Welcome to the Altera second quarter 2008 earnings results conference call. (Operator Instructions) At this time, I would like to turn the call over to Scott Wylie, Vice President of Investor Relations for Altera Corporation.

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. The telephone replay will be available at 7194570820, and use code 258712. During today's call, we'll 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 are 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 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. Timothy R. Morse: In the second quarter 2008, Altera generated roughly 12.5% year-over-year revenue growth, 31.5% operating margin and 31% return on equity. For the first time in the same reporting period since establishing our themes of growth, efficiency and stockholder value, we've achieved all three goals of 10% to 15% revenue improvement, greater than 30% OM rate, and greater than 30% ROE. While these metrics are certainly subject to variation from quarter to quarter, we are pleased nonetheless to be able to deliver these kinds of results so early into our transformational efforts. Moving to a detailed review of second quarter financials, revenue of $360 million was 7% higher than first quarter and exceeded our upwardly revised guidance from June 3. The growth we experienced this quarter was broad-based, with particular strength in our larger customers. John will provide details and color commentary on product and market segment performance following my overview. In terms of gross margin rate, 67.1% for 2Q was an improvement of 2 points from last quarter, and it substantially exceeded our guidance range of 64.5% to 65.5%. Market segment mix was essentially neutral versus first quarter, so the favorability was primarily driven by our work in reducing material and logistics costs. This work is ongoing and should continue to bear fruit well into the future. As a result, we see near-term upside to our stated gross margin model of 65% certainly through this year and remain comfortable with that 65% target, plus or minus a point, over the longer term. Continuing down the income statement, operating expenses were roughly $128 million for second quarter, down 2% from prior year and at the low end of guidance. In sharp contrast to 1Q, there was essentially no impact from NQDC embedded in OPEX this quarter. R&D landed at $64 million, up 2% from 2Q '07 but approximately $2 million below the midpoint of guidance. The favorability versus guidance was attributable to under runs and R&D labor costs in other indirect spending. Our development masks, wafers and prototypes were spot on the original estimate, and our program rollouts remain solidly on track. SG&A finished 2Q at $64 million as well, down 6% from last year and right at the midpoint of guidance. All in all, it was a very strong quarter for OPEX execution. At the operating margin level, Altera earned roughly $113 million, up 50% from 2Q '07. The resulting 31.5% OM rate compares favorably to both last quarter's adjusted 28% rate and to our historical level of 22% to 23%. Rate expansion so far in 2008 is slightly ahead of expectations, and we remain committed to continuing along the path of greater operating efficiency. Other income for the quarter was just shy of $4 million, slightly ahead of guidance but significant below last year as a result of lesser cash balances, falling interest rates and increased interest expense. The effective tax rate for 2Q '08 was 16.5%, right at the midpoint of our 16% to 17% guidance. We expect that underlying rate to be stable in the 16% to 17% range for the full year. If and when the U.S. R&D tax credit is passed, it will reduce the full year rate to the previously communicated range of 14% to 15%. On the net income line, Altera generated roughly $98 million or $0.32 per diluted share. That result was up 22% from last year in dollar terms and 43% in EPS. Share repurchases in second quarter were essentially zero as our buyback pricing grids weren't triggered until the very end of June. With regard to the balance sheet, cash and investments were roughly $1.2 billion, up $237 million from last quarter as a result of strong operating cash flow and the final planned drawdown of our credit facility. Cash flow from operations for first half 2008 was $227 million, reflecting the strength of our financial model. At $257 million, accounts receivable on shipments into distribution rose by $26 million on the back of continued top line strength. With regard to inventory, total months' supply on hand remains level with the prior two quarters at three months. Altera inventory ticked up a tenth to 1.9 months. [Industry] inventory ticked down a tenth to 1.1 months. On the right-hand side of the balance sheet, long-term debt increased by $150 million to $500 million in accordance with the long-communicated plan for this facility. As previously noted, the combination of operating results and capital structure improvements have yielded 31% ROE this quarter on a trailing 12 months basis, up from 21% in 2007 and 23% in 2006. Moving to our outlook for the third quarter, we expect to see revenue in the flat to minus 3% range, with turns in the high 50s, broadly consistent with 2Q's 58%. We enter 3Q off a book to bill ratio fractionally below 1 last quarter and a slight decline in backlog versus 2Q entering levels. Gross margin rates will continue to be segment mix dependent, in the 66.5% to 67.5% range. 3Q operating expenses should be $66 to $68 million for R&D and $63 to $65 million for SG&A. The sequential uptick in R&D spending is attributable to our 40-nanometer product rollout. Rounding out third quarter guidance, we anticipate having $4 million of other income and an effective tax rate of 16% to 17%, unless the U.S. R&D tax credit is renewed during the quarter. Before closing, I'd like to update a few expectations for full year as well. Ignoring the $5 million first quarter flipflop between OPEX and other income related to NQDC, on our last call we had projected $268 million R&D, $259 million SG&A, and $15 million other income. Staying on that NQDC-neutral basis, our view is now that R&D will be roughly $265 million, SG&A will be roughly $255 million, and other income will be approximately $18 million. With that, I'll turn the call over to John.

