Lattice Semiconductor Corporation (the "Company", "we", "us" or "our") designs, develops and markets high performance programmable logic products and related software. Programmable logic products are widely used semiconductor components that can be configured by the end customer as specific logic circuits, and thus enable the end customer to shorten design cycle times and reduce development costs. Within the programmable logic market there are two groups of products - programmable logic devices ("PLD") and field programmable gate arrays ("FPGA") - each representing a distinct silicon architectural approach. Products based on the two alternative programmable logic architectures are generally optimal for different types of logic functions, although many logic functions can be implemented using either architecture. We believe that a substantial portion of programmable logic customers utilize both PLD and FPGA architectures. Our end customers are primarily original equipment manufacturers in the communications, computing, industrial, consumer, automotive, medical and military end markets.

Critical Accounting Policies and Estimates

Critical accounting policies are those that are both most important to the presentation of a company's financial condition and results and require management's most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Management believes that there have been no significant changes during the three months ended April 4, 2009 to the items that we disclosed as our critical accounting policies and estimates in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended January 3, 2009.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and classification of assets, such as marketable securities, accounts receivable, inventory and deferred income taxes and liabilities, such as accrued liabilities (including restructuring charges), income taxes and deferred income and allowances on sales to certain distributors, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the fiscal periods presented. Our most critical estimate relates to auction rate securities, and the estimates of fair value of these securities made in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 157 "Fair Value Measurements" ("SFAS No. 157"). Actual results could differ from these estimates.

New Accounting Pronouncements

During the first fiscal quarter of 2009, the Financial Accounting Standards Board issued Staff Positions SFAS No. 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability has Significantly Decreased and the Identifying Transactions that Are Not Orderly", SFAS No. 115-2 and SFAS No. 124-2, "Recognition and Presentation of Other -Than -Temporary Impairments", and SFAS No. 107-1 and APB 28-1, "Interim Disclosures about Fair Value of Financial Instruments". These Staff Positions were issued to clarify the application of SFAS No. 157, "Fair Value Measurements" in the current economic environment, modify the recognition of other-than-temporary impairments of debt securities, and require companies to disclose the fair value of financial instruments in interim periods. The Staff Positions are effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009, if all three Staff Positions or both the fair-value measurement and other-than-temporary impairment Staff Positions are adopted simultaneously. The Company plans to adopt the Staff Positions in the second quarter of fiscal 2009 and is currently evaluating the impact, if any, the adoption will have on the Company's Condensed Consolidated Financial Statements.

Results of Operations

Revenue

Key elements of our Condensed Consolidated Statements of Operations (dollars in
thousands) were as follows:



                                                       Three Months Ended
                                             April 4, 2009           March 29, 2008
     Revenue                               $ 43,336     100.0 %    $ 56,604     100.0 %
     Gross margin                            22,678      52.3        31,444      55.6
     Research and development                14,891      34.4        17,668      31.2
     Selling, general and administrative     12,943      29.9        14,999      26.5
     Amortization of intangible assets          228       0.5         1,481       2.6
     Restructuring                              (25 )    (0.1 )       1,790       3.2

     Loss from operations                  $ (5,359 )   (12.4 )%   $ (4,494 )    (7.9 )%

Revenue in the quarter ended April 4, 2009 decreased 23% to $43.3 million compared to $56.6 million for the quarter ended March 29, 2008. Revenue from Mature and Mainstream products decreased and was partially offset by an increase in revenue from New products.

The communications end market accounted for approximately 63% of our revenue for the quarter ended April 4, 2009 and 54% for the quarter ended March 29, 2008. The increased percentage of revenue from this end market during the quarter ended April 4, 2009, was due to the China 3G telecommunications network build-out, primarily related to products sold to two large telecommunications equipment providers, one of which was through one of our distributors. We expect that a significant portion of our revenue will continue to be dependent on the health of the communications end market.

We experienced a sequential decline in revenue of 13% during the first quarter of fiscal 2009, as a result of the current worldwide economic downturn. Forecasting for the remainder of 2009 is particularly challenging and there is limited visibility to the broad market for programmable logic devices. The communication market in Asia however, showed a better than expected revenue trend during the first fiscal quarter of 2009. Subsequent to the first fiscal quarter of 2009, we began restructuring our distribution network in the Greater China region, including the selection of new distribution partners. Our future revenue from our distribution network in the Greater China region is partially dependent on our ability to manage this restructuring. See Note 14 to the Condensed Consolidated Financial Statements.

Revenue by Product Line

From a product line viewpoint, in the first three months of fiscal 2009 when compared to the first three months of fiscal 2008, there was a 19% increase in FPGA units sold primarily driven by an increase in demand for our FPGA New products. PLD revenue decreased in the first three months of fiscal 2009, when compared to the first three months of fiscal 2008, due to a decline in both units sold and average selling prices.

