LATTICE SEMICONDUCTOR CORP
10-Q, 1999-10-21
SEMICONDUCTORS & RELATED DEVICES
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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                            ------------------------

                                   FORM 10-Q

/X/  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15

     (d) OF THE SECURITIES EXCHANGE ACT OF 1934

     FOR THE QUARTERLY PERIOD ENDED OCTOBER 2, 1999

                                       OR

/ /  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15

     (d) OF THE SECURITIES EXCHANGE ACT OF 1934

     FOR THE TRANSITION PERIOD FROM             TO

                         COMMISSION FILE NUMBER 0-18032

                            ------------------------

                       LATTICE SEMICONDUCTOR CORPORATION
             (Exact name of Registrant as specified in its charter)

                            ------------------------

<TABLE>
<S>                                       <C>
           STATE OF DELAWARE                  93-0835214
      (State or other jurisdiction         (I.R.S. Employer
   of incorporation or organization)      Identification No.)

5555 N.E. MOORE COURT, HILLSBORO, OREGON      97124-6421
(Address of principal executive offices)      (Zip Code)
</TABLE>

                                 (503) 268-8000
              (Registrant's telephone number, including area code)

                            ------------------------

    Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes /X/  No / /

    At October 2, 1999, there were 47,926,112 shares of the Registrant's common
stock, $.01 par value, outstanding.

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<PAGE>
                       LATTICE SEMICONDUCTOR CORPORATION
                                     INDEX
                         PART I. FINANCIAL INFORMATION

<TABLE>
<S>        <C>                                                                              <C>
Item 1.    Financial Statements

           Consolidated Statement of Operations--Three and Six Months Ended October 2,
           1999 and September 26, 1998....................................................          3

           Consolidated Balance Sheet--October 2, 1999 and April 3, 1999..................          4

           Consolidated Statement of Cash Flows--Six Months Ended October 2, 1999 and
           September 26, 1998.............................................................          5

           Notes to Consolidated Financial Statements.....................................          6

Item 2.    Management Discussion and Analysis of Financial Condition and Results of
           Operations.....................................................................         14

                                     PART II. OTHER INFORMATION

Item 4.    Submission of Matters to a Vote of Security Holders............................         26

Item 6.    Exhibits and Reports on Form 8-K...............................................         26

           Signatures.....................................................................         27
</TABLE>

                                       2
<PAGE>
                         PART 1. FINANCIAL INFORMATION

    ITEM 1. FINANCIAL STATEMENTS

                       LATTICE SEMICONDUCTOR CORPORATION
                      CONSOLIDATED STATEMENT OF OPERATIONS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                        THREE MONTHS ENDED     SIX MONTHS ENDED
                                                                       --------------------  ---------------------
                                                                        OCT. 2,   SEPT. 26,   OCT. 2,    SEPT. 26,
                                                                         1999       1998        1999       1998
                                                                       ---------  ---------  ----------  ---------
<S>                                                                    <C>        <C>        <C>         <C>
Revenue..............................................................  $  94,973  $  48,088  $  154,711  $  96,116
Costs and expenses:
  Cost of products sold..............................................     39,771     19,043      62,652     38,152
  Research and development...........................................     17,864      7,920      27,753     15,815
  Selling, general and administrative................................     20,393      9,005      31,238     18,010
  In-process research and development................................         --         --      89,003         --
  Amortization of intangible assets..................................     21,127         --      25,291         --
                                                                       ---------  ---------  ----------  ---------
    Total costs and expenses.........................................     99,155     35,968     235,937     71,977
                                                                       ---------  ---------  ----------  ---------
(Loss) Income from operations........................................     (4,182)    12,120     (81,226)    24,139
Other (expense) income, net..........................................     (3,645)     2,503      (1,840)     5,026
                                                                       ---------  ---------  ----------  ---------
(Loss) income before provision for income taxes......................     (7,827)    14,623     (83,066)    29,165
(Benefit) provision for income taxes.................................     (2,857)     4,753     (26,933)     9,479
                                                                       ---------  ---------  ----------  ---------
Net (loss) income....................................................  $  (4,970) $   9,870  $  (56,133) $  19,686
                                                                       =========  =========  ==========  =========
Basic net (loss) income per share....................................  $   (0.10) $    0.21  $    (1.18) $    0.42
                                                                       =========  =========  ==========  =========
Diluted net (loss) income per share..................................  $   (0.10) $    0.21  $    (1.18) $    0.41
                                                                       =========  =========  ==========  =========
Shares used in per share calculations:
Basic net (loss) income..............................................     47,714     47,036      47,483     46,992
                                                                       =========  =========  ==========  =========
Diluted net (loss) income............................................     47,714     47,228      47,483     47,474
                                                                       =========  =========  ==========  =========
</TABLE>

          See Accompanying Notes to Consolidated Financial Statements

                                       3
<PAGE>
                       LATTICE SEMICONDUCTOR CORPORATION

                           CONSOLIDATED BALANCE SHEET

                       (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                                           OCTOBER 2,    APRIL 3,
                                                                                              1999         1999
                                                                                           -----------  ----------
                                                                                           (UNAUDITED)
<S>                                                                                        <C>          <C>
                                                      ASSETS

Current assets:
  Cash and cash equivalents..............................................................   $  29,613   $   79,301
  Short-term investments.................................................................     105,661      240,133
  Accounts receivable....................................................................      26,102       23,788
  Inventories............................................................................      23,292       17,683
  Prepaid expenses and other current assets..............................................      30,213        6,061
  Deferred income taxes..................................................................      19,660       14,400
                                                                                            ---------   ----------
    Total current assets.................................................................     234,541      381,366
Property and equipment, net..............................................................      57,325       44,993
Foundry investments, advances and other assets...........................................     104,156      114,537
Intangible assets, net...................................................................     395,012           --
Deferred income taxes....................................................................      39,781           --
                                                                                            ---------   ----------
                                                                                            $ 830,815   $  540,896
                                                                                            =========   ==========

                                       LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable and accrued expenses..................................................   $  91,968   $   32,184
  Bank borrowings........................................................................      37,500           --
  Deferred income on sales to distributors...............................................      33,118       19,993
  Income taxes payable...................................................................       8,850        4,985
                                                                                            ---------   ----------
    Total current liabilities............................................................     171,436       57,162
Bank borrowings..........................................................................     182,500           --
Other long-term liabilities..............................................................      11,638           --
Commitments and contingencies............................................................          --           --

Stockholders' equity:
  Preferred stock, $.01 par value, 10,000,000 shares authorized; none issued or
    outstanding..........................................................................          --           --
  Common stock, $.01 par value, 100,000,000 shares authorized, 47,926,112 and 47,194,472
    shares issued and outstanding........................................................         479          472
  Paid-in capital........................................................................     260,687      223,054
  Retained earnings......................................................................     204,075      260,208
                                                                                            ---------   ----------
    Total stockholders' equity...........................................................     465,241      483,734
                                                                                            ---------   ----------
                                                                                            $ 830,815   $  540,896
                                                                                            =========   ==========
</TABLE>

          See Accompanying Notes to Consolidated Financial Statements.

                                       4
<PAGE>
                       LATTICE SEMICONDUCTOR CORPORATION

                      CONSOLIDATED STATEMENT OF CASH FLOWS

                                 (IN THOUSANDS)

                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                              SIX MONTHS ENDED
                                                                                           -----------------------
                                                                                           OCTOBER 2,   SEPT. 26,
                                                                                              1999         1998
                                                                                           -----------  ----------
<S>                                                                                        <C>          <C>
Cash flows from operating activities:
  Net (loss) income......................................................................  $   (56,133) $   19,686
  Adjustments to reconcile net (loss) income to net cash provided by operating
    activities:
    Depreciation and amortization........................................................       32,446       4,881
    Acquisition of in-process research and development...................................       89,003          --
    Deferred income taxes pertaining to intangible assets................................      (38,369)         --
    Changes in assets and liabilities (net of effects of acquisition):
      Accounts receivable................................................................        2,368       9,363
      Inventories........................................................................        2,325       3,613
      Prepaid expenses and other assets..................................................      (10,485)        419
      Deferred income taxes..............................................................       (1,412)       (950)
      Accounts payable and accrued expenses..............................................        6,015           2
      Deferred income....................................................................        2,921      (2,647)
      Income taxes payable...............................................................       (5,160)     (1,441)
      Other liabilities..................................................................       11,638          --
                                                                                           -----------  ----------
    Total adjustments....................................................................       91,290      13,240
                                                                                           -----------  ----------
  Net cash provided by operating activities..............................................       35,157      32,926
                                                                                           -----------  ----------
Cash flows from investing activities:
  Proceeds from short-term investments, net..............................................      134,472       9,921
  Acquisition of Vantis Corporation, net of cash acquired................................     (439,258)         --
  Foundry investments....................................................................       (4,590)         --
  Capital expenditures...................................................................       (9,329)    (10,836)
                                                                                           -----------  ----------
  Net cash used by investing activities..................................................     (318,705)       (915)
                                                                                           -----------  ----------
Cash flows from financing activities:
  Proceeds from bank borrowings..........................................................      253,000          --
  Debt payments..........................................................................      (33,000)         --
  Net proceeds from issuance of common stock.............................................       13,860       6,332
  Repurchase of common stock.............................................................           --      (8,460)
                                                                                           -----------  ----------
  Net cash provided (used) by financing activities.......................................      233,860      (2,128)
                                                                                           -----------  ----------
Net (decrease) increase in cash and cash equivalents.....................................      (49,688)     29,883
Beginning cash and cash equivalents......................................................       79,301      60,344
                                                                                           -----------  ----------
Ending cash and cash equivalents.........................................................  $    29,613  $   90,227
                                                                                           ===========  ==========
Supplemental disclosures of cash flow information:
  Cash paid for interest.................................................................  $     3,468  $       --
  Cash paid for income taxes.............................................................        9,477      10,225