The 7% sequential and 13% year-over-year Q2 revenue increase exceeded our forecast as a result of stronger-than-expected communications and industrial growth with business accelerating in June for both markets. Our new products, now 42% of revenue grew 13% sequentially and 58% year-over-year derived from continued ASIC and ASSP replacement. FPGAs grew 9% sequentially and 18% year-over-year as by my estimate we continue to take market share. In a more detailed view of our new products, Cyclone III was up 88%, Stratix III up 135%, Cyclone II up 2%, Stratix II and Stratix II GX up 16%, MAX II up 9%, and HardCopy decreased 2%. With leadership in software and in architecture creating the highest density and highest performance devices at the lowest power, we expect 90-nanometer and 65-nanometer product ramps to continue to fuel market share gains. Introduction of our 40-nanometer Stratix IV product remains on schedule, with silicon shipments this year. Our architectural leadership, coupled with a first-time process technology lead at 40-nanometer, should accelerate our replacement of ASIC and ASSP products, resulting in continued strong growth and market share gain. By vertical market for Q2, we had forecast industrial and computer to be flat to down, for communications to grow strongly across each sub segment, and for consumer to grow. In Q2, computer declined 8% sequentially, with both computer and storage down. Consumer increased 2%, with broadcast growth more than offsetting weakness in highend flat panel televisions. Industrial grew 5%, with military, automotive, medical and the broad industrial base up, and test and measurement down. Communications increased 14%, with strong growth in telecom, wireless and networking in Europe, North America, and Asia. In summary, computer declined a little more than expected, the broad industrial growth was a positive surprise, and communications growth exceeded our expectations. Moving to Q3, we are forecasting revenues to range from flat with Q2 to down 3%. The third calendar quarter is typically slower for communications, and we have also removed customer forecasts for 3G wireless purchases for China. Based on an uncertain macroeconomic environment, we have also reduced customer forecasts for the broad industrial base of accounts and for high-end consumer products such as flat panel televisions. We therefore expect communications to slightly decline, with growth in Japan offsetting some of the seasonal weakness in other geographies, for computer to be down, industrial flat to down, and for consumer to grow in both broadcast and display. As a note, business is solid thus far in the quarter, supporting the top end of the range, the book to bill is significantly above 1, and the turns rate for our forecast is consistent with that of the last several quarters. While early to precisely call Q4, based on customer forecasts and our own analysis, we expect sequential revenue growth with communications, broadcast, military, automotive and servers leading the way. In summary, our Q2 results demonstrated the benefits of our focus on deploying innovative products that can drive 10% to 15% long-term top line growth, simplifying and streamlining our business to reduce operating expense as a percentage of revenues to enable EPS to grow faster than revenues, and creating an efficient capital structure to drive ROE greater than 30%. In the second quarter, our revenues grew 13% year-over-year, EPS an outstanding 43% year-over-year, and our ROE reached 31%. Let me now turn this call back to Scott.

We would now like to take questions.

(Operator Instructions) Your first question comes from Christopher Danely - J.P. Morgan.

John, I was wondering if you could just give us your thoughts on the com market for the second half of the year. It sounds like things are pretty strong in the first half given your caution on the China 3G base station and what we've heard out of Cisco's CEO, can you just expand up, what you see for the second half of the year in the [com market].