The composition of our revenue by product line for the first quarter of fiscal 2009 and 2008 was as follows (dollars in thousands):

                                           Three Months Ended
                                   April 4, 2009        March 29, 2008
                 FPGA            $    15,547    36 %   $    13,691    24 %
                 PLD                  27,789    64          42,913    76

Total revenue $ 43,336 100 % $ 56,604 100 %

Revenue by Product Classification

Revenue for New products increased 50% for the first quarter of fiscal 2009, compared to the first quarter of fiscal 2008, as a result of increased unit sales. Revenue for Mainstream products decreased 36% for the first quarter of fiscal 2009 compared to the first quarter of fiscal 2008, with a decline in units sold. Mature product revenue decreased 50% for the first quarter of fiscal 2009, compared to the first quarter of fiscal 2008, also primarily related to decreased unit sales.

The composition of our revenue by product classification for the first quarter of fiscal 2009 and 2008 was as follows (dollars in thousands):

                                           Three Months Ended
                                   April 4, 2009        March 29, 2008
                 New *           $    16,775    39 %   $    11,218    20 %
                 Mainstream *         17,471    40          27,153    48
                 Mature *              9,090    21          18,233    32

                 Total revenue   $    43,336   100 %   $    56,604   100 %

* Product Classification:

New:           LatticeXP2, LatticeSC, LatticeECP2/M, LatticeECP, LatticeXP, MachXO,
               Power Manager, ispClock

Mainstream:    FPSC, ispXPLD, ispGDX2, ispMACH 4/LV, ispGDX/V, ispMACH 4000/Z/ZE,
               ispXPGA, Software and IP

Mature:        ORCA 2, ORCA 3, ORCA 4, ispPAC, ispLSI 8000V, ispMACH 5000B, ispMACH
               2LV, ispMACH 5LV,
               ispLSI 2000V, ispLSI 5000V, ispMACH 5000VG, all 5-Volt CPLDs, all
               SPLDs

Revenue by Geography

Domestic revenue declined for the first quarter of fiscal 2009 when compared to the first quarter of 2008; however, the percent of total revenue increased to 18% from 17%, respectively. Export revenue as a percentage of total revenue was 82% for the first quarter of fiscal 2009, compared to 83% for first quarter of fiscal 2008. Export revenue as a percentage of overall revenue decreased primarily due to the reduction in the Japan and Taiwan regions of the world export markets. We believe the export market to Asia will remain the primary source of our revenue due to more favorable business conditions in Asia and a continuing trend towards outsourcing of manufacturing by North American and European customers to Asia.

The composition of our revenue by geographic location of our direct and indirect customers is as follows (dollars in thousands):

                                                         Three Months Ended
                                                 April 4, 2009        March 29, 2008
   United States:                              $     7,675    18 %   $     9,815    17 %
   Export revenue:
   Asia Pacific (primarily China and Taiwan)        22,930    53          23,234    41
   Europe                                            9,189    21          12,506    22
   Japan                                             2,600     6           8,681    16
   Other Americas                                      942     2           2,368     4

   Total export revenue                             35,661    82          46,789    83

   Total revenue                               $    43,336   100 %   $    56,604   100 %

Our five largest customers make up a significant portion of our total revenue. In the first quarter of fiscal 2009 and 2008, revenue attributable to two large telecommunications equipment providers, one of which was supported through one of our distributors, accounted for approximately 27% and 8% of revenue, respectively. More than 90% of our property and equipment is located in the United States.

Gross Margin and Operating Expenses

Our gross margin percentage was 52.3% and 55.6% in the first quarter of fiscal 2009 and 2008, respectively. The decrease in gross margin percentage resulted primarily from a decline in revenue from our Mature products, which carry a higher gross margin than our other product categories, as well as revenue growth from New products, which typically carry an initial lower gross margin than our other product categories. Additionally, due to the lower production levels during the first quarter of fiscal 2009, we incurred a charge to cost of sales for underabsorbed overhead costs.

Research and development expense was $14.9 million and $17.7 million in the first quarter of fiscal 2009 and fiscal 2008, respectively. Research and development expenses consist primarily of personnel, masks, engineering wafers, third-party design automation software, assembly tooling and qualification expenses. The decrease in fiscal 2009 compared to fiscal 2008 was primarily a result of a decrease in labor costs due to a headcount reduction related to the restructuring plan implemented in the third quarter of fiscal 2008 ("2008 restructuring plan"). We believe that a market-based commitment to research and development is essential in order to maintain product leadership and provide innovative and value-based new product offerings, and therefore we expect to continue to make significant future investments in research and development. As we continue to move to more advanced process technologies such as 65nm, mask and engineering wafer costs are becoming increasingly more expensive and will therefore increasingly represent a greater proportion of total research and development expenses.