Supplemental disclosures of non-cash investing and financing activities:
  Conversion of Vantis Corporation stock options to Lattice stock options (Note 4).......       23,982          --
</TABLE>

          See Accompanying Notes to Consolidated Financial Statements.

                                       5
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1--BASIS OF PRESENTATION:

    In our opinion, the accompanying unaudited consolidated financial statements
contain all adjustments (consisting only of normal recurring adjustments with
the exception of the in-process research and development charge discussed in
Note 4) necessary to present fairly the financial information included therein.
We believe disclosures are adequate to make the information not misleading,
however, we suggest that these financial statements be read in conjunction with
the audited consolidated financial statements and accompanying notes included in
our Annual Report on Form 10-K/A for the year ended April 3, 1999 and filed on
July 27, 1999, and the report on Form 8-K/A which was filed with the Securities
Exchange Commission on August 20, 1999.

    On June 15, 1999, we completed the acquisition of all of the outstanding
capital stock of Vantis Corporation ("Vantis") from Advanced Micro
Devices, Inc. ("AMD"). The transaction was accounted for as a purchase, and
accordingly, the results of operations of Vantis and estimated fair value of
assets acquired and liabilities assumed were included in our consolidated
condensed financial statements beginning June 16, 1999. The acquisition of
Vantis is discussed further in Note 4. There are no significant differences
between our accounting policies and those of Vantis.

    The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from these
estimates. For financial reporting purposes, we report on a 13 or 14 week
quarter with the year ending April 1, 2000. The results of operations for the
quarter ended October 2, 1999 are not necessarily indicative of the results to
be expected for the full year.

    This Quarterly Report on Form 10-Q contains forward looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. In particular, the assumptions set forth
in Note 4 and in the Management Discussion and Analysis section of this Current
Report on Form 10-Q regarding revenue growth and cost of capital which underlie
the Company's calculation of the in-process research and development expenses
contain forward-looking statements and are qualified by the risks associated
with overall semiconductor market conditions, market acceptance and demand for
our new products, our dependencies on our foundry suppliers, the impact of
competitive products and pricing, technological and product development risks,
as well as our ability to successfully integrate Vantis into our operations,
retain key employees of Vantis, retain key customers and suppliers, successfully
increase our combined revenue and profitability, and other risks detailed in our
Annual Report on Form 10-K/A for the year ended April 3, 1999 and other reports
filed from time to time with the Securities Exchange Commission ("SEC"). Actual
results could differ materially from those projected in the forward-looking
statements.

NOTE 2--REVENUE RECOGNITION:

    Revenue from sales to OEM (original equipment manufacturer) customers is
recognized upon shipment. Certain of our sales are made to distributors under
agreements providing price protection and right of return on unsold merchandise.
Revenue and costs relating to such distributor sales are deferred until the
product is sold by such distributors and the related revenue and costs are then
reflected in income.

NOTE 3--NET (LOSS) INCOME PER SHARE:

    Net income per share is computed based on the weighted average number of
shares of common stock and common stock equivalents assumed to be outstanding
during the period (using the treasury

                                       6
<PAGE>
       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

NOTE 3--NET (LOSS) INCOME PER SHARE: (CONTINUED)
stock method). Common stock equivalents consist of stock options and warrants to
purchase common stock. Net loss per share is computed based on the weighted
average number of shares of common stock outstanding during the period.

    On August 11, 1999 our Board of Directors approved a two-for-one split of
its common stock to be effected in the form of a stock dividend of one share of
common stock for each share of our outstanding common stock. The stock dividends
were paid September 16, 1999 to stockholders of record as of August 26, 1999.
All share and per share amounts presented in the accompanying unaudited
consolidated financial statements and notes thereto have been adjusted
retroactively to reflect the two-for-one split.

NOTE 4--ACQUISITION OF VANTIS.

    As discussed in Note 1, we completed the acquisition of all of the
outstanding capital stock of Vantis from AMD on June 15, 1999. We paid
approximately $500.1 million in cash for all of the outstanding capital stock of
Vantis. Additionally, we paid approximately $10.8 million in direct acquisition
costs, we accrued an additional $5.4 million of pre-acquisition contingencies,
we accrued $8.3 million in exit costs and recorded normal accruals of
$34.5 million related to the Vantis business. This purchase was financed using a
combination of cash reserves and a new credit facility bearing interest at
adjustable rates (See Note 5). In addition, we exchanged Company stock options
for all of the options outstanding under the former Vantis employee stock plans
with a calculated Black-Scholes value of approximately $24.0 million. The total
purchase price of Vantis was $583.1 million. The purchase price was allocated to
the estimated fair value of assets acquired and liabilities assumed based on an
independent appraisal and management estimates. The purchase price and the
related allocation are subject to further refinement and change over the period
covering one year from the acquisition date.

    The total purchase price was allocated as follows (in millions):

<TABLE>
<S>                                                                   <C>
Current technology..................................................  $   210.3
Excess of purchase price over net assets assumed....................      158.8
In-process research and development.................................       89.0
Fair value of other tangible net assets.............................       61.3
Assembled workforce, customer list, patents and trademarks..........       53.5
Fair value of property, plant and equipment.........................       10.2
                                                                      ---------
Total...............................................................  $   583.1
                                                                      =========
</TABLE>

VANTIS INTEGRATION

    We have taken certain actions to integrate the Vantis operations and, in
certain instances, to consolidate duplicative operations. Accrued exit costs
related to Vantis were recorded as an adjustment to the fair value of net assets
in the purchase price allocation. Accrued exit costs include $4.2 million
related to Vantis office closures, $2.5 million related to separation benefits
for Vantis employees and $1.6 million in other exit costs primarily relating to
the termination of Vantis foreign distributors. These accruals are based upon
our current estimates and are in accordance with Emerging Issue Task Force
("EITF") No. 95-3, "Recognition of Liabilities in Connection with a Purchase
Business Combination". Activity against the accrued exit costs was not
significant through October 2, 1999.

                                       7
<PAGE>
       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

NOTE 4--ACQUISITION OF VANTIS. (CONTINUED)
IN-PROCESS RESEARCH AND DEVELOPMENT ("IPR&D")

    The value assigned to IPR&D was determined by identifying individual
research projects for which technological feasibility had not been established.
These include semiconductor projects with a value after application of the SEC's
IPR&D valuation methodology of $77.2 million and a process technology project
with a value of $11.8 million. The value of each project was determined by
estimating the expected cash flows from the projects once commercially viable,
applying a factor based on the stage of completion of each project so as to
include only those cash flows that relate to development efforts prior to the
acquisition date, and discounting the resulting net cash flows back to their
present value. The percentage of completion for each project was determined
using proportionate cost incurred and technical milestones achieved to date. The
percentage of completion varied by individual project ranging from 50% to 69%
for semiconductors on June 16, 1999. The process technology project was
estimated to be 90% complete on June 16, 1999.

    The nature of the efforts to develop the in-process research and development
into commercially viable products for semiconductors principally relate to the
completion of design, simulation, verification, documentation, test program
development, prototyping, reliability testing and qualification, hardware and
software integration as well as customer system-level testing and acceptance.
For the process technology, the nature of the efforts required to establish the
commercial viability of the in-process research and development project
principally relate to transistor design, lithography and metalization process
development, process integration, transistor size reduction plans, development
of packaging integration technology, achievement of manufacturability goals,
satisfaction of reliability standards and completion of qualification testing.

    The semiconductor projects are related to new PLD products (requiring new
architectures and process technologies) and have the attendant risks associated
with development of advanced semiconductor circuit designs such as achievement
of speed, power, density, reliability and cost goals. All of the semiconductor
projects have remaining risks related to achievement of these design goals and
effective software integration. In addition, certain projects have basic circuit
design and layout activities which had not been completed as of June 15, 1999.
These semiconductor projects are scheduled for market release beginning in the
first calendar quarter of 2000 and continuing through 2001. Estimated costs to
complete all in-process semiconductor projects total $19.0 million and range
from $0.2 million to $16.5 million.

