LERACH COUGHLIN STOIA GELLER RUDMAN & ROBBINS LLP WILLIAM S. LERACH [email protected] DARREN J. ROBBINS [email protected] 401 B Street, Suite 1600 San Diego, CA 92101 Telephone: 619/231-1058 619/231-7423 (fax)

DENNIS J. HERMAN [email protected] 100 Pine Street, Suite 2600 San Francisco, CA 94111 Telephone: 415/288-4545 415/288-4534 (fax)

TAMARA J. DRISCOLL [email protected] 700 Fifth Avenue, Suite 5600 Seattle, WA 98104 Telephone: 206/749-5544 206/749-9978 (fax)

Lead Counsel for Plaintiffs

[Additional counsel appear on signature page.]

UNITED STATES DISTRICT COURT

DISTRICT OF OREGON

In re LATTICE SEMICONDUCTOR CORP. CV-04-01255-HU (Consolidated Cases) SECURITIES LITIGATION CLASS ACTION This Document Relates To: CONSOLIDATED CLASS ACTION ALL ACTIONS. COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS

[Caption continued on following page.] DEMAND FOR JURY TRIAL

CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS

AUTUMN PARTNERS, LLC, Individually Case No. CV-04-01255-HU and On Behalf of Itself and All Others Similarly Situated, CLASS ACTION

Plaintiff,

vs.

LATTICE SEMICONDUCTOR CORP., CYRUS Y. TSUI, STEPHEN A. SKAGGS, STEVEN A. LAUB and RONALD HOYT,

Defendants.

CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS

TABLE OF CONTENTS

Page

I. INTRODUCTION...... 1

II. JURISDICTION AND VENUE...... 6

III. PARTIES...... 7

IV. BACKGROUND AND OVERVIEW...... 9

A. Lattice’s Business Suffers as Its Core CPLD Business Declines, Competitors Dominate FPGA New Product Growth, and Its Inflated Expense Structure Decreases Profitability ...... 11

B. Defendants Mislead the Market About the True Impact on Lattice's Business...... 13

C. Defendants Publish False Financial Statements to Mislead Investors About the Success of Lattice’s Business...... 14

D. Lattice Restates Its Financial Results and Admits the Fraud that Had Been Perpetrated on Investors...... 17

V. MATERIALLY FALSE AND MISLEADING STATEMENTS DURING THE CLASS PERIOD...... 19

A. False Statements Regarding 1Q03 Performance and Results ...... 19

1. False Financial Statements and Results ...... 19

2. False Statements Regarding Lattice’s Performance in the Market During 1Q03...... 29

B. False Statements Regarding 2Q03 Performance and Results ...... 31

1. False Financial Statements and Results ...... 31

2. False Statements Regarding Lattice’s Performance in the Market During 2Q03...... 37

C. False and Misleading Registration Statements to Permit Resale of Zero Coupon Bonds...... 40

D. False Statements Regarding 3Q03 Performance and Results ...... 41

1. False Financial Statements and Results ...... 41 CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF Page i THE FEDERAL SECURITIES LAW

Page

2. False Statements Regarding Lattice’s Performance in the Market During 3Q03...... 48

VI. THE TRUTH BEGINS TO EMERGE...... 53

VII. LATTICE’S MATERIALLY FALSE ACCOUNTING AND FINANCIAL REPORTING ...... 65

A. Overview ...... 65

B. Lattice’s Improper Recognition, Accounting and Reporting of Revenue...... 66

C. Lattice’s Improper Reporting of Gross Margins...... 69

D. Lattice’s Admission that It Issued False Financial Statements During the Class Period...... 71

E. Other GAAP Violations ...... 75

VIII. ADDITIONAL MOTIVE AND SCIENTER ALLEGATIONS...... 77

A. Option Exchange Program ...... 77

B. Qualification for Incentive Compensation ...... 80

C. Lattice Raises Capital Through Private Offering...... 81

IX. APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD-ON-THE- MARKET DOCTRINE...... 82

X. ADDITIONAL GROUP PLEADING AND CONTROL PERSON ALLEGATIONS ...... 85

XI. CLASS ACTION ALLEGATIONS...... 89

CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF Page ii THE FEDERAL SECURITIES LAW

