Good day, everyone, and welcome to the Altera first quarter 2007 earnings results 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. Mr. Wylie, 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 webpage where you will find complete instructions. A 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 on 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 Tim Morse, CFO. Tim will open the call with a financial overview of the first quarter 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 would now like to turn the call over to Tim Morse. Timothy R. Morse: Thanks, Scott. My comments today will cover three topics: 1Q results, 2Q guidance, and a revised spending outlook for 2007. Beginning with first quarter, revenue of $305 million came in at the low end of our guidance range, down 4% versus 4Q. Nonetheless, we were able to maintain modest positive momentum on new products with sequential growth of 1%. Versus first quarter 2006, our top line grew 4%, fueled by a 100% expansion in new products. With respect to product families, FPGAs declined 3% versus 4Q but still gained 5% compared with 1Q06. We saw particularly positive momentum on Cyclone II, registering growth of 28% quarter over quarter. CPLD revenue was down 4% sequentially but up 3% year over year with MAX II growing versus both comparison periods. In end market terms, communications remained soft but our industrial segment grew 3% sequentially and 15% versus last year. John will provide more details by product family and market segment following my overview. Turning to the remainder of the income statement, gross margins finished at 65.7% for 1Q, roughly in the middle of our guidance. Operating expenses landed at $130 million in total with a breakdown of $58 million for R&D and $72 million for SG&A. These results were $7 million favorable to our February guidance and they reflect the beginnings of a cost-out initiative that I will describe more fully in my 2Q and total year guidance commentary. SG&A favorability was $3 million of the $7 million, driven by modifications in our hiring and discretionary spending plans, as well as lower volume related incentives and bonuses. The remaining $4 million of R&D favorability results from better-than-planned efficiencies in launching our new products. Other income was $17 million for the first quarter, slightly ahead of guidance as a result of favorable returns on the assets in our non-qualified deferred compensation plan. However, as those gains are simply offset in operating expense for accounting purposes, they create no impact on our earnings in total. Our tax provision in the first quarter was 14%, right at the midpoint of guidance. In 1Q, we also transitioned to FIN-48 with an immaterial impact on our total reserves but a $117 million reclass of tax liabilities from short-term to long-term. Net income for 1Q was $75 million, or $0.21 per diluted share, up 28% from last year in dollar terms and up 29% in EPS. At quarter end, cash and investments were approximately $1.5 billion. Year-to-date share repurchases are roughly 9.4 million shares for $191 million. Late in 1Q, we also announced an increased share repurchase authorization level, a more aggressive timeline for those buy-backs, and initiation of the first quarterly dividend in Altera's history. These steps reflect a continuing belief in the strength of our business model and the future growth prospects for our company. Elsewhere on the balance sheet, first quarter day sales outstanding of 39 days increased versus the previous quarter due to a pattern of shipments to distribution that was weighted toward the quarter end. Given our rev-rec policy, shipments to distribution are primarily for inventory, not for current period revenue. Dividing receivables by revenue therefore can be misleading at times. For that reason, DSO is not a very effective metric for us. Distributor payment terms have not changed versus prior periods and we had no significant past due accounts at the end of either quarter. First quarter capital spending was $14 million, slightly higher than guidance as a result of timing among the quarters. We had an opportunity to accelerate some planned spending at economically favorable terms so we took advantage of it. Pipeline inventory ended 1Q at 3.7 months supply on hand versus 3.5 months in 4Q. Distributor inventory remained flat at 1.3 months while Altera inventory increased from 2.2 months to 2.4 months in preparation for 2Q demand. Turning to our outlook for the second quarter, we expect to see sequential revenue growth in the 1% to 4% range. This will require 2Q turns in the high 50s, which is roughly consistent with 1Q but below our historical average of mid 60s. Gross margins will continue to be in the 65% to 66% range. With respect to operating expense, in 1Q we initiated a company-wide focus on substantially and permanently reducing our cost structure. At present, involvement in this initiative is widespread and growing and we are executing on a broad range of projects across all major spending areas. As a result of these efforts, operating expenses will continue to be favorable to previous guidance. For 2Q, we see both R&D and SG&A at roughly $70 million. At this time, we are also comfortable updating ’07 op-ex guidance to 275 of R&D and 275 of SG&A, both on a GAAP basis. These levels are down $50 million from the $600 million total in previous guidance. In both R&D and SG&A there is a volume-sensitive component to our cost structure related to incentives and bonuses. Higher top line growth rates generate higher incentive payments with the converse also holding true. Those factors, in combination with the revised revenue profile versus last fall’s view, represent roughly $10 million of our $50 million cost reduction, with 6 of that attributable to SG&A. The remaining SG&A favorability is the primary focus of the aforementioned cost-out initiative. In total, our 2007 SG&A spending will be down approximately 10% versus 2006. With respect to R&D, the vast majority of favorability versus previous guidance is attributable to better-than-expected yields and fewer re-spins on our 65-nanometer product development. At this point, we see the remaining second-half expense being fairly evenly split between the two quarters. It is important to note, however, that we foresee no change to the rollout schedule for our new products as a result of these revised