Selling, general and administrative expense was $12.9 million and $15.0 million in the first quarter of fiscal 2009 and fiscal 2008, respectively. The decrease in fiscal 2009 compared to fiscal 2008 was primarily a result of a decrease in labor costs due to a headcount reduction related to the 2008 restructuring plan, and to a lesser extent lower selling related costs due to lower revenue.

Amortization of intangible assets was $0.2 million and $1.5 million in the first quarter of fiscal 2009 and fiscal 2008, respectively. Intangible assets related to the acquisition of the FPGA business of Agere Systems, Inc. on January 18, 2002 became fully amortized during the first quarter of fiscal 2009.

Restructuring activity relates to the restructuring plans implemented during the fourth quarter of fiscal 2005 ("2005 restructuring plan"), the third quarter of fiscal 2007 ("2007 restructuring plan") and the third quarter of fiscal 2008 ("2008 restructuring plan"). Included in our Condensed Consolidated Statements of Operations and reported as Restructuring for the first quarter of fiscal 2009 is a net credit of less than $0.1 million primarily resulting from changes in original estimates under these restructuring plans. Included in our Condensed Consolidated Statements of Operations and reported as Restructuring for the first fiscal quarter of 2008, is a net charge of $1.8 million primarily related to severance costs and costs to vacate leased properties under the 2007 restructuring plan.

Other (expense) income, net

Other (expense) income, net was an expense of $0.5 million in the first quarter of fiscal 2009 and included an impairment charge of $0.7 million related to an other-than-temporary decline in the fair value of auction rate securities held in Long-term marketable securities and a $0.1 million loss of value in deferred compensation assets partially offset by interest on marketable securities and cash equivalents of $0.4 million. The impairment charge to Long-term marketable securities was recorded due to the continued decline in fair value related to the holdings in auction rate securities that are considered illiquid.

Other income, net, was $1.3 million in the first quarter of fiscal 2008 and included interest on marketable securities and cash equivalents of $1.6 million partially offset by a $0.2 million loss of value in deferred compensation assets.

The decrease in interest income is the result of a reduction in the average invested balances and lower interest rates for those invested balances in Marketable securities for the first quarter of fiscal 2009 compared to the first quarter of fiscal 2008.

(Benefit) provision for income taxes

We are paying foreign income taxes, which are reflected in the Provision for income taxes in the Condensed Consolidated Statements of Operations and are primarily related to the cost of operating an offshore research and development subsidiary and sales subsidiaries. We are not currently paying federal income taxes and do not expect to pay such taxes until the benefits of our tax net operating losses are fully utilized. We expect to pay a nominal amount of state income tax. We also accrue interest and penalties related to unrecognized tax benefits in the Provision for income taxes. See Note 8 to the Condensed Consolidated Financial Statements.

On February 17, 2009, The American Recovery and Reinvestment Act of 2009 was signed into law. This act extends the election to forego bonus depreciation and accelerate certain unutilized income tax credits in 2009. The Company recorded an income tax benefit of $0.3 million during the quarter ended April 4, 2009 related to the acceleration of its research tax.

Liquidity and Capital Resources

Financial Condition (Sources and Uses of Cash) (in thousands):



                                                        Three Months Ended
                                                     April 4,       March 29,
                                                       2009           2008
        Net cash provided by operating activities   $    7,465     $     6,900
        Net cash provided by investing activities        9,442          26,967
        Net cash used in financing activities           (1,129 )        (1,135 )

        Net increase in cash and cash equivalents   $   15,778     $    32,732

Operating Activities

Net cash provided by operating activities was $7.5 million in the first quarter of fiscal 2009, compared to $6.9 million in the first quarter of fiscal 2008, primarily as a result of an increase in cash flow from the decline in accounts receivable and the decline in inventory which more than offset a decrease in cash flow from reduced usage of Fujitsu advance credits.

Investing Activities

Net cash provided by investing activities decreased by $17.5 million in the first quarter of fiscal 2009 compared to the first quarter of fiscal 2008. The decrease was due to amounts invested in short-term securities at the end of fiscal 2008 that were transferred to cash and cash equivalents at the end of fiscal 2009.

Financing Activities

Net cash used in financing activities remained essentially flat at $1.1 million for the first quarter of fiscal 2009 compared to the first quarter of fiscal 2008.

