

Sorry, I meant for 2007.

Okay. I am sorry. For GAAP, its 14% to 16% and for non-GAAP it's 16% to 18%.

Okay. And, in terms of that tax guidance, why does it go down potentially? Especially, if you have lower employee stock option expense next year?

One of the things it does drive taxes of course where the revenue appears geographically, and so we have seen, as you have noticed over time, a change in that mix, and that certainly does drive the tax rate. We have only about 25% of our business for instance in North America at this point.

Okay. And then, in terms of the 2007 outlook, John; any chance that you want to take a stab at the revenue projection for the year.

That was Scott laughing in the background. Seogju, I'd hate to do that at this point. I mean, we do internally have a plan. I am pretty proud of the fact that year-after-year, we've been close to our plan, but I would hate to venture a guess at this point because it's so hard to predict even a quarter out, let alone two quarters out.

Okay. And just, if I look -- if I think about your revenue trend versus timings, if I look at the calendar 2006 numbers, you are growing them by roughly a percent or so if I look at both, at your mid point of your ranges. Obviously, there is some mathematical stuff that goes on because of last year's Q4 as you exited the year. But as we look forward, we should potentially see that to accelerate again as the newer products move to volume or how would you frame that?

I would expect to continue to take market share and the reason I get there, Seogju, is because if you look at our -- first of all in the CPLD category, we said a couple of year, when we introduced MAX II that we expected to start taking market share in CPLDs in the back half of 2006, and I think you are starting to see that already MAX II is 14% of CPLD revenues and growing in a much faster rate than really I believe any of our competitors in CPLD products. And so, I think in that category we've turned around what has been years and years, perhaps stagnant or slightly declining market share. And then in the FPGA segment, if you look at the 130 nanometer, 90 nanometer, we believe we have about half of the market and if you go back to the 150 nanometer, no we only have perhaps 10% to 15% of the market. So, as the older nodes continue to decline and the new nodes grow, we have much higher market share in the new nodes and therefore I would expect our market share to continue to grow.

Okay. And do you think that '07 thing or is that more of a '08 thing at this time?

I think it's going to be '07, I believe it's going to be '08, I believe it's going to be '09. I see this trend continuing. Bottom line, our goal is to be number one. We are doing everything that we can in order to do that. We believe that quarter-in, quarter-out, we are continuing to gain momentum in design wins and we believe our products are differentiated and we believe that we will continue to take market share.

Great, good luck.

Thank you very much. Next question please.

We'll go next to Gurinder Kalra with Bear Stearns.

Hi. Just looking at your other income, it was slightly higher than what has been in the past compared to say what you had in Q1, any reasons for that?

Other income has certainly increased because we haven’t been doing share repurchases, so therefore our cash balance has been growing and generally--

Did that affect your growth?

Yeah, cash balance has been growing obviously with interest rates trending upwards; also and other income is the impact of the non-qualified deferred comp program. We had a $2.1 million gain in Q3, so that serves to increase other income with the offset being to have higher OpEx, operating spending. So that number, obviously, we don’t try to forecast, but overall higher cash with higher interest rates moving forward.

Okay.

Thank you.

One question on the R&D, should we look at the reduced R&D expense as a push out through 2007 in terms of just mask costs? I mean, how should we sort of look at '06 and obviously the increase in '07, is it a push out or do you think the '06 is [going the way]?

No. I think in '06 and particularly if you go back to our Q2 call, we mentioned that R&D was under forecast simply because we had expected to need to spend some more in the mask and wafer side that was no longer required. Mark Edelstone at that time had asked, I believe, whether that meant that we had cancelled the product and I should have said that the mask and wafer decrease was because we just didn’t need to re-spend our product and we built in an assumption that we would need some re-spends. I think the way to think of Q4 is this is really sort of a bottom period. We are not doing any real prototyping activity on any families per se and that that activity is going to be building in the very near term in 65 nanometer, and that starts the ramp of the R&D. As we've said in the past, R&D does oscillate, goes up and down with prototyping of any family in a technology.

Operator, I think we have time for one more question please.

Alright. And that question comes from Sumit Dhanda with Banc of America Securities.

Hi, this is Eric Ghernati for Sumit. Just one clarification, on R&D, you said that’s 22% of the $275 million would be in Q1 or 22% of this 65 nanometer spending will be in Q1?

So, a great clarification question, 22% of the $275 million would be Q1.

Okay.

And then, 25% in Q2, 28% in Q3 because that’s the peak of the prototyping and then 25% in Q4, so it peaks in Q3, starts coming down again in Q4 because of mask and wafer start to decrease.

Okay. And then on your share counts, you said the 380 million exiting Q4 '07, is that assuming any share buybacks, seems like your share counts are going to be growing next year?

Typically within these assumptions, we don’t assume any repurchases, so the other income that we give you is with the straight assumption that it's all cash that we generate and on the shares it is that we aren’t operating any repurchases because of course those numbers do fluctuate and that’s why I did say in those two numbers that those numbers could be different if we were, for instance, to do share repurchases or even in the share account if the stock price were to fluctuate, that can change that number as well.

That’s all I had. Thank you.

Thank you very much.

And that does conclude our question-and-answer session. At this time I'll turn the call back over to Mr. Wylie for closing comments.

Thank you. We will participate at two industry conferences this quarter. We'll present November 30 at the Credit Suisse Annual Technology Conference in Phoenix, and then in early December, on the 6th, we'll present at the Lehman Brothers 2006 Global Technology Conference in San Francisco. Specific details are available on our website. This concludes Altera's conference call. Thank you for your participation and interest.