estimates. Finishing out 2Q guidance, our view of the GAAP basis tax rate continues to be in the 13% to 15% range. We are modeling roughly $16 million in other income and $363 million diluted shares as a placeholder, while we firm up the timing impact of our 1 billion share repurchase plan. Obviously that share count number will ultimately be substantially less. Finally, pipeline inventory will remain within our three- to four-month desired range and we now project capital spending at $35 million for the year, with 10 of that in 2Q. To put today’s commentary into the larger business context, we not only believe that our cost-out efforts will enable us to deliver the revised 2007 targets, but we are also reinforcing our commitment to cost productivity over the longer term. To that end, our goal is to reduce both SG&A and R&D spending in dollar terms for 2008 compared to 2007. Over the longer term, we are driving toward the mid-teens as a percentage of revenue for SG&A and the high-teens as a percentage of revenue for R&D. In summary, we intend to be a leading edge growth company with both sustainable, strong double-digit revenue performance and an efficient cost structure. With that, I will hand it over to John. John P. Daane: Thank you, Tim. The first quarter sequential revenue decline of 4%, while disappointing, was in line with forecast, albeit at the low end. The inventory overhang from late summer 2006, the atypical anemic end-of-year quarter in Japan, due both to a weak domestic communications market and uncharacteristic inventory reduction programs, and weakness in communications were the major contributors as expected. The one unforecasted addition was the computer and storage decline that I will discuss in a moment. By product classification, new products grew 1% sequentially and 100% year over year. Cyclone II was up 28% sequentially; Stratix II and Stratix II GX up 1%; MAX II up 4%; but HardCopy decreased 35% and masked what would otherwise have been a solid new product growth in a sluggish environment. The HardCopy decline was predominantly tied to inventory reductions within the computer and storage space. HardCopy should rebound in Q2 with recovery in computer and storage and the ramp of new programs in consumer and communications. Mainstream products were down 4% sequentially. Stratix and Stratix GX declined 1% and Cyclone declined 9%. Mature products were down 7% sequentially. A few specific product and business highlights to emphasize for the quarter. First, we introduced Cyclone III, the industry’s first 65-nanometer low-cost FPGA. Cyclone III is built on a low-power process and enables programmables to move into an array of new applications. We had more than 250 customers participate in the early access program and we have been shipping silicon for over a month. We received the EDN Innovation Award for our Nios II C2H compiler that enables FPGAs to be used as co-processors and hardware accelerators in new applications within the computing and wireless industries. Early process development work has paid off with 65-nanometer yields ahead of schedule. The Cyclone III rollout has been very smooth and we expect the same for Stratix III. To see the rapidly growing Chinese high-tech industry, we have been working with universities for several years to establish Altera dedicated training and development laboratories. We celebrated the opening of our 30th Chinese university lab in the quarter. Finally, consistent with our design win momentum, we had record sales in Q1 for both intellectual property course and development kits. Also, HardCopy had a record number of customer takeouts and Quartus II subscriptions reached a new high. By vertical market for Q1, we had forecasted communications to decline and the other markets to be flattish. Communications declined 4% but was better than first thought. Inside communications, telecom and wireless were both down and networking flat. Consumer decreased 8% with both broadcast and digital entertainment sub-segments down, in the latter case due to customer slips and new program ramps. Computer and storage decreased 20% across the server, storage and office automation sub-segments, predominantly from inventory reduction, and industrial grew 3% in total with segments -- excuse me, industrial grew 3% in total with sub-segments medical and military down and manufacturing systems, test and measurement and automotive all up. In the second quarter, I expect communications to increase sequentially. Networking should be down as a major customer transitions to a lean inventory model that results in the elimination of their buffer stock. Telecom and wireless should increase and lead to the overall segment growth in the wireless case due to TD-SCDMA deployments in China and general strength in 3G. Consumer should be flattish, with growth in digital entertainment due to the ramp of new programs, offset by weakness in broadcast. Computer and storage should grow across all sub-segments and industrial should also grow. All in all, I expect our Q2 revenue to increase 1% to 4% sequentially. Note that the book-to-bill was above 1 for the first quarter and turns required to hit the midpoint of guidance was in the high 50s, down from the typical mid-60 level we have seen for the last several years. Overall, it is a gradual recovery in Q2. We see some continued market softness in communications and a few additional customers looking to work inventory down, as in the case of networking. We also see segments where customers are returning to consumption after aggressively reducing inventory, such as in the computer and storage market, and cases where inventory reduction programs have gone too far and customers are now expediting us for product. Throughout this lull, we have executed extremely well on the fundamentals. Inventory has remained within our target three- to four-month supply. New product rollouts remain on schedule and 65-nanometer yields are solid. Design wins remain strong and we have a record number of Quartus II licenses. And with our expense reduction program, we have delivered significant short-term savings. With continued long-term emphasis on expense reduction and containment, Altera is uniquely positioned to enjoy higher-than-market revenue growth, combined with earnings leverage from operating expenses that is declined as a percentage of revenues. 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.

