David Pasquale - Investor Relations, Global IR Partners Bruno Guilmart - President and Chief Executive Officer Michael G. Potter - Corporate Vice President and Chief Financial Officer

Richard Shannon - Northland Securities Bill Dezellem - Tieton Capital Management Joanna Linsley - Robert W. Baird John O'Brian - Regan Mackenzie

Good evening. My name is Kara, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Lattice Semiconductor Second Quarter 2009 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remark there will be a question-and-answer session. (Operator Instructions). As a reminder this call will be available for replay beginning at 8 o'clock PM Easter time today to 12:59 PM on August 6th, 2009. The conference ID number for the replay is 19724416. Again the conference ID number for the replay is 19724416. The number to dial for the replay is 1-800-642-1687 or 7076-645-991. Thank you. I would now like to turn the call over to David Pasquale of Global IR Partners. Sir, you may begin.

Thank you, operator. Welcome everyone to Lattice Semiconductor second quarter 2009 results conference call. Joining us today from the company are Mr. Bruno Guilmart, the Company's President and CEO and Mr. Michael G. Potter, Lattice's Corporate Vice President and Chief Financial Officer. Both executives will be available for Q&A after the prepared comments. If you have not yet received the copy of today's results release, please email Global IR Partners using lscc@globalirpartners.com, bring in a copy of the release of the Investor Relations sections of the Lattice semiconductor's website. Before we begin the formal remarks, I'll review the Safe Harbor statement. Is the intention of this call will comply with requirements of SEC Regulation FD. This call includes and constitutes the company's official guidance for the third quarter fiscal 2009. If at any time after this call, we communicate any material changes to this guidance, we intend such update will be done using public form such as a press release or a publicly announced conference call. The matters that we discuss today other than historical information include forward-looking statements relating to our future financial performance and other performance expectation. Investors are cautioned that forward-looking statements are neither promises nor guarantees. The involve risks and uncertainties that may cause actual results to differ materially from those protection in the forward-looking statements. Some of those risks and uncertainties are detailed in our filings with Securities and Exchange Commission including our fiscal year 2008 Form 10-K filed on March 9 and in our quarterly reports on Form 10-Q. The Company disclaims any obligation to update or revise any such forward-looking statements to reflect the events or circumstances that occur after this call. Our prepared remarks all will be presented within the requirements of SEC Regulation G regarding Generally Accepted Accounting Principles or GAAP. Some financial information presented by us during this call will be provided on both the GAAP and on a non-GAAP basis. By disclosing certain non-GAAP information, management intends to provide investors with additional information to permit further analysis of the company's performance for results and underlying trends. Management uses non-GAAP measures to better assess operating performance and to establish operational goals. Non-GAAP information should not be viewed by investors as a substitute for data prepared in accordance with GAAP. If we use any non-GAAP financial measures during the call, you'll find there is required presentation of in reconciliation to the most directly comparable GAAP financial measure is in the company's earnings press release. I will now turn the call over to Mr. Bruno Guilmart. Please go ahead, sir.