    The process technology project is related to the development of a new
advanced manufacturing process to reduce transistor size, improve speed and
lower power consumption. Through June 16, 1999, transistor design, lithography
and metalization process development, process integration and certain transistor
size reduction plans had been achieved. Development of packaging integration
technology, achievement of manufacturability yield objectives, satisfaction of
reliability standards and qualification testing had not been accomplished at
June 16, 1999. The process is expected to be qualified for initial production in
fourth calendar quarter of 1999 with approximately $450,000 of costs to be
incurred after June 15, 1999 out of a total of $4 million of estimated costs.
This process technology, once qualified, is expected to remain in production
through 2004.

    If the projects discussed above are not successfully developed, the future
sales and profitability of the combined company may be adversely affected.
Additionally, the value of other intangible assets acquired may become impaired.
Management believes that the IPR&D charge of $89 million is valued consistently
with the SEC staff's current views regarding valuation methodologies. There can
be no

                                       8
<PAGE>
       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

NOTE 4--ACQUISITION OF VANTIS. (CONTINUED)
assurances, however, that the SEC staff will not take issue with any assumptions
used in our valuation model and require a revision in the amount allocated to
IPR&D.

    The estimated costs to develop the in-process research and development into
commercially viable products are approximately $19.4 million in
aggregate--$4.7 million in 1999 subsequent to the transaction date,
$10.0 million in 2000, and $4.7 million in 2001.

    The net cash flows from each project are based on management's estimates of
revenues, cost of sales, research and development costs, selling, general and
administrative costs, and income taxes from such projects. These estimates are
based on the below mentioned assumptions.

    The estimated revenues are based on projected average compounded annual
revenue growth rates for semiconductor products that are in line with industry
analysts' forecasts of growth in the markets in which Vantis competes. Estimated
total revenues from the in-process research and development product areas are
expected to peak in the year 2005 and decline rapidly thereafter as replacement
products are expected to enter the market. These projections are based on
management estimates of market size and growth, expected trends in technology,
and the nature and expected timing of new product introductions by Vantis and
its competitors.

    In developing cash flow estimates, gross margins, research and development
costs and selling general and administrative expenses were consistent with
Vantis historical experience adjusted for expected changes in its stand-alone
performance.

    Vantis' management estimated a profit split from the in-process projects to
the current products to account for the fact that Vantis' in-process projects
are partially dependent on technology that has already established its
feasibility. The profit split from each in-process product was estimated as a
percentage of the total value of the in-process product which was attributable
to existing Vantis core technology.

    The net cash flows were discounted back to their present value based on the
weighted average cost of capital (WACC). The WACC calculation estimates the rate
of return required on an investment in an operating enterprise and considers the
rates of return required from investments in various areas of that enterprise.
The WACC assumed for Vantis, as a corporate business enterprise, is
approximately 16%. The discount rate used in discounting the net cash flows from
in-process research and development is 20% to 22%, which is 4% to 6% higher than
the discount rate used in discounting the net cash flows from current
technology. This discount rate is higher than the WACC due to the inherent
uncertainties in the estimates described above including uncertainty surrounding
the successful development of the in-process research and development projects,
the useful life of such technology, the profitability levels of such technology
and the uncertainty of technological advances that are unknown at this time.

USEFUL LIVES OF INTANGIBLE ASSETS

    The estimated weighted average useful life of the intangible assets for
current technology, assembled workforce, customer lists, trademarks, patents and
residual goodwill, created as a result of the acquisition, is approximately five
years.

                                       9
<PAGE>
       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

NOTE 4--ACQUISITION OF VANTIS. (CONTINUED)
PRO FORMA RESULTS

    The following pro forma results of operations information is provided for
illustrative purposes only and do not purport to be indicative of the
consolidated results of operations for future periods or that actually would
have been realized had Lattice and Vantis been a consolidated entity during the
periods presented. These pro forma results do not include the effect of
non-recurring purchase accounting adjustments. The pro forma results combine the
results of operations as if Vantis had been acquired as of the beginning of the
periods presented. The results include the impact of certain adjustments such as
goodwill amortization, estimated changes in interest income (expense) related to
cash outlays and borrowings associated with the transaction (see discussion in
Note 5) and income tax benefits related to the aforementioned adjustments.
Additionally, an in-process research and development charge of $89 million
discussed above has been excluded from the periods presented due to its
non-recurring nature.

<TABLE>
<CAPTION>
                                                                       SIX MONTHS   SIX MONTHS
                                                                          ENDED        ENDED
                                                                       OCTOBER 2,    SEPT. 26,
                                                                          1999         1998
PROFORMA RESULTS
- ---------------------------------------------------------------------  -----------  -----------
(UNAUDITED)                                                             (IN THOUSANDS, EXCEPT
                                                                          PER-SHARE AMOUNTS)
<S>                                                                    <C>          <C>
Revenue..............................................................   $ 199,406    $ 197,775
Net (loss) income....................................................   $  (9,236)   $ (10,890)
Basic net (loss) income per share....................................   $   (0.19)   $   (0.23)
Diluted net (loss) per share.........................................   $   (0.19)   $   (0.23)
</TABLE>

NOTE 5--DEBT:

    On June 15, 1999, we entered into a credit agreement by and among the
Company, a group of lenders and ABN AMRO Bank N.V. ("ABN AMRO") as
administrative agent for the lender group. The credit agreement consists of two
credit facilities: a $60 million unsecured revolving credit facility
("Revolver"), and a $220 million unsecured reducing term loan ("Term Loan"). On
October 2, 1999, the Company had borrowings of $220 million under the Term Loan
and had no borrowings outstanding under the Revolver. The credit facilities
allow for borrowings at adjustable rates. Interest payments are due quarterly.
The Revolver and Term Loan expire on June 30, 2002 at which time outstanding
borrowings are payable in full. The Term Loan has mandatory redemptions of
$12.5 million per quarter beginning March 31, 2000 through September 30, 2001,
increasing to $25 million per quarter for the two quarters ending December 31,
2001 and March 31, 2002, with the remaining balance due at maturity. We, in
accordance with the credit agreement, must comply with certain financial
covenants related to profitability, tangible net worth, working capital, and
debt leverage. At October 2, 1999, we were in compliance with these covenants.
Both the Revolver and the Term Loan may be prepaid in part or in full without
penalty. (See Recent Developments in Management's Discussion and Analysis,
following).

                                       10
<PAGE>
       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

NOTE 6--RECONCILIATION OF BASIC AND DILUTED NET INCOME (LOSS) PER SHARE (IN
THOUSANDS, EXCEPT PER SHARE DATA):

    The following is a reconciliation of the basic and diluted per share
computations as required by SFAS No. 128, "Earnings Per Share ("EPS")."

<TABLE>
<CAPTION>
                                                                        THREE MONTHS ENDED       SIX MONTHS ENDED
                                                                      ----------------------  ----------------------
                                                                      OCTOBER 2,   SEPT. 26,  OCTOBER 2,   SEPT. 26,
                                                                         1999        1998        1999        1998
                                                                      -----------  ---------  -----------  ---------
<S>                                                                   <C>          <C>        <C>          <C>
Basic and diluted net (loss) income.................................   $  (4,970)  $   9,870   $ (56,133)  $  19,686
                                                                       =========   =========   =========   =========
Shares used in basic net (loss) income per share calculations.......      47,714      47,036      47,483      46,992
Dilutive effect of options and warrants.............................          --         192          --         482
                                                                       ---------   ---------   ---------   ---------
Shares used in diluted net income per share calculations............      47,714      47,228      47,483      47,474
                                                                       =========   =========   =========   =========
Basic net (loss) income per share...................................   $    (.10)  $    0.21   $   (1.18)  $     .42
                                                                       =========   =========   =========   =========
Diluted net (loss) income per share.................................   $    (.10)  $    0.21   $   (1.18)  $     .41
                                                                       =========   =========   =========   =========
</TABLE>

    For the three and six months ended October 2, 1999, approximately
2.17 million and 1.80 million common equivalent shares were excluded from the
computation of diluted shares as a result of their anti-dilutive effect on loss
per share.

NOTE 7--INVENTORIES (IN THOUSANDS):

<TABLE>
<CAPTION>
                                                                           OCT. 2,   APRIL 3,
                                                                            1999       1999
                                                                          ---------  ---------
<S>                                                                       <C>        <C>
Work in progress........................................................  $  12,283  $  10,956
Finished goods..........................................................     11,009      6,727
                                                                          ---------  ---------
                                                                          $  23,292  $  17,683
                                                                          =========  =========
</TABLE>

    The October 2, 1999 inventory increased as a result of the acquisition of
Vantis on June 15, 1999. Vantis inventory at October 2, 1999 was $7.9 million,
consisting of $4.3 million in work-in-process and $3.6 million in finished goods
inventories.