(Operator Instructions) We will take our first question from [Parag Agrawal] with Jefferies & Company.

This is Parag for John Lau. I just wanted to get a handle on your guidance. The midpoint of your guidance of 2.5% looks conservative, given that you are coming from a down March quarter and you need just 55% down for that. Could you provide some more color as to what are the factors going into your guidance? John P. Daane: I think we have provided a lot of information on a vertical basis, as well as a lot of the other financial information that goes into it. Again, what I would emphasize is we are not seeing necessarily the strong rebound. We are seeing a slow rebound. Some markets are through with their inventory depletion and we have customers returning to order. Some markets are still, end markets are still a little bit weak and we also have seen some new areas of customers looking to now deplete inventory and in that case, I mentioned the networking industry. So while the turns rate is substantially lower than we have had in the past, based on all the signals that we see in the end marketplace at this point, that is a number that we feel comfortable with.

Could you provide linearity during the quarter and your lead times? John P. Daane: We typically do not provide linearity during a quarter. As we have mentioned in the past, this is a very linear business with the exception of the third calendar quarter, where the summer holiday season tends to mean that September is a stronger month in general. That has been something that I have witnessed as long as I have been here. In terms of lead times, lead times across all of our products for the most part are at normalcy, which means that there are or is finished goods inventory available to some basis or extent within distribution, and if distribution runs out of product, it is typically between two to four weeks, sometimes six weeks for us to meet customer demand. HardCopy is a build-to-order product. Typically the lead times there are about eight to ten weeks. Thank you very much. Next question, please.

Thank you, sir. Our next question will come from David Wu with Global Crown Capital.

Good afternoon. John, can you give us a little guidance on -- before you were talking about R&D expense because of take out peaking in Q3. Are we still looking for an increase from Q2 and peaking in Q3 and then coming down the other end? The other one I would like to follow up was if you can talk about what is your target operating ratio going into let’s say a “normal” year, if ’08 could be characterized as a normal year? What is your new model now that you are on this efficiency drive? Timothy R. Morse: With respect to the first question, you see the bump up in R&D from 1Q to 2Q. You also see a small bump from 2Q to 3Q and that will remain flat into fourth quarter. So the second half will be about equally split between the two quarters, as I had commented in my previous comments. With respect to the second part of the question, I think you can look at again my comments in the script and get to what we consider our long-term model to be. We have talked about 65% margins. We have talked about SG&A in the mid-teens as a percentage of revenue, and R&D in the high-teens as a percentage of revenue. So I’m thinking you can get through the math there.

Basically, have you seen any recovery in North America of the wireless infrastructure? John P. Daane: David, we do not cut the data that fine, so I cannot really comment at this level. I would note that usually as we have talked about before, the geographic split of where our revenue is is kind of irrelevant. I think you are probably asking about the end operators themselves and I understand that question, but at the end of the day we do not cut our data for this call down to that fine a level, so I will have to ask your forgiveness and not answer that question. Thank you very much for your questions, though. Next question please, Operator.

Moving on, John Dryden with Charter Equity Research will have our next question.

Thanks, Tim, for taking my question. Could you just walk through your overall positioning on capital allocation with respect to leverage, the buy-back, and the dividend? The dividend was particularly -- it was a low disbursement versus an accelerated buy-back. Just your opinions on that going forward. Timothy R. Morse: Our Board reviews these questions on a continuing basis. In the first quarter, dividend and repurchase announcements were a product of that process and we will continue to look at the issues going forward. It is not just an event. It really is a process. We will continue also to evolve and keep pace with the changing internal and external environment with respect to all aspects of our capital structure. With regard to your specific question, I would say that as we said in the press release, we have not taken any options off the table with respect to the buy-back and as I just said, with respect to debt, this is an evolving company. It is an evolving industry and we will continue to look at the suitability of that as well.