I. INTRODUCTION

1. This is a class action for violations of the federal securities laws brought on behalf of purchasers of the publicly traded securities of Lattice Semiconductor Corporation (“Lattice” or the

“Company”) between April 22, 2003 and April 19, 2004 (the “Class Period”) seeking to pursue remedies under the Securities Exchange Act of 1934 (the “Exchange Act”) against Lattice and its top officers and directors during the Class Period: Chief Executive Officer (“CEO”) Cyrus Y. Tsui

(“Tsui”), Chief Operating Officer (“COO”) Steven A. Laub (“Laub”), Chief Financial Officer

(“CFO”) Stephen A. Skaggs (“Skaggs”), and Controller Ronald Hoyt (“Hoyt”) (collectively, the

“Individual Defendants”).

2. Lattice designs, develops and markets programmable logic devices (“PLDs”) and related software. PLDs are widely used semiconductor components that can be configured by end customers as specific logic circuits, and thus enable shorter design cycle times and reduced development costs. Lattice sells three main types of products: Complex PLDs (“CPLDs”), Simple

PLDs (“SPLDs”) and Field Programmable Gate Arrays (“FPGAs”). These three product lines are used primarily by original equipment manufacturers (“OEMs”) in the communications, computing, industrial, automotive, medical, consumer and military end markets. OEMs purchase products directly from Lattice or from Lattice’s distributors or manufacturers’ representatives.

3. Throughout the Class Period, defendants manipulated Lattice’s financial statements to inflate its revenues and gross margins, and understate its liabilities and net losses, causing Lattice’s shares to trade at artificially inflated levels. Defendants did this by intentionally manipulating its financial statements to achieve desired margins, and by causing or permitting Lattice to prematurely recognize revenues on products that had been shipped to distributors but never sold to end users.

The recognition of these revenues was improper under Generally Accepted Accounting Principles

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(“GAAP”) and contrary to Lattice’s publicly stated revenue recognition policies because the products sold to distributors were subject to rights of return and price protection agreements.

4. After the Class Period, Lattice restated its financial statements for the first three quarters of its 2003 fiscal year (“FY03”), revealing that its revenues had been inflated by $10.6 million as a result of these shipments, and its earnings per share (“EPS”) had been overstated by

$0.08. In addition, Lattice revealed that gross margins had been declining during FY03 for the first time in years, a fact which had been hidden from investors as the result of intentional manipulation of Lattice’s accrued expenses and its deferred income accounts. Deferred income is the account

Lattice used to reflect the expected revenues from, and the costs incurred to produce, inventory that had been shipped to distributors but not sold to end users. As defendant Skaggs admitted on a conference call with investors, Lattice’s deferred income account had been “over-depleted” and was

“below the level that was required to support the inventory on our distributors’ shelves.” In other words, Lattice falsely claimed to have earned millions of dollars in revenue from the sale of products which were still sitting in its distributors’ warehouses and were subject to being sold at drastically reduced prices or being returned to Lattice for a full refund.

5. Throughout, and even prior to, the Class Period, Lattice used its accrued expense and deferred income accounts to manipulate its reported margins, which it then pointed to as a sign of the strength and stability of its business. Prior to restating, Lattice reported seven straight quarters of

60% gross margins. This level of consistency would have been virtually impossible for Lattice to achieve unless its margins were managed. Lattice was able to cover up the extent to which it was doing so by reporting its deferred income as a single “net” number on its balance sheet, so that investors could not see the quarterly changes in deferred revenues and deferred costs (the two components of deferred income) that were used to keep its gross margins stable. When its restated

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results were reported, however, investors learned that its gross margins were not stable at all and had declined to at most 59% in 2Q03, 55% by 3Q03 and 55% by 4Q03. Lattice falsely attributed this decline to the use of a more “conservative” methodology for calculating deferred income in order to hide the fact that its prior method for doing so was simply to plug in whatever numbers were necessary to force the gross margins on its balance sheet.