Generally, as we just mentioned, communications was strong in three of our geographies. It was down sequentially in Japan, both in wireless as well as in wireline, but was strong in all of the other geographies. And we saw that our telecom, out networking and our wireless businesses were all up sequentially. Q3 is typically a slower quarter in communications, as we've witnessed over the last 15 years, so we certainly have that playing in the short term. Plus we have ourselves removed some of our customer forecasts for short-term 3G deployment within China. We have been told that China Mobile is putting out an RFQ for TDSCDMA deployments for the second half of the year. Personally, I think that might be a little aggressive, so we've discounted those customer forecasts although, if that does happen, that's clearly an upside to our number and would drive better results. In Japan we do see that this will be a good quarter, particularly for the telecom side within NGN for NTT, and that will help moderate some of what we'd see as seasonal weakness from the other geographies. We do expect, though, going into Q4 that we will have growth. We do see networking and wireless and telecom growing again in the fourth calendar quarter, and so overall we would expect that this will be a very solid year overall for communications. So I would say seasonal weakness in the short term, but returning to growth in Q4. And overall, a very strong communications year for Altera.

Tim, you said that the stock didn't fall into your buyback range until the end of June and it seems to be lower than where it was at the end of June, so could we expect you to buy back a lot of stock this quarter? Timothy R. Morse: Well, you can see that, Chris, in our press release. You can see what we've purchased in the last few weeks. We will continue to reevaluate our buyback grids and, do the appropriate thing, as we've committed in the past. When opportunities arise, we'll take advantage of them.

I'm just a little bit surprised; given the cash balance went up a couple hundred million bucks, why you wouldn't be in there with both fists right now. Timothy R. Morse: Well, because we trade on 10b5-1 plans. So they're preordained well, well, well in advance. We established it back at the end of March, and then it takes effect a few weeks after that. And at that point, we had just finished the big $1.5 billion buyback and couldn't do too much, couldn't foresee what the right levels would be here. And then, when the buyback grids kicked in June, they've recently started to do some reasonably okay repurchases. And we'll continue to evaluate all those levels as we get into this thing.

Your next question comes from Ruben Roy - Pacific Crest Securities.

John, can you expand a little bit on what went on in Japan? I get the feeling that you were expecting some growth maybe in Q2. Were there push outs or something like that and that's why you're expecting growth in Q3 out of Japan?

Yes, I would say Japan was weaker than we had expected. You can see that in - overall, that was the only geography that did decrease. There were some short-term slowdowns from customers. I would say the area it was both in telecom and wireless. I would say wireless was a little bit stronger than the telecom side. We do expect the telecom is going to be strong this quarter and overall will lead to our Japanese geography growing again this quarter.

In terms of your 65-nanometer product growth, you mentioned the percentage growth for both Cyclone and Stratix III. I was wondering if you can give us some rough idea of what the mix is between those two, the low end and the higher end product, or maybe if not if you can talk about whether or not Stratix III design or demand creation activities have been de-emphasized at all with Stratix IV around the corner?

So Stratix III continues to be a predominant high end design win vehicle for us today. All of the high end activity really is in that family. It's actually very strong right now. It's strong because we have the highest density products. So for the prototyping industry; we've seen a lot of acceptance there, which is new for us. We also have the highest density highest performance and lowest power, which is very appealing to the infrastructure, types of customers that Altera and the PLD industry service. So that product is actually extremely strong for us right now, in fact, it's the one product that we are chasing demand trying to expedite more wafers in order to satisfy the product ramp that we're seeing. Also Cyclone III is obviously ramping very strong. We mentioned the percentages. I get - what was the question specifically?

Well, I was actually wondering if you can give us the mix, a rough idea, are the majority of the shipments for 65nanomenter Cyclone III today?

I think if I just ballpark that, they're close to even. Cyclone III is a little bit bigger.

On the gross margins it sounds like model out gross margins similar to your Q3 guidance through the end of the year. Timothy R. Morse: Yes. We'll obviously be back to you with more updates as we go along. For this quarter, I don't see any certainly cost out catalysts, so it really will just vary with the market segment mix, underlying market segment mix. For the fourth quarter and beyond, as I said, we've got more work that we're working on here in cost of goods sold, but a little bit too early to quantify the exact impact and other dynamics that will impact us. So we'll just take it quarter by quarter here.

Ruben, just as a follow up to what you'd asked, we do expect that Stratix IV will become the predominant high end design vehicle as we move into the second half of this year and customers move over there for the obvious benefits of the product.

Your next question comes from John Dryden - Charter Equity Research.

John, first for you, the upside in industrial, can you comment on that by geography please?

The industrial category is broader than what the name says because we also have a few of the other vertical markets in there like automotive, military, medical, test and measurement. And really we've seen some strength growth in the broad base of industrial, and we also saw growth in areas like medical and military, automotive - which you should expect, because it's a newer category out of us. The only area that was down was test and measurement. So strong growth across each of those specific end markets. We haven't broken down the end markets by geography, so unfortunately I'm not going to be able to give you much more color than what we've already provided there.