Just a follow-up, in your work with GE with cost efficiencies and Six Sigma, what was the primary timeline to evaluate and implement the first wave of changes? Is that really what we are seeing here in the reduced operational expenses for the next couple of years? Timothy R. Morse: There again, it is a process, not an event. There has been emphasis on the cost piece starting from John for a little while now. So I came in and was able to take the reins of that. The culture has really, really responded to it very well so yes, you are seeing the beginnings of it but it is an ongoing thing.

And then, final question, could you just give us an outlook for your inventory position end 2Q? Such strong performance at the end of last quarter and then we saw the up-tick here in the first quarter. Timothy R. Morse: Again, the up-tick here makes sense given where we see 2Q demand. Most of the build is in the plain vanilla stuff, which retains our flexibility. We are looking at inventory, looking in total in our capital structure, our working capital, I should say, for efficiencies just the way we are in the cost side. So in general, I would expect inventory to follow sales in dollar terms and where we can reduce inventory in smart ways, just like the rest of working capital, we will also do that. John P. Daane: Just to add further emphasis to the inventory level, while it was up 0.2 month supply on hand and first calendar quarter from Q4, note that it is still well within the range of three to four months supply on hand, which is the typical range that we have operated within for quite a few years. I would also note that as a range, it is also substantially lower than our competitors, so we feel very comfortable with it. Yes, it did increase a little bit in the quarter but still very much within control and we see no issues with inventory at this point. Thank you very much, John. Next question, please.

Our next question will come from Louis Gerhardy with Morgan Stanley.

Hi, this is John calling in for Louis. Let’s see, just to lead off with a housekeeping question, your stock option expense expectations for Q2? Timothy R. Morse: For the year, they will end up being about where we last talked about them. I do not have the exact -- I think the remaining, trailing three quarters are about at the 1Q level, a little bit less.

Okay, sounds good, and just to follow up, basically Japan sequentially has gone down again and it seems like it is pretty weak out there. I just wanted to see if John could comment on what the long-term prospects for Japan are. John P. Daane: I would expect Japan to pick back up over time. I think we have seen a very different pattern from Japan than we have seen historically. Usually the first calendar quarter is a very strong quarter. A lot of companies will take extra product as they are trying to fulfill a lot of orders from their customers who are sort of going through a budget flush process. This year, we did not see that. We also saw many of the companies aggressively work to reduce their overall inventory, and I think we are also at a trough in terms of some of the spending from the end communications carriers. I would expect Japan will pick up over time and continue to do well as a market. The reason Japan is so large for Altera as a percentage of revenues is they really have strong representation across what are really all of the end markets for which Altera has been successful -- communications equipment, medical equipment, computing equipment, storage equipment, the broad industrial base, consumer, obviously -- so all of the areas that you see Altera's revenue are actually all the areas for which Japan as a country has national companies which are extremely strong. I would expect our revenues to do better over time within the Japanese space. Thank you very much, John. Next question, please.

Thank you. The next question we will take from Michael Masdea with Credit Suisse.

Thank you. This is [Ahmed] calling in for Michael Masdea. Could you just talk about the wireless infrastructure market as a whole, what you see going on there? Do you think we have seen the bottom of that market in 1Q? John P. Daane: We do think that wireless is going to increase for Altera in the second calendar quarter. As I mentioned in the script, we are seeing strength both in TD-SCDMA deployments for China now, as well as just general strength in 3G. So we do expect that the wireless market is going to grow for Altera in the second calendar quarter.

Could you just give a little commentary on visibility and overall customer mentality currently? John P. Daane: Customer mentality right now is to try to maximize flexibility and minimize inventory, which translates into they want you to hold as much inventory for them as possible. That is what we see. I think the visibility is the same that it has always been. In general, customers do not have a tremendous amount of end visibility themselves and so they do provide us forecasts. We do put some higher level spins on those forecasts ourselves, which then translate into the guidance that we give you. I would say that the visibility that we have is exactly the same that it has been in the past. Thank you very much, Ahmed. Next question, please.

(Operator Instructions) Our next question will come from Ruben Roy with Pacific Crest Securities.