6. Skaggs and others attempted to blame the restatement on an unnamed “individual in our finance department” who had made “inappropriate accounting entries ... to restore the deferred income account by offsetting accrued expenses to the balance that was originally reported for those quarters.” In other words, the employee was intentionally manipulating Lattice’s financial statements to present knowingly false information to the investing public. Former Lattice employees have identified that individual as defendant Hoyt, Lattice’s former controller, who they say agreed to take the fall for the Company’s accounting shenanigans. The notion that a senior executive like Hoyt could or would have manipulated Lattice’s financial statements without the knowledge or consent of other members of Lattice’s management strains credulity, particularly in a

Company that is, according to numerous former employees, run with an iron fist by its CEO, defendant Tsui, who micro managed every detail of Lattice’s operations in concert with Laub and

Skaggs.

7. Lattice’s management also attempted to blame the restatement on the lack of adequate internal and disclosure controls at the Company, which purportedly permitted Hoyt to make manual journal entries to reverse millions of dollars in accrued charges to manipulate Lattice’s deferred income. Again, the explanation strains credulity, especially since both Tsui and Skaggs repeatedly signed certifications during the Class Period pursuant to the Sarbanes-Oxley Act of 2002 attesting that they could personally vouch for the adequacy of the Company’s internal and disclosure

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controls, and had designed them specifically “to ensure that material information relating to [Lattice] is made known to us by others” before quarterly financial information is published. The resignation of long-time Lattice Director Larry Sonsini immediately following the announcement of the restatement casts further doubt on defendants’ explanations, particularly given Sonsini’s position as the managing director of one of the nation’s leading securities fraud class action defense law firms.

8. Throughout the Class Period, Lattice and its senior executives, including the

Individual Defendants, recognized that continued declines in its stock price caused by an extended downturn in the semiconductor industry would have severe consequences. Lattice had already warned investors that a sustained decline in its stock price would trigger a substantial goodwill writeoff. Stock price declines also would threaten the Company’s efforts to boost its working capital reserves and eliminate its high-interest debt. In addition, Lattice’s top management and other employees had just been permitted to exchange millions of underwater stock options for new options issued at a lower price. Defendants recognized that further sustained declines in Lattice’s stock price would entirely eliminate the benefits of these transactions, again costing themselves and other employees millions of dollars in incentive compensation, destroying morale, and causing key employees to flee the Company.

9. Defendants’ accounting fraud concealed the full extent to which worsening economic conditions and increased competition were harming the Company’s operations, falsely maintaining or inflating its share price and causing its stock to trade at inflated values during the Class Period.

As a result, Lattice was able to complete a $200 million private sale of zero coupon (no interest) notes it used to retire its higher interest debt and obtain new working capital. The fraud also prevented a substantial and immediate decline in stock price that would have occurred just weeks

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after the new employee stock options were issued, that would have immediately plunged those new options deeply underwater.

10. Lattice’s report on Form 10-K for FY03, filed on April 1, 2004, revealed that Lattice had materially overstated its reported revenues by 6.8% and materially understated its net loss by

15.5% during the Class Period. Lattice restated its results for the first, second and third quarters of

2003, drastically cutting its nine-month revenue by $10.6 million, reducing its gross margins, widening its loss by $8.9 million, and reducing its earnings per share by $0.08. Throughout the

Class Period, defendants had used these false financial statements to assure investors that Lattice’s sales prospects were improving, margins were stable, and the Company was performing in line with market expectations. However, contrary to defendants’ statements to investors, Lattice’s gross margins were falling, sales of Lattice’s core CPLD and SPLD products were in steep decline, and its efforts to penetrate the market for new FPGA products were inadequate to make up the difference.