Thank you, David and thank you everyone for joining our call today. We continue to make progress in the second quarter as we executed on our focus product strategy and they all improved the product structure. As a result, we achieved revenue growth that came in above a (inaudible) year revised guidance. Specifically, revenue was 46.9 million, up 8% from prior quarter. We saw strengths that by China combined with strong new product revenue growth from prior wins existing customers. Revenue remained strong through the end through the quarter with our turns business exceeding expectations. Equally importance even in tough ongoing environment, we are able to narrow our GAAP net loss and maintain a strong balance sheet. Our organization at all levels is focused on our goal of returning to sustained profitability as soon as practical. Later in the call, I will review a series of additional steps we will be taking to address our profitability growth and to better serve our customers. Let me now give you some color on the quarter. New products continue to show strong growth in the quarter contributing about 45% of the total revenue, up from 21% a year ago. This shift has been a focus for our company and part of our refine business strategy. Clearly, we are making progress but there is room for further improvements. The remaining mix in Q2 had Mature at about 18% of revenue and mainstream at approximately 37%. Revenue from our nonvolatile products grew 40% quarter-on-quarter and 80% on year-on-year led by our XO and XT270. Computing demands of XO performance with gross in consumer driving our XT performance. Revenue from our new -- based products with flat quarter-on-quarter but almost double year-on-year due to higher demands in communication and computing. On the geographic basis growth in Asia was stronger led by communication in China. Revenue in from Asia, I think Japan was 64% of revenue in Q2 up from 59% in Q1. In addition to strength from communications in China, we benefited from an uptick in business in Taiwan and Japan. Revenue from North America came in at 20%, with Europe at 16%, down from last quarter 21% of total revenue. Europe remains the weakest of all regions in terms of recovery. Lattice, like most other in the industry expect an easing of demand out of China moving into the second half of the year compared to heightened levels we saw in the first half of the year. We continue to view China as a long-term opportunity with considerable growth potential and unmet demand in front of us. We're early in establishing our China based R&D center and we have proven our ability to win significant designs and revenue in this important region. We're committed to the region and well positioned as we move forward. Overall, on a market basis, communications was basically flat in dollar terms compared to Q1 that came in at 57% of total revenue versus 63% in Q1. Within communications, continued weakness in the U.S. and Europe was a drag on the strength we saw in China. Computing increased to 12% of total revenue from 8% in the prior quarter. We saw some signs of recovery in the U.S. competing market with momentum in the several markets. Computing, as a whole, however we're still be below the year ago levels. Industry represented about 17% of total revenue, essentially flat compare to Q1. Finally, consumer was 14% of total revenues, up from 11% in the first quarter. We continue to get momentum with multiple customers around the world. I will now turn the call over to Michael for more detailed financial review. Michael? Michael G. Potter: Thank you, Bruno. As noted earlier, revenues for the second quarter was 46.9 million up 8% from the prior quarter and ahead of prior guidance. And while on a year-over-year basis, revenue declined by 19%, our net loss during the same quarter improved to a loss of 2.7 million in Q2 2009 from a loss of 13.6 million in Q2 2008. Gross margin for Q2 came in at 52.4%. This was above our guidance and slightly higher than the gross margin posted in our Q1 2009, primarily due to continue strict cost controls combined with the favorable product mix. This includes the impact of the distribution transition which occurred in Q2 in a greater China region. We saw the benefits of the lower cost and improve yields across most high density products. Total operating expenses for the second quarter came in at 27.4 million compared to 27.8 million in the first quarter. Second quarter GAAP net loss improved to 2.7 million or $0.02 per share as compared to the 5.8 million losses or $0.05 per share we posted in the first quarter. Our balance sheet remains strong with no long-term debt. As of July 4th, 2009 we had 104.3 million in cash, cash equivalents and short-term marketable securities. Cash flow from operations for the three months ended July 4th, 2009 was 33.6 million, which includes collecting 30 million from Fujitsu during the quarter. Regarding our remaining cash advance to Fujitsu, the balance totaled 53.9 million at the end of Q2 compared to 88.3 million at the end of last quarter. In addition to the 30 million received in the second quarter, we anticipate that we'll receive another 30 million cash payment from Fujitsu in the fourth quarter of 2009. The remainder of the advance will be returned to us in the form of wafers and other services until completely utilized. Not included in the liquidity discussion I just went through are our auction rate securities with the fair value of 18.4 million. Due to the illiquid market for these types of investments, they're classified as long-term marketable securities. The auction rate securities market remains weak with auctions that continue to fail and we experience credit downgrades that fell of our auction rate securities holdings during the second quarter. As a result, we recorded a charge in the second quarter of approximately $536,000. However, on a positive note, we realized again of approximately a 169,000 on redemption of some our student loan back auction rate securities. Accounts receivable at July 4th were 26.6 million compared to 25.3 million at the end of last quarter and day sales outstanding were at 51 days, an improvement compared to the 52 days recorded last quarter and we had 45 day sales outstanding in Q2 2008. Inventory July 4th was 28.1 million compared to 30.3 million last quarter. Months of inventory now stands at 3.8 months compared to 4.4 months to the end of Q1 2009 and 4.6 months at the end of Q2 2008. We spend approximately $1.7 million on capital expenditures during the second quarter, up from Q1 with the quarterly depreciation expense at 2.7 million, down slightly from the prior quarter. This concludes the financial review portion of the call. I will now turn things back over to Bruno for the third quarter business outlook. Please go ahead, Bruno.