Thank you. John, I was wondering if you could talk a little bit about the cost savings program as it applies to R&D and if there are any areas that perhaps you might be de-emphasizing. If you split it up into three bucks, FPGAs, CPLDs, and HardCopy perhaps, and just give us some more detail on what is going on from a roadmap perspective? John P. Daane: There is no basic change in strategy for the corporation. The R&D savings that you are seeing this year, as Tim outlined, are not from any product changes or cancellations or strategy changes. They simply are because of efficiency. There are two basic things that are happening within the R&D space. Number one is we always do bake in an assumption that we will need to re-spin products because of design errors, and that is something that you always build in because I have seen statistics that say about 75% of all chips need to be re-spun. Note that mass costs are in the multi-million dollar area for one chip, so it can be very expensive if you have to re-spin. At this point, we have Cyclone III out and working and therefore, since we are very confident in that and confident in other products that we are rolling out at this point that we will not have to spend some of those re-spin dollars and therefore you are seeing those savings reflected in Tim’s updated forecast. Number two, as I mentioned, also the 65-nanometer yields are tracking well ahead of schedule and there is some spending that Altera will normally do for yield enhancement work of engineering and wafers that at this point we will not need to do within this year’s assumptions, so we are really saving in R&D in two specific areas just because I think of excellent execution, both of this company as well as the partners that we use, not because of any fundamental change within our overall strategy. In terms of R&D, areas that we will be looking to for productivity gains over time will be things like continuing to improve our design methodology to take advantage of new tools and new design methodologies in order to enhance the productivity of our engineers.

Thanks for that detail. John, if I could follow up quickly, you gave us a data point on record number of Quartus II licenses. That seemed interesting. Are those from new customers or existing customers that are moving up to the new design tools, or any detail around that data point? James A. Skinner: Thank you. The record number of licenses is I think because of the success of the company, so when we report licenses or subscriptions, what we do is take the total number of licenses that we have, we subtract out universities, we subtract out consultants, we subtract out students and get to real paying customers who are buying our end product. So what we have been seeing I think with the success that we have had, both with the products over the last four or five years, we have seen a growing subscription base. I think as Altera has also moved into some new markets like automotive into the consumer side of the business, we are also seeing traction of new licensees in companies that we have not previously engaged with. It is a number that we do track, along with IP sales and development kit sales, because we think those are leading indicators as to business momentum and how our design wins will look in the future. Thank you very much, Ruben. Next question, please.

Thank you. Moving on, our next question will come from Glen Yeung with Citigroup.

Hi, this is Peter for Glen Yeung. I am wondering; I see your turns business is expected to be lower next quarter than it has traditionally been. What is driving that? Is there any change where your business is going to be less reliant on turns going forward? John P. Daane: I think that the business will be highly dependent on turns going forward. I think it is probably going to increase. The reason I say that is we have a majority of our large customers who are moving to basically vendor-managed inventory or just-on-time inventory programs where they will book and expect shipment in the same day, so therefore you will get forecasts from the end customers but you are not going to get backlog. So I think over time we are going to see probably the turns rate continue to increase rather than decrease. This quarter, a little bit different. Again, typically we have turned business in the mid-60s. Again, this quarter we are forecasting high-50s, which is consistent with what we saw last quarter. But I would say over the next several years, you probably will see that turns percentage actually creep up rather than mover down.

And then on the operating expense side, are there any opportunities you are finding, or where are you finding opportunities for sales efficiency, greater sales efficiency? John P. Daane: We have talked about for years the fact that Altera had been building out a direct sales channel, and that is adding our own sales people and FAEs to really call on the top accounts, where we used to have reps and distributors do that predominantly in the past. So we have been adding SG&A expense over several years to build out a direct sales force really on a worldwide basis. We have also said that a lot of that build out is completing and therefore, as we move forward, we can enjoy the fact that we are getting increased revenues without the need to continue to invest at the same pace within SG&A, so we should, moving forward, start to see the leverage of the fact that we have really done most of the build out of the sales force, won’t need to do it -- certainly won’t need to spend on an increasing rate at the rate that we will see revenues rise. Thank you very much, Peter.

Thank you. Our next question will come from Seogju Lee with Goldman Sachs.

Thank you -- very busy quarter for you all. John and Tim, as you have -- the balance sheets this quarter, as you look at the cash balance that you maintain and going forward, how should I think about -- do you have targets, what you need from an operations standpoint? How are you looking at the cash on hand going forward? Timothy R. Morse: We’ve said before and will continue to say that we definitely have excessive cash, far in excess of what we need. We are going to drive that down with the announcements we made in the first quarter, accelerating the buy-back specifically. What remains is going to be a function of a number of things, but yes we look at it in terms of having a certain amount of cash on hand, especially in the U.S., to meet operating expenses, to meet on-demand payables, now to have a year’s worth of the dividend, for example. So we run through a formula like that internally that governs where we want to be on cash but we are definitely driving it down.

Also, in terms of looking at the SG&A, you said there was a volume contingent portion of that based on the expectations of the growth. What are you building in for the growth for this year? Timothy R. Morse: That is a little bit too forward-looking. I think you pick up the 2Q about the 1% to 4% guidance range, but we are not prepared to go beyond that at this point. Good try, though.