11. The fraud was uncovered only after Lattice’s outside auditors,

PricewaterhouseCoopers (“PWC”), began reviewing Lattice’s books and records in preparation for

Lattice’s 2003 year-end audit and discovered the improper journal entries. On January 22, 2004, the

Company announced the “possible overstatement” of its deferred income account, causing its shares to immediately drop 16% on more than 3.5 times its ordinary trading volume. The Company further revealed that PWC, with the assistance of outside legal counsel (presumably Sonsini’s firm, Wilson

Sonsini), had begun an investigation into the errors, which was expected to be completed the following month.

12. On March 1, 2004, Lattice announced that the investigation was still not complete, fueling fears that the accounting fraud was greater than indicated in the January announcement and causing the Company’s stock to immediately drop by over 6% in value. Then, on March 18, 2004,

CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF Page 5 THE FEDERAL SECURITIES LAWS

Lattice finally admitted that its deferred income account had been overstated throughout the Class

Period, and that its 1Q03, 2Q03 and 3Q03 results, and possibly results for other quarters, were false when issued, causing Lattice’s stock price to lose over 9% of its value on triple its ordinary trading volume. The stock price drops on January 22, 2004, March 1, 2004 and March 18, 2004 confirm that Lattice’s stock traded at artificially inflated prices during the Class Period causing millions of dollars in damage to thousands of investors who relied on the efficiency of the market and the accuracy of the publicly reported information about Lattice’s performance.

13. The full extent of the restatement was not revealed until April 19, 2004, the last day of the Class Period, when Lattice issued its restated quarterly reports for the first three quarters of

FY03, which provided investors with even more details about Lattice’s efforts to manipulate its deferred income, gross margins and accounts payable during the Class Period. By that time, the price of Lattice’s stock had declined to $8.64 on the continued uncertainty caused by the restatement, causing further damage to members of the proposed Class.

II. JURISDICTION AND VENUE

14. The claims asserted herein arise under and pursuant to §§10(b) and 20(a) of the

Exchange Act [15 U.S.C. §§78j(b) and 78t(a)] and Rule 10b-5 promulgated thereunder by the

Securities and Exchange Commission (“SEC”) [17 C.F.R. §240.10b-5].

15. This Court has jurisdiction over the subject matter of this action pursuant to 28 U.S.C.

§§1331 and 1337, and §27 of the Exchange Act [15 U.S.C. §78aa].

16. Venue is proper in this District pursuant to §27 of the Exchange Act and 28 U.S.C.

§1391(b). Lattice maintains its principal place of business in this District and many of the acts and practices complained of herein occurred in substantial part in this District.

CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF Page 6 THE FEDERAL SECURITIES LAWS

17. In connection with the acts alleged in this complaint, defendants, directly or indirectly, used the means and instrumentalities of interstate commerce, including, but not limited to, the mails, interstate telephone communications and the facilities of the national securities markets.

III. PARTIES

18. Lead plaintiff Jeffrey Thompson purchased Lattice securities at artificially inflated prices during the Class Period as described in the certification filed herewith, and has been damaged thereby.

19. Plaintiffs Carlos Marcano, Milton Pfeiffer, and Autumn Partners, LLC each alleged that they purchased the securities of Lattice at artificially inflated prices during the Class Period and filed actions which have been consolidated into this proceeding.

20. Defendant Lattice is an Oregon corporation with its principal place of business at

5555 Moore Court, Hillsboro, Oregon. Lattice is a public company whose securities are regularly traded on the NASDAQ market under the ticker symbol LSCC. At the commencement of the Class

Period, approximately 112.5 million shares of Lattice stock were issued and outstanding.

21. Defendant Tsui joined Lattice in September 1988 as president, CEO and director, and in March 1991 became chairman of the board. From 1987 until he joined Lattice, Tsui was corporate vice president and general manager of the Programmable Logic Division of Advanced

Micro Devices (“AMD”). Prior to that Tsui was vice president and general manager of the

Commercial Products Divisions of Monolithic Memories Incorporated (MMI) from 1983 until its merger with AMD in 1987. Tsui assisted in the preparation of Lattice’s false financial statements and certified, pursuant to the Sarbanes-Oxley Act of 2002, that Lattice’s quarterly reports did not contain any untrue statement of a material fact or omit to state a material fact necessary to make the

CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF Page 7 THE FEDERAL SECURITIES LAWS

statements made not misleading, and that the Company’s disclosure and internal controls were adequate and effective.