Thank you, Michael. We expect continued improvements in the broader market in Q3 based on our increased backlog combined with customers and design wins coming out of Asia, the U.S. and Europe. Of note, we have some significant consumer related wins. As an example, one win was at one of the world's largest flat panel companies. This was the displacement of a competitor in an existing product and we expect strong revenue growth at the customer starting in Q3. Let me now speak to our continuing actions to attain our goal of profitability and our efforts to better serve our customers. First, ramping our workforce reduction that will effect approximately 8% of our employees worldwide as we redeploy our resources to better serve our customers in the market in which we now operate. We expect this reduction in force result in a charge of about 1.2 million in Q3 while saving us about 1.5 million per quarter going forward or about 6 million annually starting in the fourth quarter. We will continue to actively iterate our cost structure on an ongoing basis as we seek to further increase operating efficiencies. Secondly, we are transferring our warehouse operation from corporate headquarters in Hillsboro, Oregon to Singapore. We do the 60% of our business today in Asia and this move gets much closer to our customers. We also expect this move to reduce our customer's cost and delivery time. We expect approximately 1 million in freight savings annually and expect reduction in inventory levels overtime by around five to seven days. Subject to obtaining necessary regulatory approvals, the transfer of the warehouse operations is schedule to start in August and should be completed by the end of 2009. Finally, as we continued to streamlining of our distribution network, which we began in Q2, we are transitioning two distributors from sell-in to a sell through mode. This will provide us higher visibility and transparency with our end customers. We expect the trend in business model will result in approximately $2 million reduction in the revenue in the third quarter. In terms of specific Q3 guidance, as noted a minute ago, we're entering Q3 with a stronger backlog than the prior quarter, visibility is improving as we move through the year but still not great. As we look to Q3, we're guiding for revenue to be sequentially down 2% and up 3%. This includes the expected reduction in revenue of approximately 2 million due to the distributor transition, I mentioned a minute ago. Q3 growth margin are expected to be in the range of 52 to 54%. Operating expenses are expected to be approximately 29.2 million, inclusive of 1.2 million in restructuring cost. The increase over Q2 is primarily attributable to higher mass growth. In closing, we remain optimistic in our outlook and in our ability to execute on the company's continent growth, cost structure improvement and focus on profitability. This concludes our prepared remark. Operator, we'll now be happy to take any questions.

(Operator Instructions). Your first question comes from the line of Richard Shannon with Northland Securities. Richard Shannon - Northland Securities: Hi, Bruno and Michael, how are you?

We're good. How are you? Richard Shannon - Northland Securities: I'm doing fine, thanks. I apologize if I've missed some of your commentary, I'm kind of switching between calls here, but I guess the first question I had was looking at your segmentation by markets, it looks your computer and consumer market did quite well sequentially. The telecom looks it did kind of a flat quarter. Kind of curious what was the driver of those two markets that appeared to do pretty well sequentially?

So as I've explained we've got some pretty good momentum going especially in the U.S. on the computing side with in the server markets. So that's one element, why we've done well sequentially. We've also done well in consumer as we saw higher demand from one of the consumer, customer we do have in the U.S. and as I've mentioned also, we've had a major win with a significant, with a major I would say, flat panel manufacturer in Asia and that also owe towards more revenue in the second quarter that has contributed through the segment doing quite well. The reason for communication being flat is basically communication continue to be I would say so-so in U.S. and Europe and in Asia, especially in China, we started to see the slowdown of the built-up that I have started earlier in the year for the 3G deployment. So essentially, in terms of dollars if you wonder the kind of communication segments was flat although it decreased in revenue because -- I'm sorry, decreased in percentage because our revenue was well higher than that in Q1. Richard Shannon - Northland Securities: Okay. And may be I'll dovetail those comment into your guidance for the third quarter some of these key drivers here with the consumer computing in China specifically, how do you see those playing into your overall guidance of, was it down 2 to plus 3 as I recall?

So to give you a little bit of color, as you know we do about our business insurance, so we do have full visibility on what's going to happen in the third quarter but I think that we'll continue to see some strengths in computing on consumer and communication will be I would say we'll see a deferring up of definitely what's the 3G deployment in China. So I can't comment more than that for the time being. Richard Shannon - Northland Securities: Fair enough. Then did you mentioned a level of turns you required to get through midpoint of your guidance for this quarter?

The level of what?

The turns, I think.

Oh, turns, yeah.

Our backlog is stronger at the beginning of Q3 than it was in the beginning of Q2. Typically, in the last while, it's been at 50% or may be a little bit less in terms of backlogs. So we needed over 50% of our revenue to come from turn. We are close to the 60% in backlog at the beginning of this quarter. So it's last in what has been recently for turns necessary to make the forecast. Richard Shannon - Northland Securities: Great. And then last question for may be Michael, probably one for you, you discussed the 80% reduction in work force, can you kind of ducktail than in to the overall cost structure and what you think your breakeven point when all this changes come to operation? Michael G. Potter: It’s a little bit variable depending on if we're doing take out some math during a quarter but essentially we've moved our breakeven point from mid to highest 50s down to the low 50s. So it's I'll call it 51 to 52 million depending on math and pay part and before may be within 57,58. Richard Shannon - Northland Securities: And I assume that's on an earnings basis. Correct, Michael?