I had to try though, right? Timothy R. Morse: I have no problem with that.

Lastly, John, if I think about the actions that you are doing, you talked about driving the efficiencies on the R&D side, but as you scale back some of the SG&A component, how are you looking at that compared to the long-term sales growth opportunity for the company and throughout the industry? John P. Daane: Nothing has fundamentally changed. If you go back several years, Seogju, we have said that the R&D is really separate from the rest of or how the year is going, in particular. So in other words, we identify products that we think are going to be successful in the market, we research those products and we bring them out as quickly as possible. During the year, certainly in the last several years, I cannot think of a time where we have cancelled the product or changed its delivery date or something of that nature in order to try to change the spend pattern. We will invest what we need to in order to be successful. Again, the change in R&D numbers this year really are related to the fact that I think Altera continues to perform in R&D extremely well. Long term, we will continue to look at it as we’d like to be in the high-teens, some years maybe a little bit higher, some years will be a little bit lower. The variability there will be I think dependent on the prototype schedule, since there is in R&D as you may be well aware at this point, a variable component based on mask and wafer spend. So for this year, you would expect that R&D is going to be a little bit higher than next year because we are doing a heavy spend on 65-nanometer rollouts.

Okay, so if as you exit this year flat Q4 versus Q3, we would probably see a little bit of step down as we enter ’08 then? John P. Daane: It is hard for us to give you a specific model at this point. We certainly will share an ’08 model as we get further into this year but in general, as Tim said in his remarks, we would expect that R&D is going to be at this point down next year over this year. And again, it is driven mainly by the fact that you are seeing a variable component of the 65-nanometer tape outs end this year and therefore you will see the lull that we have talked about in the past.

And then you will get a bump as you ramp up 45 at some point. John P. Daane: Yes.

Okay, great. Thanks, good luck. John P. Daane: Thank you very much, Seogju. Next question, please.

Thank you. Moving on, Tim Luke with Lehman Brothers will have our next question.

Just on the networking side, it sounds like Cisco is moving back towards the lean inventory. I was under the impression that of the program that they started a while ago, and maybe you could give us some sense of how long that you think that will take to work through in terms of having an impact in your orders, and then when you would expect to see that move upwards again, having been worked through? Separately, just in the wireless infrastructure area, obviously there had been a lot of dislocation associated with Nokia, Siemens, and Alcatel-Lucent combining. How in general, without commenting specifically on customers, you have begun to see some of the consolidation dislocation get sort of addressed and some re-ordering there, or do you think that is ahead of you for the second-half? For Tim, on the receivables, it looked like they went up quite a lot and I think you talked about some of the factors that have contributed to that, but if you could just touch on that, that would be helpful, and how you see it maybe next quarter. Thanks. John P. Daane: Tim, I will start with the networking side. As you probably are familiar with us, we tend, or we really do not want to talk about specific customers, so I am going to stay generic here. We have seen customers move to sort of a lean model over time where they are moving to a VMI program, if you will, vendor management inventory essentially or a program where they are having ultimately the contract manufacturer hold their inventory for them, in which case you are basically removing one of the buffer spots in the chain where there used to be inventory before. Typically, if you think about it, customers only keep a small amount of inventory, so you would expect at any particular time that there may be an impact of about a quarter, so a month to three months, and then you should see a return to the normal buying pattern. This is specific to one customer this quarter. That’s a major customer in the networking space. I would note that we have had this effect over the last several years from other large customers, particularly in the communications area, that have also been doing this. I would caution that while companies can move to lean or a sort of a pull, demand pull strategy, it may not be uniform where they do it on all products, or all of their end products on day one. They may ease it in over time, either by product line or a contract manufacturer and therefore you can see semiconductor companies impacted at different spots in a particular time. In terms of wireless customers --

To be clear, that you are basically summarizing networking as a one-quarter impact, really? John P. Daane: I would expect that it would impact this quarter, yes, and then return back to normalcy in the next calendar quarter. In wireless, the customer combinations that you mentioned, Alcatel-Lucent, Siemens, Nokia, they are actually wireline customers as well, so in general whenever there are the combinations of end companies, there is some I would say confusion in the marketplace for a period of time. It’s based on which product survives. Obviously the carriers, which are extremely conservative, as you well know, want to know which piece of equipment is going to be supported and for how long, and in R&D which pieces of equipment are alive, and that can cause disruptions and purchase patterns for a particular period of time. I think that you have that going on with some of those cases. I think you also have some basically pauses from some of the operators purchasing equipment, and you put the two things together and you get sort of a weakness within the communications area. In general, communications only declined 4% sequentially, and I say only because it was actually stronger than I had anticipated going into Q1, so business was a little bit stronger than we had originally thought. We do expect both wireline and wireless to be up. That is the traditional telecom side, and the wireless business to be up for Altera in the second calendar quarter. Networking is the only area in communications that will be down. Again, communications as a whole should be up this calendar quarter.