                                       11
<PAGE>
       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

NOTE 8--CHANGES IN STOCKHOLDERS' EQUITY (IN THOUSANDS):

<TABLE>
<CAPTION>
                                                                       COMMON      PAID-IN     RETAINED
                                                                        STOCK      CAPITAL     EARNINGS     TOTAL
                                                                     -----------  ----------  ----------  ----------
<S>                                                                  <C>          <C>         <C>         <C>
Balances, April 3, 1999............................................   $     472   $  223,054  $  260,208  $  483,734
Fair value of options issued to Vantis employees (Note 4)..........          --       23,982          --      23,982
Common stock issued................................................           7        9,403          --       9,410
Tax benefit of option exercises....................................          --        4,450          --       4,450
Other comprehensive income.........................................          --         (202)         --        (202)
Loss for the six-month period......................................          --           --     (56,133)    (56,133)
                                                                      ---------   ----------  ----------  ----------
Balances, Oct. 2, 1999.............................................   $     479   $  260,687  $  204,075  $  465,241
                                                                      =========   ==========  ==========  ==========
</TABLE>

NOTE 9--NEW ACCOUNTING PRONOUNCEMENTS:

    In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes new accounting
treatment for derivatives and hedging activities and supercedes and amends a
number of existing accounting standards. For the Company, this pronouncement
will be effective in fiscal year 2002, and is not anticipated to have a material
effect on the consolidated financial statements.

NOTE 10--LEGAL MATTERS:

ADVANCED MICRO DEVICES, INC. V. ALTERA CORPORATION
  (CASE NO. C-94-20567-RMW, N.D. CAL.).

    This litigation, which began in 1994, involves multiple claims and
counterclaims for patent infringement relating to Vantis and Altera programmable
logic devices. We assumed this litigation as part of our acquisition of Vantis.

    In April 1999, the Federal Court of Appeal reversed earlier jury and Court
decisions and held that Altera is not licensed to the eight AMD patents-in-suit.
These eight AMD patents were subsequently assigned to Vantis. Also in
April 1999, following the decision of the Federal Court of Appeal, Altera filed
a petition for rehearing. In June 1999, the Federal Court of Appeal denied
Altera's petition for rehearing.

    In connection with our acquisition of Vantis, we have agreed to assume both
the claims against Altera and the claims by Altera against AMD. Although there
can be no assurance as to the results of such litigation, based upon information
presently known to management, we do not believe that the ultimate resolution of
this lawsuit will have a material adverse effect on our business. The foregoing
statement constitutes a forward-looking statement and the actual results may
differ materially depending on a number of factors, including new court
decisions and additional counterclaims made by other parties to such litigation.

                                       12
<PAGE>
       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

NOTE 11--SEGMENT AND GEOGRAPHIC INFORMATION:

    The Company operates in one industry segment comprising the design,
development, manufacture and marketing of high performance programmable logic
devices. The Company's sales by major geographic area were as follows (in
thousands):

<TABLE>
<CAPTION>
                                                    THREE MONTHS ENDED     SIX MONTHS ENDED
                                                   --------------------  ---------------------
                                                   OCT. 2,    SEPT. 26,   OCT. 2,    SEPT. 26,
                                                     1999       1998        1999       1998
                                                   ---------  ---------  ----------  ---------
<S>                                                <C>        <C>        <C>         <C>
United States....................................  $  45,321  $  24,084  $   76,004  $  48,548
Export sales:
  Europe.........................................     26,119     12,545      40,699     26,185
  Asia...........................................     16,152      8,392      28,390     15,470
  Other..........................................      7,381      3,067       9,618      5,913
                                                   ---------  ---------  ----------  ---------
                                                      49,652     24,004      78,007     47,568
                                                   ---------  ---------  ----------  ---------
                                                   $  94,973  $  48,088  $  154,711  $  96,116
                                                   =========  =========  ==========  =========
</TABLE>

    Resale of product through three distributors accounted for approximately
19%, 14% and 12% of revenues, respectively, in the second quarter of fiscal
2000, and approximately 15%, 12% and 12%, for the first six months of fiscal
2000. No individual customer accounted for more than 10% of revenue in any of
the periods presented. No export sales to customers or distributors of any
individual country accounted for more than 10% of revenue in any of the periods
presented.

                                       13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION RESULTS OF OPERATIONS

    The results of operations for the three month and six month periods ended
October 2, 1999 presented include the effect of the acquisition of Vantis from
June 16, 1999, which is discussed in Note 4 to the Unaudited Consolidated
Financial Statements contained herein.

    Key elements of the statements of operations, expressed as a percentage of
revenues, were as follows:

<TABLE>
<CAPTION>
                                               THREE MONTHS ENDED               SIX MONTHS ENDED
                                         ------------------------------  ------------------------------
                                          OCT 2, 1999    SEPT 26, 1998    OCT 2, 1999    SEPT 26, 1998
                                         -------------  ---------------  -------------  ---------------
<S>                                      <C>            <C>              <C>            <C>
Revenue................................        100.0%          100.0%          100.0%          100.0%
Gross margin...........................         58.1%           60.4%           59.5%           60.3%
Research and development expense.......         18.8%           16.5%           17.9%           16.5%
Selling, general and admin. expenses...         21.5%           18.7%           20.2%           18.7%
(Loss) income from operations..........         (4.4)%          25.2%          (52.5)%          25.1%
</TABLE>

REVENUE:

    Revenue for the second quarter and first six months of fiscal 2000 increased
$46.9 million and $58.6 million or 98% and 61%, respectively, as compared to the
second quarter and first six months of fiscal 1999. In addition to the
acquisition of Vantis, the revenue increase was attributable to increased sales
of ISP products and recovering demand from Asia. Overall average selling prices
increased slightly in the second quarter and first half of fiscal 2000 as
compared to the second quarter and first half of fiscal 1999. Fluctuations in
overall average selling prices were due primarily to changes in our product mix.
Although selling prices of mature products generally decline over time, this
decline is at times offset by higher selling prices of new products.

GROSS MARGIN:

    Gross margin was 58.1% and 59.6% in the second quarter and first half of
fiscal 2000 as compared to 60.4% and 60.3% in the second quarter and first half
of fiscal 1999. The decline for the second quarter and first six months of
fiscal 2000 is attributable to the acquisition of Vantis Corporation on
June 16, 1999. The decline was partially offset by an improvement in product mix
and reductions in our manufacturing costs. Reductions in manufacturing costs
resulted primarily from yield improvements, migration of products to more
advanced technologies and smaller die sizes, and wafer price reductions.

RESEARCH AND DEVELOPMENT:

    Research and development expenses were $17.9 million and $27.8 million, an
increase of approximately $9.9 million and $11.9 million, or 126% and 75%, in
the second quarter and first six months of fiscal 2000, when compared to the
second quarter and first six months of fiscal 1999, respectively. In addition to
the acquisition of Vantis, spending increases resulted primarily from the
increased development of new products. We believe that a continued commitment to
research and development is essential in order to maintain product leadership of
our existing product families and provide innovative new product offerings, and
therefore, expect to continue to make significant future investments in research
and development.

                                       14
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE:

    Selling, general and administrative expense was $20.4 million and
$31.2 million, an increase of $11.4 million and $13.2 million, or 126% and 73%,
in the second quarter and first six months of fiscal 2000 when compared to the
second quarter and first six months of fiscal 1999, respectively. This increase
was primarily due to the Vantis acquisition and to a lesser extent attributable
to increased variable costs associated with higher levels of revenue and
profitability.

AMORTIZATION OF INTANGIBLE ASSETS:

    Amortization of intangibles was $21.1 million and $25.3 million, an increase
of $21.1 million and $25.3 million for the second quarter and first half of
fiscal 2000 as compared to the second quarter and first half of fiscal 1999,
respectively, due to the inclusion of amortization of intangible assets arising
from the Vantis acquisition on June 15, 1999. In-process research and
development expenses of $89.0 million in the first quarter of FY 2000 are
further described in Note 4 to the Unaudited Consolidated Financial Statements.

OTHER EXPENSE (INCOME), NET:

    Other expense (income), net of interest income was $3.6 million and
$1.8 million, an increase of approximately $6.1 million and $6.9 million in the
second quarter and first six months of fiscal 2000 as compared to the second
quarter and first six months of fiscal 1999, respectively. This was primarily
due to interest expense of approximately $4.4 million and $5.3 million in the
second quarter and first six months of fiscal 2000, respectively, from
acquisition-related debt (as discussed in Note 5) offsetting increased interest
income on higher cash balances prior to the acquisition.