22. Defendant Laub joined Lattice in 1990 as vice president and general manager. In

1996, he was promoted to COO. In 2001, Laub was promoted to president and elected to the

Company’s board of directors. Laub resigned in October 2003 immediately prior to the release of its false 3Q03 financial statements. Prior to his resignation, Laub assisted in the preparation of the false financial statements and repeated the contents therein to the market, including during regular quarterly conference calls Lattice held following its earnings announcements. Laub spent 13 years in executive positions at Lattice, where he had responsibility for the Company's sales, product development, marketing, operations and legal activities. Laub spent five years as the Company's

COO, and earlier served as vice president and general manager for Lattice's high- and low-density programmable logic businesses. Prior to his tenure at Lattice, Laub was a vice president at Bain and

Company, a global strategic consulting firm which provided consulting services to Lattice prior to and during the Class Period in exchange for warrants to purchase Lattice securities. Laub has a bachelor's degree in economics from the University of California at Los Angeles and a J.D. from

Harvard Law School.

23. Defendant Skaggs became Lattice’s president in October 2003 following Laub’s resignation. Skaggs originally joined Lattice in December 1992 as director of corporate development. He became Lattice’s vice president, CFO and secretary in August 1996. Skaggs signed the 2003 1Q-3Q Form 10-Qs which contained Lattice’s false financial results and certified, pursuant to the Sarbanes-Oxley Act of 2002, that Lattice’s quarterly reports did not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements

CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF Page 8 THE FEDERAL SECURITIES LAWS

made not misleading, and that the Company’s disclosure and internal controls were adequate and effective.

24. Defendant Hoyt was Lattice’s controller during the Class Period. Hoyt assisted in the preparation of the false financial statements and repeated the contents therein to the market.

IV. BACKGROUND AND OVERVIEW

25. Lattice is one of four companies that together share approximately 98% of the market for programmable logic devices. Prior to and during the Class Period, semiconductor manufacturers

Xilinx, Inc. (“Xilinx”) and Altera Corporation (“Altera”) were the market leaders, while Lattice and

Actel Corporation (“Actel”) occupied smaller segments of the market. For example, in 2002, Xilinx and Altera reported revenues of $1.2 billion and $711.7 million, respectively, while Lattice and

Actel reported revenues of $229.1 million and $134.3 million, respectively. According to World

Semiconductor Trade Statistics, a semiconductor industry association, the total PLD market was approximately $2.7 billion in 2003. In 2003, CPLD sales were estimated to account for $0.5 billion of the PLD market while FPGA sales accounted for $2 billion.

26. Lattice’s core products are in the CPLD segment. During 2003, approximately 89% of Lattice’s revenue was derived from PLD products, including 69% from CPLDs and 13% from

SPLDs. Just 18% of Lattice’s sales were derived from FPGA products.

27. Around the turn of the century, Lattice sought to increase its market share through acquisitions of competitors, including Vantis Corporation (“Vantis”) in 1999 and Agere Systems’

(“Agere”) programmable logic division in 2001. The Vantis and Agere acquisitions were expected to provide Lattice with entry into the FPGA market, as well as to help grow sales of its core CPLD and SPLD products. In the years following its acquisitions of Vantis and Agere, Lattice’s research and development costs had doubled. Lattice’s research and development expenses exceeded $85

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million in FY02, $71 million in FY01 and $77 million in FY00. These amounts were much higher than Lattice’s competitors on a percentage basis, in large part because of Lattice’s efforts to build a competitive FPGA product, as well as the costs of supporting the many different products which it had inherited as the result of its growth-by-acquisition strategy. By 2Q03, Lattice’s research and development expenses were over 35% of total sales. As a result, its revenue would have had to more than double to bring research and development spending in line with the 12%-15% it had averaged over the previous several years. By contrast, Lattice’s competitors’ research and development expenses during the same period were significantly lower (27% for Actel, 22% for Altera and 19% for Xilinx).