So are we through the digested period with those mergers, or do you think it is more of a second-half benefit? John P. Daane: Tim, I am hesitating to answer not because I know the data or don’t know the data but because we are talking about two specific customers and I do not want to do anything that would tip something that impacts their revenue profile, or ultimately their investor relations strategy. So again, because some of these things are narrow, I am going to just stay at a high level and not get into company specifics. Timothy R. Morse: Tim, on the AR question, just in simple dollar terms, we sold more to distribution in March than we did in December, so therefore even with payment terms being exactly the same for our customers, the distributors, you would expect more receivables to be on our books at 1Q end than it was at the end of 4Q.

How is it now? Do you expect it to be back to the lower level? John P. Daane: That number fluctuates for us a lot and the reason that every quarter it fluctuates, we point to the fact that it is a completely meaningless statistic because at the end of day, we are shipping into distribution. We do not recognize revenue until they ship it to an end customer, so if we ship a lot of stuff into distribution in a back-end loaded quarter and revenues were down, the DSO calculation will have it go up, even at the end of the day, though it does not mean that we had a back-end shipment pattern to the end customers for revenue and it does not mean that anybody has changed their payment terms to us. I would generally highlight to everybody that that is really a meaningless statistic. It bounces up and down constantly. At the end of the day, if you look at two metrics that we give you, one is, as Tim pointed out, there is really no change in payment terms from the distributors. Number two, if you look at the inventory that was in distribution, it was flat quarter on quarter on a month’s supply on-hand basis, and actually down on a dollars basis, quarter on quarter. I think generally if you look at the health of everything, it is fine. That calculation just does not work for a company that ships most of its revenue from distribution.

On the cost side, lastly, is your headcount going to be down now? Should we think about that for the year end, or fairly flat? John P. Daane: I think it is going to probably be flattish over time. There will be some groups that continue to hire. There are other areas, as Tim pointed out, that we will take advantage of attrition for cost savings, and certainly as part of the program that we have done to minimize expenses this year is we have gone back and worked through the plan in order to really take a new look at headcount hiring and what areas we want to emphasize. R&D, as an example, will get more hires this year as we continue to ramp for the 45-nanometer development. Thank you very much, Tim. Next question, please.

(Operator Instructions) Our next question will come from Shawn Webster of JP Morgan.

Good afternoon. Thank you. I’m calling in for Chris. I think you just mentioned that you were not planning on headcount reductions for the year, is that right, as part of the operational efficiencies? John P. Daane: Right, I would not expect that the headcount number will be down year on year.

Okay, and then there won’t be any program changes as well, like consolidating different product groups that may not be performing well or anything like that? John P. Daane: We are a fairly simple company, so this company is functionally organized. We have one engineering group. We have one marketing group, one sales group, one finance group, so we have remained that way. The few divisions that we did have years ago we did consolidate to be functionally managed and organized company. Generally, when you are functionally organized particularly with a few products that you have like Altera, it is much more effective in terms of minimizing the overhead and management infrastructure that you’d have. So we are fundamentally not making any dramatic changes to the company.

Okay, and then on some of the I guess synergies that you have discovered in terms of your manufacturing, one of the things that you found was that your yields on 65-nanometer were better than what you had expected. How much of the good news on the spending side came from that effect? John P. Daane: I don’t think we can break that out for you today, Shawn, in terms of that versus the masks versus whatever minor things might be in that number. I could tell you that generally what we do is we plan for a defect density or yield model with TSMC well ahead of time. That is a multi-year model. In the past couple of generations, we have actually been well ahead of that model. We were in 0.13 micron, we were in 90-nanometer and 65-nanometer’s even better, so we set aggressive targets and the nice thing for us is that we have been well ahead of those targets. The reason that that is so important to us is programmable logic requires extra transistors, therefore a lot of our cost is going to be based in yield, because our die are large, not necessarily the wafer costs. As such, we put a lot of investment and much more so than I would say almost any other fab semiconductor company that I have seen in technology yield enhancement, modeling design rule organizations to make sure that we have the best possible cost structure.

So does that mean your longer term, or maybe medium term gross margins would be a little bit better than you expected over the next couple of years? John P. Daane: Typically the new products, like Cyclone III, will not impact revenues in the short run. With Cyclone III, as with Cyclone II and I, we will need to see some volume ramp before it becomes a significant contributor to our overall revenue. The improved yields help us on the R&D side. They do not in the short run help us on gross margins because we are not running a tremendous amount of product.