(BENEFIT) PROVISION FOR INCOME TAXES:

    The benefit for income taxes for the second quarter and first half of fiscal
2000 ended October 2, 1999 is 36.5% and 32.4% of the loss before provision for
income taxes. This reflects the estimated rate at which income taxes would be
recoverable if a loss tax return were filed. The loss before provision for
income taxes is attributable to the In-Process Research and Development charge
during the period of approximately $89 million and intangible asset amortization
of $21.1 million and $25.3 million for the three and six months ended
October 2, 1999, respectively. If this charge were not present, the Company
would have taxable income and an income tax rate of approximately 36.5%. For the
three month and six month periods ended September 26, 1998, the income tax rate
was 32.5%. The principal reason for the increase from 32.5% to 36.5% is that
there is less tax exempt and tax favored interest income in the current period
(due to cash invested in the Vantis acquisition) than the same period last year.

IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE--METHODOLOGY

    The value assigned to IPR&D was determined by identifying individual
research projects for which technological feasibility had not been established.
These include semiconductor projects with a value after application of the SEC's
IPR&D valuation methodology of $77.2 million and a process technology project
with a value of $11.8 million. The value of each project was determined by
estimating the expected cash flows from the projects once commercially viable,
applying a factor based on the stage of completion of each project so as to
include only those cash flows that relate to development efforts prior to the
acquisition date, and discounting the resulting net cash flows back to their
present value. The percentage of completion for each project was determined
using proportionate cost incurred and technical milestones achieved to date. The
percentage of completion varied by individual project ranging from 50% to 69%
for semiconductors on June 16, 1999. The process technology project was
estimated to be 90% complete on June 16, 1999.

                                       15
<PAGE>
    The nature of the efforts to develop the in-process research and development
into commercially viable products for semiconductors principally relate to the
completion of design, simulation, verification, documentation, test program
development, prototyping, reliability testing and qualification, hardware and
software integration as well as customer system-level testing and acceptance.
For the process technology, the nature of the efforts required to establish the
commercial viability of the in-process research and development project
principally relate to transistor design, lithography and metalization process
development, process integration, transistor size reduction plans, development
of packaging integration technology, achievement of manufacturability goals,
satisfaction of reliability standards and completion of qualification testing.

    The semiconductor projects are related to new PLD products (requiring new
architectures and process technologies) and have the attendant risks associated
with development of advanced semiconductor circuit designs such as achievement
of speed, power, density, reliability and cost goals. All of the semiconductor
projects have remaining risks related to achievement of these design goals and
effective software integration. In addition, certain projects have basic circuit
design and layout activities which had not been completed as of June 15, 1999.
These semiconductor projects are scheduled for market release beginning in the
first calendar quarter of 2000 and continuing through 2001. Estimated costs to
complete all in-process semiconductor projects total $19.0 million and range
from $0.2 million to $16.5 million.

    The process technology project is related to the development of a new
advanced manufacturing process to reduce transistor size, improve speed and
lower power consumption. Through June 16, 1999, transistor design, lithography
and metalization process development, process integration and certain transistor
size reduction plans had been achieved. Development of packaging integration
technology, achievement of manufacturability yield objectives, satisfaction of
reliability standards and qualification testing had not been accomplished at
June 16, 1999. The process is expected to be qualified for initial production in
fourth calendar quarter of 1999 with approximately $450,000 of costs to be
incurred after June 15, 1999 out of a total of $4 million of estimated costs.
This process technology, once qualified, is expected to remain in production
through 2004.

    If the projects discussed above are not successfully developed, the future
sales and profitability of the combined company may be adversely affected.
Additionally, the value of other intangible assets acquired may become impaired.
Management believes that the IPR&D charge of $89 million is valued consistently
with the SEC staff's current views regarding valuation methodologies. There can
be no assurances, however, that the SEC staff will not take issue with any
assumptions used in our valuation model and require a revision in the amount
allocated to IPR&D.

    The estimated costs to develop the in-process research and development into
commercially viable products are approximately $19.4 million in
aggregate--$4.7 million in 1999 subsequent to the transaction date,
$10.0 million in 2000, and $4.7 million in 2001.

    The net cash flows from each project are based on management's estimates of
revenues, cost of sales, research and development costs, selling, general and
administrative costs, and income taxes from such projects. These estimates are
based on the below mentioned assumptions.

    The estimated revenues are based on projected average compounded annual
revenue growth rates for semiconductor products that are in line with industry
analysts' forecasts of growth in the markets in which Vantis competes. Estimated
total revenues from the in-process research and development product areas are
expected to peak in the year 2005 and decline rapidly thereafter as replacement
products are expected to enter the market. These projections are based on
management estimates of market size and growth, expected trends in technology,
and the nature and expected timing of new product introductions by Vantis and
its competitors.

                                       16
<PAGE>
    In developing cash flow estimates, gross margins, research and development
costs and selling general and administrative expenses were consistent with
Vantis historical experience adjusted for expected changes in its stand-alone
performance.

    Vantis' management estimated a profit split from the in-process projects to
the current products to account for the fact that Vantis' in-process projects
are partially dependent on technology that has already established its
feasibility. The profit split from each in-process product was estimated as a
percentage of the total value of the in-process product which was attributable
to existing Vantis core technology.

    The net cash flows were discounted back to their present value based on the
weighted average cost of capital (WACC). The WACC calculation estimates the rate
of return required on an investment in an operating enterprise and considers the
rates of return required from investments in various areas of that enterprise.
The WACC assumed for Vantis, as a corporate business enterprise, is
approximately 16%. The discount rate used in discounting the net cash flows from
in-process research and development is 20% to 22%, which is 4% to 6% higher than
the discount rate used in discounting the net cash flows from current
technology. This discount rate is higher than the WACC due to the inherent
uncertainties in the estimates described above including uncertainty surrounding
the successful development of the in-process research and development projects,
the useful life of such technology, the profitability levels of such technology
and the uncertainty of technological advances that are unknown at this time.

    USEFUL LIVES OF INTANGIBLE ASSETS

    The estimated weighted average useful life of the intangible assets for
current technology, assembled workforce, customer lists, trademarks, patents and
residual goodwill, created as a result of the acquisition, is approximately five
years.

FACTORS AFFECTING FUTURE RESULTS

    Notwithstanding the objectives, projections, estimates and other
forward-looking statements in this Quarterly Report, our future operating
results will continue to be subject to quarterly variations based on a wide
variety of risks. These risks include, but are not limited to:

OUR WAFER SUPPLY COULD BE INTERRUPTED OR REDUCED AND RESULT IN A SHORTAGE OF
  FINISHED PRODUCTS AVAILABLE FOR SALE.

    We do not manufacture finished silicon wafers. Currently all our silicon
wafers are manufactured by Seiko Epson in Japan; AMD in the United States; and
the UMC Group, a group of affiliated companies in Taiwan. If Seiko Epson,
through its U.S. affiliate Epson Electronics America, AMD or the UMC Group
significantly interrupts or reduces our wafer supply, our operating results
would be adversely affected.

    In the past, we have experienced delays in obtaining wafers and in securing
supply commitments from our foundries. At present, we anticipate that our supply
commitments are adequate. However, these existing supply commitments may not be
sufficient for us to satisfy customer demand in future periods. Additionally,
notwithstanding our supply commitments, we may still have difficulty obtaining
wafer deliveries consistent with the supply commitments. We negotiate wafer
prices and supply commitments on at least an annual basis. If Seiko Epson, Epson
Electronics America, AMD or the UMC Group reduces our supply commitment or
increases our wafer prices, and we cannot find alternative sources of wafer
supply, our operating results could be adversely affected.

    Many other factors that could disrupt our wafer supply are beyond our
control. Since worldwide manufacturing capacity for silicon wafers is limited
and inelastic, we could be adversely affected by significant industry wide
increases in overall wafer demand or interruptions in wafer supply.
Additionally, although the recent earthquake in Taiwan has not had a material
adverse effect on our

                                       17
<PAGE>
operating results, a disruption of Seiko Epson's, AMD's or the UMC Group's
foundry operations as a result of a fire, earthquake or other natural disaster
could disrupt our wafer supply and could have an adverse effect on our operating
results.

IF OUR FOUNDRY PARTNERS EXPERIENCE QUALITY OR YIELD PROBLEMS, WE MAY FACE A
  SHORTAGE OF FINISHED PRODUCTS AVAILABLE FOR SALE.

    We depend on our foundries to deliver reliable silicon wafers with
acceptable yields in a timely manner. As is common in our industry, we have
experienced wafer yield problems and delivery delays in the past. If our
foundries are unable to produce silicon wafers that meet our specifications,
with acceptable yields, for a prolonged period, our operating results could be
adversely affected.