Tim, just to follow up on cash flow from operations, can you walk through the main contributor of that going down Q to Q? Timothy R. Morse: Yes, you can see it in the press release on the balance sheet, the deferred income account contributed about, what is it, $68 million or so to the cash flow strength in first quarter, reversed itself slightly this quarter. It all has to do with the inventory levels out in the distribution channel. So if you remove that deferred income impact one way or another, the quarters were relatively even. Actually, 2Q was a little bit stronger. So then if you take that deferred income account as its own topic, as I had talked about on last call, it'll really float with the inventory levels out there in the channel. We sell in at very high list prices, of course, but we don't recognize revenue until we sell out to customers. So you've got a lot of margin there trapped at very high rates that then get converted to, our regular average selling prices and margins by the time they sell out. So in the meantime, though, while that inventory is there, it's very much at a very high rate. So we sell in; they hold inventory. It's a great model because as we grow and as the inventory goes up, we actually generate cash. There was a lot of that that happened in the first quarter. And then, as I talked about on the call last time as well, I'd encourage everyone to look at that deferred income account in tandem with the inventory MSOH for [Disti]. And if it stays, despite any dollar increases or decreases, you can put all those increases and decreases in context if you just look at the relative measure, which is MSOH. So that's remained constant over the last few quarters.

Your next question comes from Tristan Gerra - Robert W. Baird & Co., Inc.

The cost reduction which [inaudible] gross margin in the quarter, if the benefit of these remains going forward, why not raising the gross margin a long-term target? Is 65 [inaudible] a potential of [certainty]? Anything else that could be a potential upset next year? Timothy R. Morse: Tristan, it's just too early to say. We try to take these things one quarter at a time. It's tough. We're not talking about anything in '09 yet. We're not talking about certainly market segment growth or lack thereof. So what we can tell you is there's no reason for the baseline to be any different than market segment mix dependant, as we've been talking about for awhile. And we will continue to drive these cost upsides as we can. It's really just an outgrowth of the overall corporate initiative to take costs out of the business through big projects, small projects, streamlining, simplification. You've seen a lot of that in the OPEX. Our operating teams have really done a nice job in the last couple of quarters in creating great, great projects that impact cost of goods sold. So for right now what we see is it's dropping through. And we'll continue to work on that stuff, but it's just a little too early to change, a long-term model, certainly. And it's too early even to talk about 2009.

Based on the Q3 guidance, do you expect any change in mix between the high end and low end of [inaudible] or should that remain pretty stable?

It's really hard to call because we do sell our Cyclone products across all of the communications customers as well as Stratix, for an example. So you can have minor changes at any time given in a quarter. If you look at the end market mix, you're seeing communications a little bit down this quarter, consumer a little bit stronger although both - the latter one, both on the broadcast number as well as the typical consumer product. So it's not a tremendous change quarter to quarter. In the short run, you wouldn't expect things to significantly change. But, again, any one change by any one major customer or major program or a couple of major customers obviously can have an impact.

Your next question comes from James Schneider - Goldman Sachs.

John, if you look within the coms market, you I believe talked about both U.S. and European customers being up in the quarter. Do you see that as sustainable in the back half of the year, and if you could break them out separately by geography, that'd be great.

So we expect, outside of highlighting Japan going into Q3 as a grower, we're not breaking out the other geographies. I do expect that we can see growth in the second half of the year. You are seeing a lot of international deployments, specifically both within the telecom space as well as in the wireless space. We do follow and we do talk to most of the major carriers on a worldwide basis, and as of yet we haven't seen any significant changes one way or the other in terms of their CapEx plans or projects. And so, because of that, we would expect that we will see continued growth in wireless in the second half of the year or into Q4.

Tim, again on the gross margins, I think there's been some commentary out there about TSMC and their potential desire to increase prices. Do you see that being a headwind to gross margin maybe at the end of this year or into '09? Timothy R. Morse: It's really too early to say. We have a terrific relationship with TSMC, and we work together on all kinds of programs from yield to usage, etc. I really don't want to go beyond quarters, and I certainly don't want to comment on what TSMC plans to do or doesn't plan to do.

Your next question comes from David Wong - Wachovia Capital Markets, LLC.