Right, I was talking more the long run because you have ticked down your long-term margin model. I was just wondering if you might have any good news there because of the yields over the long term. John P. Daane: We have not reduced our long-term margin model. Our long-term margin model, and this has been consistent for at least three years, and I am looking at Scott because it has probably been four to five. We have said we want to operate the company long-term at 65% gross margins. We are fortunate in that we have had great products. We have had great success in really making sure that our pricing is the maximum that we can get at any given period of time, and we have had excellent cost structures, all of which have resulted in Altera operating above that 65% model that we have. But again, 65% remains our long-term model. Thank you very much, Shawn. Next question, please.

Thank you. Moving on, we will take Steve [Elisku] of UBS.

Yes, this is Steve Elisku for Uche Orji. First, I wanted to ask about 3G and what is driving your confidence in this going forward, as well as to get a sense of TD-SCDMA and perhaps if you could quantify the percentage of your 3G that is TD-SCDMA. John P. Daane: I cannot break out for you the percentage on TD-SCDMA or any of the other sub-standards within the 3G area. We just do not get that granular in terms of the discussion for the call on the business. In terms of why we are able to say that we expect wireless to be up is simply because of the order pattern and the forecast from the end wireless customers, and the fact that we are seeing and expect more units and more revenue this quarter than we simply saw last quarter.

Can you elaborate if this is more from emerging markets or if this is North America, Europe and Japan based? John P. Daane: It is some of those, so I think the capital profile of Japan probably is more of a late this year, start to increase again. I think China obviously is spending now. A lot of developing countries are spending now. We are also seeing some returns in business in North America from an operator perspective as well as some in Europe, so I would say it is broad-based. This quarter, predominantly 3G based.

One other question on industrial; I wanted to get a sense of the industrial growth. We would have thought we would see perhaps a stronger up-lift as you embark here on recovery and acceleration of year-on-year growth. Can you give a sense of perhaps why we are not necessarily seeing that? Could you give any color on which sub-segments are performing better than others going forward? John P. Daane: Steve, the industrial segment actually through this lull has been doing very well, so if you think of where the business has decreased in the last couple of quarters, it has been more on the communications side, more on the computer and storage side, and more on the consumer side. Industrial, not all markets but quite a few of the markets have actually seen some strength and growth. So as you know, it is a very distributed business. Again, we count in industrial things like automotive, test in medical, measurement equipment, security -- it is a very broad category so you are going to have some that will increase in a quarter and some that will decrease just either on their own cyclical pattern or based on inventory or end customer programs. But in general, it is also in general a slower growth market and it is a market for which we grow at a higher rate only because we continue to displace much older generation A6 micro controllers and other componentry that is being designed out as a lot of this really long-lasting equipment is coming up for redesign. But at the end of the day, it has been growing well for us over time and we would expect it to continue to grow well for us in the future at a very steady rate.

One final question on HardCopy, it seems that now with the latest quarter, HardCopy is now down around 3% of sales. You indicated the design win pipeline is strong. What kind of rebound should we expect here over the next quarter or so in terms of getting back to at least 5% of sales, or getting more towards your long-term goals? John P. Daane: I would expect a very strong rebound this quarter. I think this quarter will really be determined at this point based on how much we can build and get out the door to satisfy the requirements of the customers. As you may be aware, the HardCopy product is a build-to-order product. Lead times are in the eight to ten weeks area, therefore we are on the edge of customers being able to order it and our being able to turn it at this point for this quarter. So really at this point, we are seeing very strong demand. Some of that is simply a rebound because customers took their inventory levels down to zero and are now requiring product. Others because we are ramping several new programs in the consumer area and communications area. I would expect substantial very strong growth in HardCopy this quarter. Couldn’t give you a percentage on revenues. Typically don’t give that sort of breakdown on a product basis, but again -- and I can’t give you really a forecast of next quarter or the quarter after, other than this will be a strong quarter for HardCopy. Thank you very much, Steve. Next question, please.

Thank you. We have a follow-up question with Louis Gerhardy with Morgan Stanley.

I’m sorry. My questions have been answered. Thank you.

Thank you. We have no further questions at this time. Mr. Wylie, I would like to turn the call back over to your for further comments or closing remarks.

Thank you, Operator. We will present at two industry conferences this quarter. On May 1st we will attend the Merrill Lynch Tech gathering in New York, and on May 21st we will be in Boston presenting at the JP Morgan 35th Annual Technology Conference. This concludes Altera's conference call. Thanks for your participation and interest.

Thank you. Ladies and gentlemen, this does conclude today’s conference. We would like to thank everyone for their participation. Have a great rest of your day.