    Substantially all of our revenues are derived from products based on a
specialized silicon wafer manufacturing process technology called E(2)CMOS-TM-.
The reliable manufacture of high performance E(2)CMOS semiconductor wafers is a
complicated and technically demanding process requiring:

    - a high degree of technical skill;

    - state-of-the-art equipment;

    - the absence of defects in the masks used to print circuits on a wafer;

    - the elimination of minute impurities and errors in each step of the
      fabrication process; and

    - effective cooperation between the wafer supplier and the circuit designer.

    As a result, our foundries may experience difficulties in achieving
acceptable quality and yield levels when manufacturing our silicon wafers.

OUR PRODUCTS MAY NOT BE COMPETITIVE IF WE ARE UNSUCCESSFUL IN MIGRATING OUR
  MANUFACTURING PROCESSES TO MORE ADVANCED TECHNOLOGIES.

    In order to develop new products and maintain the competitiveness of
existing products, we need to migrate to more advanced wafer manufacturing
processes that utilize larger wafer sizes and smaller device geometries. We may
also utilize additional foundries. Since we depend upon foundries to provide
their facilities and support for our process technology development, we may
experience delays in the availability of advanced wafer manufacturing process
technologies at existing or new wafer fabrication facilities. As a result,
volume production of our advanced E(2)CMOS-TM- process technologies at the new
fabs of Seiko Epson, the UMC Group or future foundries may not be achieved. This
could have an adverse effect on our operating results.

WE MAY BE UNSUCCESSFUL IN DEFINING, DEVELOPING OR SELLING NEW PRODUCTS REQUIRED
  TO MAINTAIN OR EXPAND OUR BUSINESS.

    As a semiconductor company, we operate in a dynamic environment marked by
rapid product obsolescence. Our future success depends on our ability to
introduce new or improved products that meet customer needs while achieving
acceptable margins. If we fail to introduce these new products in a timely
manner or these products fail to achieve market acceptance, our business and
financial condition will be adversely affected.

    The introduction of new products in a dynamic market environment presents
significant business challenges. Product development commitments and
expenditures must be made well in advance of product sales. The success of a new
product depends on accurate forecasts of long-term market demand and future
technology developments.

    Our future revenue growth is dependent on market acceptance of our new
proprietary ISP-TM- product families and the continued market acceptance of our
proprietary software development tools. The success of these products is
dependent on a variety of specific technical factors including:

    - successful product definition;

                                       18
<PAGE>
    - timely and efficient completion of product design;

    - timely and efficient implementation of wafer manufacturing and assembly
      processes;

    - product performance; and

    - the quality and reliability of the product.

    If, due to these or other factors, our new products do not achieve market
acceptance, our business and financial condition will be adversely affected.

WE MAY EXPERIENCE UNEXPECTED DIFFICULTIES INTEGRATING VANTIS CORPORATION.

    We acquired Vantis on June 15, 1999, and are currently in the process of
integrating Vantis with our other operations. If integration is unsuccessful,
more difficult or more time consuming than originally planned, we may incur
unexpected disruptions to our ongoing business. These disruptions may have an
adverse effect on our operations and financial results.

    Further, the following specific factors may adversely affect our ability to
integrate the business of Vantis:

    - We may experience unexpected losses of key employees or customers;

    - We may experience difficulties or delays in conforming the standards,
      processes, procedures and controls of our two businesses;

    - We may experience unexpected costs and discover unexpected liabilities;

    - We may not achieve expected levels of revenue growth, cost reduction and
      profitability improvement; and

    - We may not be able to coordinate our new product and process development
      in a way which enables us to bring new technologies to the market in a
      timely manner.

    In addition, as part of our acquisition of Vantis, we entered into
arrangements with Vantis' former parent, AMD, for AMD to provide Vantis with
certain manufacturing support and administrative services. In the event AMD
fails to provide these services, or provides such services at a level of quality
and timeliness inconsistent with the historical delivery of such services, our
ability to integrate Vantis will be severely hampered and our business may
suffer.

DETERIORATION OF CONDITIONS IN ASIA MAY DISRUPT OUR EXISTING SUPPLY ARRANGEMENTS
  AND RESULT IN A SHORTAGE OF FINISHED PRODUCTS AVAILABLE FOR SALE.

    Two of our three silicon wafer suppliers operate fabs located in Asia. Our
finished silicon wafers are assembled and tested by independent subcontractors
located in Hong Kong, Malaysia, the Philippines, South Korea, Taiwan and
Thailand. A prolonged interruption in our supply from any of these
subcontractors could have an adverse effect on our operating results.

    Although we have yet not experienced significant supply interruptions, the
economic, financial, social and political situation in Asia has recently been
volatile. Financial difficulties, governmental actions or restrictions,
prolonged work stoppages or any other difficulties experienced by these
suppliers may disrupt our supply and could have an adverse effect on our
operating results.

    Our wafer purchases from Seiko Epson are denominated in Japanese yen. The
value of the dollar with respect to the yen has fluctuated in the past and may
not remain stable in the future. Future substantial deterioration of dollar-yen
exchange rates could have an adverse effect on our operating results.

                                       19
<PAGE>
EXPORT SALES ACCOUNT FOR A SUBSTANTIAL PORTION OF OUR REVENUES AND MAY DECLINE
  IN THE FUTURE DUE TO ECONOMIC AND GOVERNMENTAL UNCERTAINTIES.

    Our export sales are affected by unique risks frequently associated with
foreign economies including:

    - changes in local economic conditions;

    - exchange rate volatility;

    - governmental controls and trade restrictions;

    - export license requirements and restrictions on the export of technology;

    - political instability;

    - changes in tax rates, tariffs or freight rates;

    - interruptions in air transportation; and

    - difficulties in staffing and managing foreign sales offices.

    For example, our export sales have recently been affected by the Asian
economic crisis. Significant changes in the economic climate in the foreign
countries where we derive our export sales could have an adverse effect on our
operating results.

IF OUR ASSEMBLY AND TEST SUBCONTRACTORS EXPERIENCE QUALITY OR YIELD PROBLEMS, WE
  MAY FACE A SHORTAGE OF FINISHED PRODUCTS AVAILABLE FOR SALE.

    We rely on subcontractors to assemble and test our devices with acceptable
quality and yield levels. As is common in our industry, we have experienced
quality and yield problems in the past. If we experience prolonged quality or
yield problems in the future, there could be an adverse affect on our operating
results.

    The majority of our revenue is derived from semiconductor devices assembled
in advanced packages. The assembly of advanced packages is a complex process
requiring:

    - a high degree of technical skill;

    - state-of-the-art equipment;

    - the absence of defects in lead frames used to attach semiconductor devices
      to the package;

    - the elimination of raw material impurities and errors in each step of the
      process; and

    - effective cooperation between the assembly subcontractor and the device
      manufacturer.

    As a result, our subcontractors may experience difficulties in achieving
acceptable quality and yield levels when assembling and testing our
semiconductor devices.

THE CYCLICAL NATURE OF THE SEMICONDUCTOR INDUSTRY MAY LIMIT OUR ABILITY TO
  MAINTAIN OR GROW REVENUE AND PROFIT LEVELS DURING FUTURE INDUSTRY DOWNTURNS.

    The semiconductor industry is highly cyclical, to a greater extent than
other less dynamic or less technology-driven industries. In the past, our
financial performance has been negatively affected by significant downturns in
the semiconductor industry as a result of:

    - the cyclical nature of the demand for the products of semiconductor
      customers;

    - general reductions in inventory levels by customers;

                                       20
<PAGE>
    - excess production capacity; and

    - accelerated declines in average selling prices.

    If these or other conditions in the semiconductor industry occur in the
future, there could be an adverse effect on our operating results.

OUR FUTURE QUARTERLY OPERATING RESULTS MAY FLUCTUATE AND THEREFORE MAY FAIL TO
  MEET EXPECTATIONS

    Our quarterly operating results have fluctuated in the past and may continue
to fluctuate in the future. Consequently, our operating results may fail to meet
expectations. As a result of industry conditions and the following specific
factors, our quarterly operating results are more likely to fluctuate and are
more difficult to predict than a typical non-technology company of our size and
maturity:

    - general economic conditions in the countries where we sell our products;

    - the timing of our and our competitors' new product introductions;

    - product obsolescence;

    - the scheduling, rescheduling and cancellation of large orders by our
      customers;

    - the cyclical nature of demand for our customers' products;

    - our ability to develop new process technologies and achieve volume
      production at the new fabs of Seiko Epson and the UMC Group or at another
      foundry;

    - changes in manufacturing yields;

    - adverse movements in exchange rates, interest rates or tax rates; and

    - the availability of adequate supply commitments from our wafer foundries
      and assembly and test subcontractors.

    As a result of these factors, our past financial results are not necessarily
a good predictor of our future results.