When you said that communications was better than expected in various geographies, did you see this strengthening through the quarter or did you actually see [some] changes towards the end of the quarter?

The business was actually strong throughout the quarter, but we did see it accelerate through June.

And this is true for all geographies, is that correct?

I haven't broken that out by geography, but certainly, if you look at telecom or wireline as well as wireless at a top level it is true.

Your next question comes from Glen Yeung - Citigroup.

John, I'm a little surprised that you're willing to point to fourth quarter and suggest that you might see growth in that quarter given obviously some lack of visibility we see from a macro perspective. How would you characterize your visibility today, looking as far out as six months, and what gives you the confidence into Q4?

Glen, the reason that I put Q4 in, as you're probably aware - and the reason you're surprised is we've typically taken one quarter at a time - it's natural to ask the question okay, you're expecting to be down in Q3. What happens in Q4? In other words, is this just a pause or your typical summer slowdown, or is this a trend that we should extrapolate from? And so therefore, since we anticipated it was going to be a question, we therefore felt it was something we should put into the early comments in order to get it out there so you knew what our thinking is currently. We turn in the high 50s today, as a percentage of our business. The nice thing is that's down from the mid to high 60s that we used to see a year ago, so we do have more visibility than perhaps we did a year, a year and a half ago. But, of course, visibility is still limited. We do make calls on a quarter. Sometimes they're right. Sometimes they're a little off. So it is early to call Q4, but from the information that we do have from our customers as well as the scrub that we do, we would expect that our business will grow in Q4. That's currently our sales forecast. It's currently our marketing forecast. And that's currently our management top level scrub forecast as well.

So you make the point that 67% gross margin is ostensibly it's good through year-end, and I'll take that with the appropriate grain of salt. But then you point to the longer term target of 65, and I wonder should we expect to see a change in that target inasmuch as I would guess that a lot of the benefit you're seeing from gross margin is sustainable benefit? Should we be thinking about a different long-term margin trend? Timothy R. Morse: When we briefly touched into the 63s last year, I don't want to get too overly sensitive to these [prorogations] between quarters. This is, as you observed, underlying stuff, great cost work that we've done that has a long-term character to it, certainly, but what I've learned over 18 months in this business is things obviously are, as John said, have a relative lack of visibility. So it just doesn't make sense, I would say, to change what we've had as a long-term model for these, relatively recent events? I think, especially, Glen, I think more in terms of operating margin percent certainly than the components, the 65% of gross margin, the 15% of SG&A, the 18% of R&D. Those are all, like I said, going to be up and down, quarter to quarter, year to year. And what our overall objective is to look far enough ahead and do what we can today to achieve the right mix of those different opportunities so that we can achieve something like we did this quarter, which was a little bit north of 30% operating margin. So, again, I like the framework. I'm not all that interested at this point in picking it apart, element by element. I like the total answer, and we'll keep driving. Certainly the gross margin work we're doing right now helps offset the fact that we're not at our SG&A target of 15% yet. So we'll continue to work toward SG&A. We'll see what happens with gross margin. It's really a portfolio approach to managing your cost structure, and the overall goal of operating margin percent is the most important one for me.

Your next question comes from Uche Orji - UBS.

The comments you made on consumer, I think you said something about broadcast upsetting the weakness you saw in flat panel. I'd like to get some more color on that comment. First of all, how big was broadcast, what spend were you seeing, and how sustainable will that be? And also on the flat panel side, of course, we've seen the issues with the consumer, but any color in terms of how the mix is changing within flat panel [inaudible] for me to understand what the dynamics are in the consumer market. Thank you.

So, Uche, if you look at our consumer number, about half of it is broadcast equipment. This is equipment sold to [inaudible] as an example. There you're seeing a replacement cycle from standard definition to high definition and from 10ADI to 10ADP. So there is a significant upgrade required of all of the broadcast studio editing equipment required to support high definition, and particularly the bandwidth required for the 10ADP high definition television sets. It was up in the second calendar quarter. We do expect it to grow again this quarter. Over the next several years I think we will see growth out of broadcast just because of this upgrade cycle that's going on. The other half of our business is in - this in consumer is more of the typical consumer products which include for us things like games, flat panel television sets, set top decoder boxes. Some of the flat panel television business was down in the second calendar quarter. We've had some customers who have announced that they've seen some weakness in the end market. We are seeing forecasts which have the television business up this quarter on Altera. We have discounted some of that, but still expect that overall our consumer business will increase this quarter. So we're taking a well, maybe the consumer impact in the U.S. is having an impact on some of the higher end consumer appliances or products sold, and we should hedge that. Again, we are expecting our business to overall increase, not significantly, this quarter, so we think that we've done the right thing by hedging the forecast.