Liquidity

As of April 4, 2009, our principal source of liquidity was $71.4 million of Cash and cash equivalents and Short-term marketable securities, which were approximately $5.5 million more than the balance of $65.9 million at January 3, 2009. Working capital increased to $188.0 million at April 4, 2009 from $182.5 million at January 3, 2009.

Under the terms of a letter agreement between the Company and Fujitsu, Fujitsu agreed to repay in cash to the Company $60.0 million (recorded as Other receivable in the Condensed Consolidated Balance Sheets) in two installments, $30.0 million of which was received on April 15, 2009 and the remaining $30.0 million is expected to be received by October 15, 2009. In addition, as of April 4, 2009 we expect to receive $28.2 million in the form of advance credits, of which $22.5 million is expected to be received during the next twelve months.

We believe that our existing liquid resources and cash expected to be generated from future operations, combined with a receivable for advance payments from foundries, will be adequate to meet our operating and capital requirements and obligations for at least the next twelve months.

At both April 4, 2009 and January 3, 2009, the Company held auction rate securities with a face value of $39.2 million. At April 4, 2009, due to the occurrence of multiple failed auctions and a determination of illiquidity, the auction rate securities held by the Company had an estimated fair value of $19.7 million and had been reclassified as Long-term marketable securities.

Long-term marketable securities with a face value of $14.0 million (estimated fair value of $4.7 million) are exposed to risks associated with the sale of credit default swaps, pursuant to which the assets underlying the auction rate securities are exposed to claims in the event of default of certain debt instruments owned by third parties. In addition, investment grade long-term marketable securities with a face value of $8.3 million (estimated fair value of $0.9 million) were replaced on December 3, 2008 by auction market preferred shares, issued by Ambac Assurance Corporation ("AMBAC"), as a result of AMBAC exercising their put option feature provided in this security. As of April 4, 2009, the credit ratings on our corporate auction rate securities were BBB and BBB-, and preferred shares auction rate securities were BBB. In addition, Long-term marketable securities with a face value of $16.9 million (estimated fair value of $14.1 million) are exposed to risks associated with student loan asset-backed notes. Such notes are insured by the federal government or guaranteed by the Federal Family Education Loan Program (FFELP). The credit ratings on our student loan auction rate securities were AAA and A3.

While the auctions for auction rate securities have historically provided a liquid market for these securities, due to liquidity issues in global credit and capital markets, auction rate securities held by us have experienced multiple failed auctions (a portion

beginning in October 2007) as the amount of securities submitted for sale at the auctions has exceeded the amount of purchase orders. These instruments are considered illiquid and have been reclassified as Long-term marketable securities on the Condensed Consolidated Balance Sheets. Due to the severity of the decline in fair value, the duration of the decline, and the downgrading of the credit ratings on some of the securities, the Company determined that an other-than-temporary decline in fair value had occurred, and recorded an impairment charge of $0.7 million for the fiscal quarter ended April 4, 2009. If we were to liquidate our position in these securities, the amount realized could be materially different than the estimated fair value amounts at which we are carrying these securities and there could be a materially detrimental effect on our financial results.

In accordance with FSP SFAS Nos. 115 and SFAS 124-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments," the Company recorded an unrealized loss of less than $0.1 million during the three months ended April 4, 2009 on certain Short-term marketable securities resulting in a carrying cost of $2.0 million and an unrealized gain of $0.8 million on Long-term marketable securities resulting in a carrying cost of $15.0 million, which has been recorded in Accumulated other comprehensive income (loss). Future fluctuations in fair value related to these instruments that the Company deems to be temporary, including any recoveries of previous write-downs, would be recorded to Accumulated other comprehensive income (loss). If the Company were to determine in the future that any further decline in fair value is other-than-temporary, we would record an impairment charge, which could have a materially detrimental impact on our operating results. If we were to liquidate our position in these securities, it is likely that the amount of any future realized gain or loss would be different from the unrealized gain reported in Accumulated other comprehensive income (loss).

We may in the future seek new or additional sources of funding. In addition, in order to secure additional wafer supply, we may from time to time consider various financial arrangements including equity investments, advance purchase payments, loans, or similar arrangements with independent wafer manufacturers in exchange for committed wafer capacity. To the extent that we pursue any such additional financing arrangements, additional debt or equity financing may be required. There can be no assurance that such additional financing will be available when needed or, if available, will be on favorable terms. Any future equity financing will decrease existing stockholders' equity percentage ownership and may, depending on the price at which the equity is sold, result in dilution.

Contractual Obligations

There have been no significant changes to the Company's contractual obligations outside of the ordinary course of business in the first three months of fiscal 2009 as summarized in Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's Annual Report on Form 10-K for the year ended January 3, 2009.

Off-Balance Sheet Arrangements

As of April 4, 2009 we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation

S-K.