OUR STOCK PRICE MAY CONTINUE TO EXPERIENCE LARGE SHORT-TERM FLUCTUATIONS WHICH
  MAY RESULT IN INVESTORS LOSING ALL OR PART OF THEIR INVESTMENT.

    In recent years, the price of our common stock has fluctuated greatly. These
price fluctuations have been rapid and severe and have left investors little
time to react. The price of our common stock may continue to fluctuate greatly
in the future due to a variety of company specific factors, including:

    - quarter to quarter variations in our operating results;

    - shortfalls in revenues or earnings from levels expected by securities
      analysts;

    - announcements of technological innovations or new products by other
      companies.

WE MAY NOT BE ABLE TO SUCCESSFULLY COMPETE IN THE HIGHLY COMPETITIVE
  SEMICONDUCTOR INDUSTRY.

    The semiconductor industry is intensely competitive and many of our direct
and indirect competitors have substantially greater financial, technological,
manufacturing, marketing and sales resources. If we are unable to compete
successfully in this environment, our future results will be adversely affected.

                                       21
<PAGE>
    The current level of competition in the programmable logic market is high
and may increase as our market expands. We currently compete directly with
companies that have licensed our products and technology or have developed
similar products. We also compete indirectly with numerous semiconductor
companies that offer products and solutions based on alternative technologies.
These direct and indirect competitors are established multinational
semiconductor companies as well as emerging companies. We also may experience
significant competition from foreign companies in the future.

WE MAY FAIL TO RETAIN OR ATTRACT THE SPECIALIZED TECHNICAL AND MANAGEMENT
  PERSONNEL REQUIRED TO SUCCESSFULLY OPERATE OUR BUSINESS.

    To a greater degree than most non-technology companies or larger technology
companies, our future success depends on our ability to attract and retain
highly qualified technical and management personnel. As a mid-sized company, we
are particularly dependent on a relatively small group of key employees.
Competition for skilled technical and management employees is intense within our
industry. As a result, we may not be able to retain our existing key technical
and management personnel. In addition, we may not be able to attract additional
qualified employees in the future. If we are unable to retain existing key
employees or are unable to hire new qualified employees, our operating results
could be adversely affected.

IF WE ARE UNABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS OUR
  FINANCIAL RESULTS AND COMPETITIVE POSITION MAY SUFFER.

    Our success depends in part on our proprietary technology. However, we may
fail to adequately protect this technology. As a result, we may lose our
competitive position or face significant expense to protect or enforce our
intellectual property rights.

    We intend to continue to protect our proprietary technology through patents,
copyrights and trade secrets. Despite this intention, we may not be successful
in achieving adequate protection. Claims allowed on any of our patents may not
be sufficiently broad to protect our technology. Patents issued to us also may
be challenged, invalidated or circumvented. Finally, our competitors may develop
similar technology independently.

    Companies in the semiconductor industry vigorously pursue their intellectual
property rights. If we become involved in protracted intellectual property
disputes or litigation we may utilize substantial financial and management
resources, which could have an adverse effect on our operating results. We may
also be subject to future intellectual property claims or judgements. If these
were to occur, we may not be able to obtain a license on favorable terms or
without our operating results being adversely affected.

YEAR 2000 COMPLIANCE

    We are currently working to address the potential impact of the Year 2000 on
the processing of information by our computerized systems, including interfaces
to our business partners.

    In June 1999, we completed our planned Year 2000 compliance activities with
respect to our products and internal systems, software, equipment and
facilities. Based solely on these activities, management believes that all
products and material internal systems, software, equipment and facilities are
currently Year 2000 compliant. We do not anticipate that potential Year 2000
issues will have a material adverse impact on our financial position or
operating results. In aggregate, approximately $2 million in expenses were
incurred to fund Year 2000 compliance activities.

    However, we could be adversely impacted if any of our critical business
partners were to experience a severe business interruption due to a failure to
address their internal Year 2000 issues in a

                                       22
<PAGE>
timely manner. The most reasonably likely worst case Year 2000 scenario is a
temporary disruption in supplier deliveries or customer shipments. If a severe
disruption occurs in either of these two areas and is not corrected in a timely
manner, a revenue or profit shortfall may result in the first half of calendar
year 2000. Based solely on responses received to date from our business
partners, we have no reason to believe that there will be such a material
adverse impact. However, if the responses received from our business partners
are inaccurate or happen to change, then there could be such a material adverse
impact. Management is evaluating Year 2000 business interruption scenarios and
developing appropriate contingency plans.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

    We are subject to interest rate risk on our outstanding debt and our
investment portfolio.

    A 70 basis-point move in interest rates, approximately 10% of our
weighted-average interest rate on the floating rate debt issued on June 15, 1999
(see Note 5 to the Unaudited Consolidated Financial Statements), would have an
insignificant effect on our pretax earnings, debt compliance ratios, cash flow
and financial condition over the remainder of the fiscal year. A 35 basis-point
move in interest rates (approximately 10% of our weighted-average interest rate
on our cash, cash equivalent and short term investment income) would have an
insignificant effect on our pretax earnings, debt compliance ratios, cash flow
and financial condition over remainder fiscal year. Similarly, a 35 basis-point
move in interest rates would have had an insignificant effect on pretax
earnings, cash flow and financial condition in the first six months and the
fiscal year completed on April 3, 1999.

    We have international subsidiary and branch operations. Additionally, a
large portion of our silicon wafer purchases are denominated in Japanese yen. We
are therefore subject to foreign currency rate exposure. To mitigate rate
exposure with respect to yen-denominated wafer purchases, we maintain
yen-denominated bank accounts and bill our Japanese customers in yen. The yen
bank deposits are utilized to hedge yen-denominated wafer purchases against
specific and firm wafer purchases. If foreign currency rates fluctuated by 10%
from rates at October 2, 1999 and September 26, 1998, the effect on our
consolidated financial statements would not be material. However, there can be
no assurance that there will not be a material impact in the future.

LIQUIDITY AND CAPITAL RESOURCES:

    Our cash, cash equivalents and short-term investments decreased
$184.2 million to $135.3 million during the first six months of fiscal 2000 from
$319.4 million at April 3, 1999. The decrease was due to our use of cash for the
Vantis acquisition partially offset by cash generated from operations and
exercises of stock options. Working capital decreased $261.1 million to
$63.1 million at October 2, 1999 from $324.2 million at April 3, 1999. This
decrease in working capital was primarily a result of our use of cash for the
Vantis acquisition, current liabilities assumed net of current assets acquired
related to the Vantis acquisition and higher current liabilities from the
short-term portion of the new debt facility we entered into in order to purchase
Vantis (see below). During the first six months of fiscal 2000, we generated
approximately $35.2 million of cash and cash equivalents from our operating
activities compared with $32.9 million during the same period in fiscal 1999.
This increased generation of cash and cash equivalents was mainly attributable
to the changes in assets and liabilities described below.

    During the first six months of fiscal 2000, accounts receivable increased by
$2.3 million, or 10%, as compared to the balance at April 3, 1999. This increase
was primarily due to the inclusion of approximately $4.7 million of Vantis
receivables partially offset by timing of collections and purchase accounting
reserves related to distributor receivables. Inventories increased by
$5.6 million, or 32%, as compared to the balance at April 3, 1999 primarily due
to the inclusion of inventories related to former Vantis operations. Net
property and equipment increased by $12.3 million, or 27%, as compared to the
balance at April 3, 1999 primarily due to the inclusion of Vantis assets.
Long-term deferred income

                                       23
<PAGE>
taxes increased $39.8 million versus the balance at April 3, 1999 and primarily
represents future income tax benefits to be derived from the amortization for
income tax purposes of in-process research and development charges and
intangible assets associated with the Vantis acquisition. Accounts payable and
accrued expenses increased by $59.8 million, or 186%, due primarily to the
inclusion of liabilities related to former Vantis operations (see Note 4 to the
Unaudited Consolidated Financial Statements). The $3.9 million, or 78% increase
in income taxes payable as compared to the balance at April 3, 1999 is primarily
due to the timing of tax deductions and payments. Deferred income increased by
$13.1 million, or 66%, as compared to the balance at April 3, 1999, due
primarily to increased billings to distributors associated with former Vantis
operations.

    On June 15, 1999, we entered into a credit agreement with a group of lenders
and ABN AMRO Bank N.V. ("ABN AMRO") as administrative agent for the lender
group. The credit agreement consists of two credit facilities: a $60 million
unsecured revolving credit facility ("Revolver"), and a $220 million unsecured
reducing term loan ("Term Loan"). On June 15, 1999, the Company borrowed
$220 million under the term loan and approximately $33 million under the
revolving credit facility. On September 16, 1999, $33 million of borrowings
under the revolving credit facility were repaid. The credit facilities allow for
borrowings at adjustable rates. Interest payments are due quarterly. The
revolving credit facility and term loan expire on June 30, 2002 at which time
outstanding borrowings are payable in full. The Term Loan has mandatory
redemptions of $12.5 million per quarter beginning March 31, 2000 through
September 30, 2001, increasing to $25 million per quarter for the two quarters
ending December 31, 2001 and March 31, 2002, with the remaining balance due at
maturity. We, in accordance with the credit agreement, must comply with certain
financial covenants related to profitability, tangible net worth, working
capital, and debt leverage. At October 2, 1999, we were in compliance with these
covenants. Both the revolving credit facility and the term loan may be prepaid
in part or in full without penalty.