So just one further, let me just reach to industrial and ask you something there. Within industrial I think you said you were pleasantly surprised by the growth you saw in industrial. Just from what you're hearing from customers, is there any indication as to whether we could then see in Q3 below seasonal? Because what I've, industrial tends to be fairly correlated with GDP. And so with all the concerns we've had I think, current reasoning that it was a surprise was, probably the right thing to say. However, if we look into Q3 now, is there any sense that, as we continue to grind along with the overall macro concerns, that we might actually see industrial coming below seasonal for Q3?

Yes. Uche, we did put that in our forecast. So effectively what we've done is we've discounted some of the customer forecasts for this quarter, expecting that we're going to see some more slowdown within the industrial space, certainly than what our customers are telling us. What we do with our forecast, again, is we tend to get the data from our customers. Sales aggregate it. We have our vertical groups take a look at that, correlate it to the end markets, correlate it to, for instance, in the communications area, what the carriers are telling us in terms of equipment spend. And then management also puts a spin on that based on what we think we're seeing. So, again, we're aggregating these forecasts. We've got some numbers for industrial. We're taking it down as we give you our overall forecast for this quarter. Within industrial, it is a broad category. Things like military and automotive we would expect to continue to grow for us. Military is a newer market for us. It's grown to about 7% to 8% of revenues now, so it's, I think, probably a lot larger than a lot of you have thought. And it is growing very strong for us. Automotive is much smaller, newer, but because we're moving from prototype to production cycles with some customers now, we do expect that both of those markets will continue to grow. Really what we're hedging is some of the other areas, like the broad industrial base. And there the challenge is there are so many customers - and they're small customers - that we really don't have any direct contact with them in order to really put the proper spin on it. So we do take these macro looks a little bit more into account than we would in some of the other marketplaces.

In terms of [inaudible], I know you've got [inaudible] second half program. Is there any bit of that included in the Q3 guidance? And in terms of how much of an impact this could have on Q4 potentially, do you have any feel right now in terms of will it be material or will it, again, a mid to high single [billion] dollar impact? Just to get a sense of how confident and how much we can try to look at this as impacting the second half numbers.

So the [programmer means] exactly on track. There's no change to the program. I know there have been some rumors that have been out there. Everything is exactly on schedule for us, and we're very excited about 40nanometer. It will be the first time that we've had both architectural leadership as well as process technology leadership, and probably for some time. We do expect that this node is going to lead to further market share gain, and as a note, we've already gained 5% market share in FPGAs over the last five years, so we think that this is going to be a very, very solid node for us. With that, we've never traditionally forecasted exact revenues by quarter for any product, and so I'd hate to get into trying to predict that at this point and just say that, program's on track, high expectations for the product. We think it's going to do extremely well and, again, it's going to really drive a lot more ASIC and ASSP replacement than we've seen in the past.

Your next question comes from Gary Mobley - Piper Jaffray.

I was hoping that you can share with us any notable changes to production lead times in the quarter, versus the first part of the year. And as well, how did overall linearity of bookings progress throughout the quarter, and how have they tracked thus far in the second quarter, the first few weeks of July?

So we haven't broken out the linearity of the bookings other than to say the book to bill was slightly below 1, and I'd say just slightly below 1 for the complete quarter of Q2. It is significantly above 1 so far this quarter. Business is good, and as we've said, business so far in July - and again, it's early - but business so far in July would track to the higher end of our range. So, again, it's early. Typically this quarter is a little bit more backend loaded because of the summer holidays that you'll see in Japan and North America and Europe, so we'll see how this quarter overall develops. So that would be the flavor that I'd give.

And production lead times?

So lead times are stable. We are chasing demand a little bit on - Stratix III is our only product. We've had several quarters of very, very strong Stratix II growth. We had two quarters going into Q4, Q1, where Stratix II was about 20% sequential growth. I think this last quarter it was 16% sequential growth, so that product we were also trying to catch up with for some time, but really early in the quarter were able to for the most part satisfy most of the demand on that product. And again, with probably minor exceptions - and we see this in all quarters - most of our product is at lead time or available on distributor shelves.

Your next question comes from Sumit Dhanda - Banc of America Securities.