28. While the Vantis and Agere acquisitions had initially helped Lattice grow its revenues from $270 million to $568 million between 1999 and 2000, by 2002 Lattice revenues had fallen back to $229 million. The decline was only partially explained by the general falloff in the programmable logic industry, which declined by 36% over 2001-02. From 1999 to 2003, Lattice’s market share declined from 23% to 8%, the steepest decline of any of the four primary competitors in the industry.

29. As a result of its declining sales and loss of market share, Lattice’s stock price had fallen from a high of $27.16 on May 21, 2001 to just $8.83 by the beginning of 2003. At the same time, Lattice’s expenses were increasing dramatically as a result of the Vantis and Agere acquisitions, which had caused Lattice’s research and development expenditures to double from pre- acquisition levels, while its working capital was cut in half. In addition, the dramatic drop placed almost all of the stock options Lattice had issued to its employees, including the Individual

Defendants, deep underwater. In February 2003, the Company announced a stock option exchange program that permitted employees to turn in their old options for new lower-priced options.

Lattice’s top executives eagerly snapped up the new options, trading in over 6 million options with

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an average exercise price of $23.20 for new shares that could be exercised for just $8.21. These new shares were issued just weeks prior to the publication of Lattice’s false 3Q03 financial results, at a time when the Individual Defendants were strongly motivated to keep their own options, as well as those just issued to Lattice’s unhappy employees, above water.

30. Lattice’s falling stock price also threatened to trigger a major goodwill writeoff at the

Company, which would have had a devastating impact on its business. Indeed, Lattice had specifically warned investors in its Form 10-K report for FY02, issued March 20, 2003 that:

“Presently, our stock is trading near our consolidated book value. A sustained decline in our stock price may result in a write-off of goodwill.” In addition, in June 2003, just prior to the release of its misleading 2Q03 results, Lattice’s stock was dropped from the Philadelphia Semiconductor Index due to its continued poor performance, a major blow to the Company. Throughout the Class Period, defendants were strongly motivated to prevent further declines in the stock price to avoid even more negative impacts on Lattice’s business from occurring.

A. Lattice’s Business Suffers as Its Core CPLD Business Declines, Competitors Dominate FPGA New Product Growth, and Its Inflated Expense Structure Decreases Profitability

31. At the beginning of the Class Period, Lattice continued to face growth challenges from lackluster markets and stiff competition. This trend continued throughout 2003, when Altera and Xilinx controlled 84% of the programmable logic market. Consequently, during 2003, $5 of every $6 spent on PLDs was paid to Xilinx or Altera, leaving Lattice and Actel to fight over the remaining dollar of potential revenue. Lattice captured 8% of the market in 2003 (a decline from

10% in 2002), and Actel 6%.

32. Lattice’s ability to successfully compete in the FPGA market was critical for it to maintain or increase market share. Most PLDs produced are FPGAs. They account for 75% of the

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market while CPLDs represent 22% and SPLDs account for the rest. In particular, companies within the telecommunications industry (e.g., Alcatel, British Telecom, Ericsson and Nokia) use vast quantities of FPGAs because they face unpredictable production volumes and frequent design modification. The flexibility of FPGAs allows these companies to shorten their design cycles and reduce development costs. Lattice suffered a severe competitive disadvantage by not being able to effectively serve this segment of the market. Lattice’s inability to penetrate the FPGA market is demonstrated by the fact that, in 2003, new products accounted for only 12% of Lattice’s sales, compared with 32% and 42% for Xilinx and Altera.

33. Throughout 2003, new product developments by its competitors also made substantial inroads into Lattice’s core CPLD and SPLD product lines. In particular, sales of SPLD products (the low end of the PLD market) fell off dramatically as Lattice’s rivals introduced higher performance and lower priced products. In fact, during 2003, SPLDs became generally obsolete as pricing and performance enhancements allowed CPLDs to compete for the same socket with higher performance and lower prices. The SPLD business at Lattice accounted for about 15% of revenue. In addition, sales of Lattice’s CPLD business also declined significantly as important customers turned to rivals

Altera and Xilinx – which had comparable FPGA and CPLD products – to supply all of their needs.