    Capital additions were $9.3 million, and $10.8 million, net of retirements,
during the first fiscal half of 2000 and 1999, respectively. We expect to spend
approximately $25 to $30 million for the fiscal year ending April 1, 2000. The
primary financing activities during the first quarter of fiscal 2000 are
attributable to the two credit facilities established to fund the Vantis
acquisition (see Note 5 to the Unaudited Consolidated Financial Statements).

    In March 1997, we entered into an advance payment production agreement with
Seiko Epson and its affiliated U.S. distributor, Epson Electronics
America, Inc., under which we agreed to advance approximately $85 million,
payable upon completion of specific milestones, to Seiko Epson to finance
construction of an eight-inch sub-micron wafer manufacturing facility. Under the
terms of the agreement, the advance is to be repaid with semiconductor wafers
over a multi-year period. The agreement calls for wafers to be supplied by Seiko
Epson through Epson Electronics America, Inc. pursuant to purchase agreements
with Epson Electronics America, Inc. We also have an option under this agreement
to advance Seiko Epson an additional $60 million for additional wafer supply
under similar terms. The first payment pursuant to this agreement, approximately
$17.0 million, was made during fiscal 1997. During fiscal 1998, we made two
additional payments aggregating approximately $34.2 million. The balance of the
advance payment is currently anticipated to be made in two installments during
fiscal 2000.

    We entered into a series of agreements with United Microelectronics
Corporation ("UMC") in September 1995 pursuant to which we agreed to join UMC
and several other companies to form a separate Taiwanese company, UICC, for the
purpose of building and operating an advanced semiconductor manufacturing
facility in Taiwan, Republic of China. Under the terms of the agreements, we
invested approximately $49.7 million for an approximate 10% equity interest in
UICC and the right to receive a percentage of the facility's wafer production at
market prices.

                                       24
<PAGE>
    In October 1996, we entered into an agreement with Utek Corporation, a
public Taiwanese company in the wafer foundry business that became affiliated
with the UMC group in 1998, pursuant to which we agreed to make a series of
equity investments in Utek under specific terms. In exchange for these
investments we received the right to purchase a percentage of Utek's wafer
production. Under this agreement, we have invested approximately $17.5 million
in three separate installments and currently own approximately 2.5% of the
outstanding equity of Utek.

    In June 1999, the Board of Directors of UICC and Board of Directors of UMC
voted in favor of merging UICC into UMC. Also in June 1999, the Board of
Directors of Utek and the Board of Directors of UMC voted in favor of merging
Utek into UMC. If the merger is subsequently approved by Taiwanese authorities,
we will receive approximately 60 million shares of UMC stock in exchange for our
equity interests in UICC and Utek. After the merger, we expect to own less than
one percent of UMC's common stock. We have also received assurance from UMC
management that our capacity rights will be preserved after the mergers.

    In June 1999, as part of our acquisition of Vantis, we entered into a series
of agreements with AMD to support the continuing operations of Vantis. AMD has
agreed to provide us with finished silicon wafers through September 2003 in
quantities based either on a rolling six-month or an annual forecast. We have
committed to buy minimum quantities of wafers and AMD has committed to supply
such quantities of wafers during this period. Wafers for our products are
manufactured in the Unites States at multiple AMD wafer fabrication facilities.
Prices for these wafers will be reviewed and adjusted periodically.

    We believe that our existing liquid resources, expected cash generated from
operations and existing credit facilities combined with our ability to borrow
additional funds will be adequate to meet our operating and capital requirements
and obligations for the next twelve months.

    In an effort to secure additional wafer supply, the Company may from time to
time consider various financial arrangements including joint ventures, equity
investments, advance purchase payments, loans, or similar arrangements with
independent wafer manufacturers in exchange for committed wafer capacity. To the
extent that the Company pursues any such additional financing arrangements,
additional debt or equity financing may be required. We may in the future seek
new or additional sources of funding. 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.

RECENT DEVELOMENTS:

    On October 18, 1999, the Company announced its intention, subject to market
and other conditions, to raise approximately $200 million (excluding proceeds of
the over-allotment option, if any), through an offering of convertible
subordinated notes to qualified institutional investors. The Company stated that
it intends to use the net proceeds of the offering to repay bank debt incurred
to acquire Vantis Corporation in June 1999. As a result of the early retirement
of bank debt, the Company will recognize an extraordinary loss of approximately
$1.5 million, net of tax, representing unamortized bank debt issuance costs.

                                       25
<PAGE>
                           PART II. OTHER INFORMATION

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

(a) The annual meeting of stockholders was held on August 9, 1999.

(b) The following directors were elected at the meeting to serve term of three
    years:

                  Harry A. Merlo
                  Larry W. Sonsini

    The following directors are continuing to serve their terms:

                  Daniel S. Hauer
                  Douglas C. Strain
                  Mark O. Hatfield
                  Cyrus Y. Tsui

(c) The matters voted upon at the meeting and results of the voting with respect
    to those matters are as follows(*):

<TABLE>
<CAPTION>
                                                                                               FOR       WITHHELD
                                                                                           ------------  ---------
<S>                                                                                        <C>           <C>
(1)  Election of directors:
     Harry A. Merlo......................................................................    43,921,938    539,302
     Larry W. Sonsini....................................................................    43,540,090    921,150
</TABLE>

<TABLE>
<CAPTION>
                                                                           FOR        AGAINST    ABSTAIN      NOT VOTED
                                                                       ------------  ---------  ---------  ---------------
<S>                                                                    <C>           <C>        <C>        <C>
(2)  Ratification of PricewaterhouseCoopers LLP as the Company's
     independent public accountant for the fiscal year ending
     April 1, 2000...................................................    44,435,422     13,702     12,116             0
</TABLE>

- ------------------------

*   All vote (share) amounts have been adjusted to reflect the two-for-one stock
    split effected in the form of a stock dividend and paid on September 16,
    1999 to stockholders of record as of August 26, 1999.

    The foregoing matters are described in further detail in the Company's
definitive proxy statement dated July 12, 1999, for the Annual Meeting of
Stockholders held on August 9, 1999.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits.

<TABLE>
<S>        <C>
     11.1  Computation of Net Income Per Share (*)
       27  Financial Data Schedule for Three and Six Months Ended October 2, 1999
</TABLE>

(b) Reports on Form 8-K

    (1) On August 20,1999, the Company filed a Current Report on Form 8-K/A
       representing Amendment No. 1 to the Current Report dated June 15, 1999
       and filed June 25, 1999 regarding the June 15, 1999 acquisition of Vantis
       Corporation.

- ------------------------

(*) Incorporated by reference to Note 6 to the Unaudited Consolidated Financial
    Statements in the Company's report on Form 10-Q for the three and six months
    ended October 2, 1999.

                                       26
<PAGE>
                                   SIGNATURES

    Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

<TABLE>
<S>                             <C>  <C>
                                LATTICE SEMICONDUCTOR CORPORATION
                                (Registrant)
</TABLE>

Date: October 21, 1999

<TABLE>
<S>                             <C>  <C>
                                By:            /s/ STEPHEN A. SKAGGS
                                     -----------------------------------------
                                                 Stephen A. Skaggs
                                        SENIOR VICE PRESIDENT FINANCE, CHIEF
                                          FINANCIAL OFFICER AND SECRETARY
</TABLE>

                                       27

<TABLE> <S> <C>

<PAGE>
<ARTICLE> 5
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<S>                             <C>
<PERIOD-TYPE>                   6-MOS
<FISCAL-YEAR-END>                          APR-01-2000
<PERIOD-START>                             APR-04-1999
<PERIOD-END>                               OCT-02-1999
<CASH>                                          29,613
<SECURITIES>                                   105,661
<RECEIVABLES>                                   26,102
<ALLOWANCES>                                   (1,535)
<INVENTORY>                                     23,292
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<DEPRECIATION>                                (62,360)
<TOTAL-ASSETS>                                 830,815
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                                0
                                          0
<COMMON>                                           479
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<INTEREST-EXPENSE>                               5,329
<INCOME-PRETAX>                               (83,066)
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<CHANGES>                                            0
<NET-INCOME>                                  (56,133)
<EPS-BASIC>                                     (1.18)
<EPS-DILUTED>                                   (1.18)


</TABLE>


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