That's on a GAAP basis, yes. They're slightly last from that and on GAAP, if you take out stock comp, which some analysts do in their models. Richard Shannon - Northland Securities: And is the cash flow breakeven point similar to the non-GAAP numbers or how does that differ?

We're already above cash flow breakeven at the level of revenue we're doing now and even last quarter, we were above cash flow breakeven. Richard Shannon - Northland Securities: Okay. Great. That will do for me. I will jump offline.

(Operator Instructions). Your next question comes from the line of Bill Dezellem with Tieton Capital Management. Bill Dezellem - Tieton Capital Management: Thank you. To make sure that we are clear here, the distributor change that you are anticipating or that you discussed for the third quarter is distinctly separate from the distributor change that was discussed on the first quarter call. Is that correct?

That is correct. I think as I've mentioned in the last call, in Asia, we had I would say untraditional way of doing the distribution business unlike Europe and U.S., where it's a sales through model, we ship and debit. So in Asia, in order to improve our new transparency and get better visibility of the end customers, we started to convert or to terminate in some cases from distributors and put some new in place so that we can implement any other model than the one that we have in U.S. and Europe. So we did two in Greater China in Q1 and we're continuing that. Actually in this quarter, there will be a conversion of one in Europe, which is the only one left and one in Asia, in greater China actually. Bill Dezellem - Tieton Capital Management: And what it is, I'm sorry, go ahead.

Yeah, it's an ongoing effort. Bill Dezellem - Tieton Capital Management: Thank you. And what was the impact in the first quarter relative to what you had expected the impact to be from the distributor changes?

The impact actually was in the second quarter. We started the ground work from the first quarter but actually did it in the second quarter. Bill Dezellem - Tieton Capital Management: My apologies. That was simply my error.

Yeah. The second quarter was non-impacted by revenue, originally we had given guidance of potentially down minus 5 for the quarter because we were concerned how smoothly the transition would go. It actual went quite well. Our advance work bore quite good fruit there. And the impact for us because we terminated distributor in that case bought inventory back and then re- sold it was in growth margin. So we had above what we expected to get for impact. Our revenue was higher then we expected. So we got more the total impact in Q2 and that was slightly over $700,000 impact on our gross margins in Q2. The transition that we're talking about coming in front of us is the transition of converting an existing distributor, which is sold into sell through. And that will impact revenue as opposed to our impact in gross margin, which terminating a distributor and changing to the new one then. I know it's a little bit confusing but we're working hard to get through this in the most orderly and least disruptive fashion we can to our customers and it's giving us very good visibility from the first one we did and what our real end customers and what are real product mix is. Bill Dezellem - Tieton Capital Management: And relative to this process I think that Bruno, you had mentioned that it was an ongoing process. Does that imply that we should expect this you to do another one or two each quarter for a few quarters to come or how do we look at this from a bigger picture prospective?

What I can tell is that we would have converted the entire Greater China, pretty much the entire Greater China markets, which is our key market in Asia. Right now it's difficult to predict anything. And we will have to evaluate. We have to evaluate as we move on but right now, there is no current plan.

And to be honest with you, the number of distributors we could convert and the percentage for revenues is going down pretty rapidly with the ones we're working through right now. So there is not really very many big distributors left that would fall in that category. Bill Dezellem - Tieton Capital Management: Thank you. And then to make sure that we're understanding correctly since $2 million is roughly 4% of the second quarter revenues, your revenue guidance for the third quarter because it includes that $2 million impact is in fact you were not having that impact, are we to understand correctly that you would be providing revenue guidance a positive 2% to roughly positive 7% sequentially Q3 versus Q2?

That's approximately right, yes. Bill Dezellem - Tieton Capital Management: And then are you anticipating any gross margin impact from the changes that you are going to execute in the third quarter?

Not, not directly from the distributor transition and that's why our guidance is going up from 52 to 54, which has been more of a run rate recently. It was lower last quarter because we did have that impact from the buying back and then reselling of the inventory. Bill Dezellem - Tieton Capital Management: Thank you both.

(Operator Instructions). It appears that there are no further questions in the queue. I would like to turn the call back to management for any prepared remarks.

I just wan to say thank you everybody for joining the call today and we are open for any follow-up questions. If you need to contact us, if not, we look forward to talking to you in our next quarter's conference call. Thank you.

We actually do have a question. She's just now come into queue from Joanna Linsley with Robert W. Baird.