I wanted to follow up on gross margins again. Obviously, a pleasant surprise this quarter, and you talked about certain measures, reduction in materials costs, logistics costs. How did this suddenly show up? This is not something you'd necessarily alluded to before, if memory serves me right. And, if you could give us something more specific, and then back to that original point in terms of your hesitation to commit to this because on the surface these all sound like fairly permanent changes. Timothy R. Morse: In relation to the first question, yes, we've been working on these kinds of things for awhile. I have alluded to them in the past, that we're not only doing OPEX work but cost of goods sold work. But the problem with telegraphing too far in advance on the gross margin rate is it's not entirely under our control. Unlike OPEX, where we really have a pretty good ability to dial it in and impose our will on those numbers, gross margin has the market segment mix to it, it has the general trends in wafer pricing, up and down - as someone alluded to earlier, TSMC plans or other foundries - there are other, packaging materials, test and assembly costs, there are logistics costs, rising transportation and fuel costs, there are a lot of things outside of our control. So I would say that going into this quarter, we certainly expected to realize a lot of this cost savings, but it is a relatively eye-popping number, so I personally was a little bit hesitant, not being able to control all the variables here, to go too far out on a limb. I figured it would be better to deliver the upside and prove we've delivered the upside. It's been such a, hot button issue for us since it started high last quarter, last year, gross margin did, and then eroded through the year. And it was, again, perfectly in line with market segment mix, but it was a very hotly discussed topic, a very frequently discussed topic on these calls and all of our investor meetings. All that put together just didn't make sense to me that we should go too far out on a limb. As it turns out, we're very pleased because all of the cost out work we were working on and thought we saw came through, and all of the mix that we've been driving also held steady, so we get a benefit here. So now you've got a feel for all the different moving pieces, and hopefully that helps you understand a little bit better why I'm, looking out for, at least into the fourth quarter, which we don't usually do and I don't usually give any guidance there, I'm confident that yes, this looks like it's staying in the near term. Out into the future, again, I'd prefer to think about things in terms of the operating margin goal and the portfolio of mix. Sometimes gross margin's going to be a little favorable, R&D will be a little unfavorable at times because of, product rollouts, SG&A is on its way but not to the goal yet, so, again, we're dealing with a large mix of stuff, and we've got a 65% - if you want to dissect it down to 65% gross margin - we've put that there on purpose because we think it's a good level where we have the best of all worlds. We can still grow in this 10% to 15% range, but we can maintain a really good gross margin profitability. It doesn't make sense to us to change that overall philosophy and certainly the overall operating margin percent goal at this point.

You highlighted the fact that you've built in some conservatism based on, your view on China, 3G demand and a couple of other factors. Relative to the conservatism you've built in those specific verticals or geographies, how has the demand progressed so far? In other words, have you built in conservatism, but the orders have come in pretty well, because you talked about orders being pretty strong? And I'm referring to those specific markets where you've built in conservatism.

It's too early to tell. We're only a few weeks into the quarter, and you're not going to get enough to really draw a trend, I would say, by vertical market or by geography in order to correlate. Again, what we've tried to do is tell you what we're thinking at a high level by vertical so you have an understanding how we're building up our forecast. We could absolutely be right or we could be wrong, or it could be in between. And so we're just giving you the data that supports both what our forecast is and why, and also what's been the current trend in terms of what you see out of the business. But it is far too early to, I think, correlate any of our forecasts to what we've actually seen. And going back, Sumit, to what Tim was saying on gross margins, I think if you go back to last year, we saw very, very strong consumer growth here. And so, as we've talked about, verticals tend to drive gross margins to an extent. Obviously, in some of the consumer programs that we're in, higher volumes, more customer concentration to an extent, lower gross margins. This year what we're seeing is much more strength in communications and in particular in the industrial sector, and what we're seeing is consumer take a year off. And so naturally, I think, to some extent, you're seeing some of that benefit flow into the gross margins where clearly industrial as an aggregate carries the highest gross margin in the company as a vertical. This is something that we predicted last year. This is something that's coming true. That plus, as Tim points out, the cost reduction efforts are absolutely flowing through and giving us a really strong gross margin number. Hard to say exactly what's going to happen next year other than we all feel very comfortable saying 65% is still our long-term model.

Your next question comes from Unidentified Analyst - Jefferies & Co.

My question is actually on the pricing environment. Right now what do you think is the pricing differential between your product [inaudible] and ASICS? And as an extension to that, as you move to 40-nanometer, how much of that differential do you expect to cover? Thank you.

The benefit that we have moving to 40-nanometer is we can cover almost all of the design starts that are done in the industry today on ASICs, both from a density perspective as well as an overall performance perspective. So the question really comes down to economics, and what you'll find is in an ASIC, the chip component price will always be lower because you're creating a function which exactly fits your application, whereas in a programmable environment, we do require more transistors to make the product [inaudible] in nature. However, there is that upfront charge that you have to pay for an ASIC that you do not have to pay for an FPGA or a CPLD, and that can be substantial. You're seeing in the 65-nanometer world moving to 40-nanometer, NREs that are in the $7.5 to $10 million per chip. And once you amortize that price into the actual component run, what you find is the ASIC is far more expensive for many of the infrastructure-related customers. So if you're in volumes of tens of thousands, hundreds of thousands, even into the low millions, what you will find is the PLD has a lower total cost than your ASIC. And because that number keeps moving up, 10 years ago it was tens of thousands would be the crossover, now you're getting into the low millions - that allows us to expand our market and grow as a company. As so as an example, you see that in communications, a market that we've been very strong in. On average, Altera's been growing between two to three times faster than our customer base. Part of the reason is we're able to move into higher-volume sockets, replace older generation ASICs, because customers can't afford to use those. And also, ultimately, because we have higher-density devices, put more onto our chips, and capture a larger proportion of the [inaudible] materials. ASICs will still be used in extremely high-volume applications - games, cell phones, applications that are in the tens of millions of units per year, or applications where they require something in performance that is unique that can't be done in FPGA. But generally in the infrastructure markets that Altera's very strong in, we find that customers do few if any ASIC design anymore and are moving more and more of their past programs into just pure programmables.

Your next question comes from Unidentified Analyst - Lehman Brothers.

Just a couple of quick questions. John, did you break out the percentage mix by 90-nanometer, 65nanometer, etc.?

We haven't. What we've given, Kate, historically is we gave some revenue numbers to start with, and then we've given every quarter a percentage increase or decrease in those numbers to get to the point where they are. And so there's a way probably to go back in time and triangulate pretty accurately as to where our numbers are. We think we've done very, very well in those nodes. A question had come up earlier about where are we competitively and, it was thought that Altera did very well at the high end in 130, do not do as well in 90-nanometer. Today, and these are using our estimates based off of our competitors' calls, we believe this last quarter that Stratix in the 130-nanometer is the largest high-end FPGA family by quarterly revenue. We also think today that Stratix II, in 90-nanometer, is about even with our major competitor. And given a year ago, we would have said it was about 30% smaller. So that follows that Altera's been a little later in terms of introducing some of these products, perhaps, because we've been a little bit more cautious in the past about adopting process technologies, but because in my view we've had a superior product, we catch up very quickly. So that gives you a feel. I'd say we're ahead in 130 at the high end, even on a quarterly shipment in 90, and, again, 65, we expect to do quite well. That's ramping very well for us right now. And then in 40, because we're out early and because I believe we will have the best product in 40, I expect in that node we will have more than 50% market share, and be able to ramp that more strongly out of the gate.

The other quick question I had was I think you said you're still comfortable with the 10% to 15% longer-term revenue growth rate. Is that the case? And, again, if you could just highlight the highest growth, in markets if they still are the same or what you're feeling like there.

Kate, we just updated the vertical markets last December. We would still go back to those and say that our expectation for growth rates, both the Gartner data as well as the data that we provided, is still solid with what we said in December. We can provide those numbers to you or to anybody else who is interested. They do add up to 10% to 15% longer-term growth. The reason we're a little bit higher is we do expect to continue to gain market share, as we have in the last five years and do expect to again this year. And also because we have HardCopy, and as an ASIC platform, that is additive to the overall PLD numbers. If you look at Altera in the last five years, compound annual, we've grown 12%, and that does include a year that was a very slow growth rate year - last year, which was minus 3 for the industry, minus 2 rounded for us; it was actually I think minus 1.7 - and then this year so far, if you look at the year-over-year statistics, with this last quarter it was 13%. If you take this guidance that we're providing for next quarter of flat to down 3, it still gives you a number that's above 10. So longer range, we still feel comfortable with the 10% to 15% for the core business.

And that does conclude our question-and-answer session.

During the third quarter we will attend the Citi 15th Annual Global Technology Conference on September 4 in New York. With that note, this concludes Altera's conference call. Thanks for your participation and interest.