Okay. Joanna Linsley - Robert W. Baird: Hi, guys. Thanks for adding me on in. When I looked at your operating expense guidance excluding the restructuring cost, it's about 28 million for the third quarter. How can we expect that to follow between SG&A and R&D?

It will be approximately the same as the prior quarter except R&D will be the difference between the 28 and the 27.4. And that's mainly because of math and pay out expenses that we are anticipating in Q3. Joanna Linsley - Robert W. Baird: Okay. And then when we look at the 1.5 million in savings that we will have in OpEx post as restructuring plan. Is that going to come off of the $28 million base that we are going to see in third quarter or?

Yeah. Joanna Linsley - Robert W. Baird: Okay. So use 28 million of base line, 1.5 million for the quarter coming off of that starting in fourth quarter.

It will be transitioning and be more following the fourth quarter. Some of it will be in cost to goods sold because we are taking some operational streamlining as well. But the majority of it will be in operating expenses. Joanna Linsley - Robert W. Baird: Okay. Thank you.

We have another question in the queue from the line of John O'Brian with Regan Mackenzie. John O'Brian - Regan Mackenzie: Good afternoon. I didn't -- I got on the call late. So I apologize. But I didn't hear whether or not you said how much you spent in CapEx in the quarter? I was wondering if I get that number.

About 1.7 million. John O'Brian - Regan Mackenzie: Okay. Thank you.

Your next question comes from Bill Dezellem with Tieton Capital Management. Bill Dezellem - Tieton Capital Management: Thank you. Couple of additional questions, the first one is you had specifically in the press release called out the fact that you saw strength in your business through the end of June. Is the implication that things continue to be strong here in the third quarter?

I think we gave guidance on the range we expect in Q3. So we expect it to be down 2 to up 3 and that's with us basically transitioning and having $2 million plus revenue in the quarter because of the transition. So I guess compared to the prior historical results, it's not strong. But compared to recent results, it's a good start. What happens in the end of the quarter, last quarter was typically as we get right near the quarter end, people manage their inventory levels and orders slow down and that didn't happen in Q2. Bill Dezellem - Tieton Capital Management: That is helpful. And is it also historically the case that the third quarter is usually flat to down for the company?

It's a little bit hard to draw direct historical parallels right now, because we are still in the midst of either recovery or the late stages of our recession depending on which economist you believe. So traditionally, yes, Q3 has been weaker particularly, when Europe was a bigger part of our business. It's traditionally a weak quarter in Europe because of vacation shutdowns and such. But it's hard to say where our normal seasonality we'd be right now in this environment. Bill Dezellem - Tieton Capital Management: Thank you. And then your matured revenues have been declining as a percent of total revenues for several quarters now. Where are you anticipating they will ultimately set aloud relative to what is it 18% or so if they are at now?

We expect matured revenue to continue to decline. I think it's normal and natural for that type of revenue to decline. The most noteworthy thing about the recent quarters is that growth in our product revenue has gotten ahead of and exceeded our declines in our mature product revenue and that's allowed us to grow our topline. So I would expect it continue to go down. Q2 was at a much reduced rate compared to the prior quarter and we think that rate of decline will be more stable going forward than it was at the beginning of the downturn. But it will continue to go down.

By the way, our mainstream product in dollars were flat and that we do -- we do reclassify our products down for early, so between new mature and mainstream. Bill Dezellem - Tieton Capital Management: And did we hear you say that the mainstream products were flat in terms of revenues in Q2?

Yeah, yeah. We had a pretty significant decline in the previous quarter but we were flat this quarter. So it's actually quite encouraging. Bill Dezellem - Tieton Capital Management: And the mature products were down, which highlight just how strongly the new products were?

Yeah. The mature products, there is a steady decline although the rate of decline is slowing down as the base is becoming smaller and smaller. Bill Dezellem - Tieton Capital Management: Thank you both again.

And management, that was the final question in the queue. You may proceed with your closing remark.

Right. I gave my closing remarks already. I think if do them again, we'll get more questions. So thank you and I look forward to talking to everybody at our next quarter's conference call.

Thank you for participating in today's Lattice Semiconductor Second Quarter 2009 Conference Call. This call will be available for replay beginning at 8 o'clock PM Eastern Time today to 12:59 PM Easter Time on August 6th, 2009. The conference ID number for the replay is 19724416. Again, the conference ID number for the replay is 19724416. The number to dial for the replay is 1-800-642-1687 or 706-645-9291. Thank you for your participation. You may now disconnect your line.