In 2003, OEMs were actively seeking to reduce the number of semiconductor suppliers they used in an attempt to cut costs and reduce design times. As a consequence, OEMs were turning away from

Lattice at an accelerated pace.

34. This drop off in sales has been confirmed by Lattice insiders. For example,

Confidential Witness (“CW”) 5, a manufacturers’ representative who sold Lattice products during the Class Period, has stated that Lattice could never make up the lost sales opportunity or compete successfully with FPGA products offered by Xilinx because it was too late getting into the FPGA

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market. CW6, who also sold Lattice FPGA products during the Class Period, similarly said that customers were more likely to buy Xilinx products because Lattice did not provide the software that

Xilinx could provide. CW7, who helped manage the Company’s internal website during the Class

Period, said that Lattice experienced repeated software problems that caused it to repeatedly miss projected launch dates for new products, further delaying its ability to penetrate the FPGA market.

CW7 said that Tsui refused to permit information about product change notifications to be posted on

Lattice’s website, for fear that it would make Lattice look bad.

35. The falling sales of CPLD and SPLD products triggered the price protection and return guarantees provided in Lattice’s agreements with its distributors. The amended Form 10-Q reports Lattice filed after the end of the Class Period reveal, for example, that contrary to the reports of continued sequential growth throughout the Class Period, the purported gains from sales of new products had been more than offset by sharply lowered demand, and diminishing prices, for its core

CPLD and SPLD products. In particular, the amended Form 10-Q/A for 3Q03 shows that sales of

SPLD units, which were reported in the original Form 10-Q for the quarter to represent 14% of

Lattice’s sales as a percentage of revenues, had actually accounted for only 10% of sales. The difference between the amended and original numbers can only be explained because the SPLD product was sitting on distributors’ shelves, unsold.

B. Defendants Mislead the Market About the True Impact on Lattice’s Business

36. The actions taken by defendants to develop new FPGA products, maintain or increase

CPLD market share, and prevent deterioration of SPLD sales were not sufficient to keep up with

Lattice’s competition. As a result, Lattice continued to lose market share to its competitors throughout 2003. By 3Q03, not only was Lattice the only PLD supplier to experience declining sales, its sales had fallen by an astonishing 12%. Lattice was the only dedicated PLD vendor that CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF Page 13 THE FEDERAL SECURITIES LAWS

had not recovered to the revenue levels it achieved in 2001. In fact, all of the PLD suppliers except for Lattice had surpassed even their highest revenue levels from 2001. As Lattice’s prospects suffered, it came under mounting criticism about the viability of both its products and its business plan. In stark contrast with the previous few years, it became entirely possible for rival Actel to supplant Lattice in the number-three position in the PLD market.

37. Beginning with the release of Lattice’s 1Q03 results on May 12, 2003, or earlier, defendants sought to inflate Lattice’s quarterly revenues in order to boost gross margins and make it appear that Lattice’s financial results were, and would continue to be, in line with market expectations. In every quarter of FY03, defendants claimed that Lattice’s gross margins were stable, its new product designs were hugely successful in the market, and Lattice was on track to maintain or increase market share. To explain away the slow pace of Lattice’s purported recovery, defendants blamed the economy, the seasons, and even the “number of holidays” occurring in the fourth quarter, while pointing to its stable gross margins and purportedly strong new products as a sign of its financial health. In fact, Lattice’s gross margins were declining and it was continuing to lose CPLD market share to its competitors, who faced the same seasonal slowdowns, economic conditions and number of holidays as Lattice.

C. Defendants Publish False Financial Statements to Mislead Investors About the Success of Lattice’s Business

38. The revenues Lattice reported earning during the Class Period were grossly inflated because the figures released to investors included millions of dollars in products that had been sold to distributors but never re-sold to end users, or had been sold at lower prices than those necessary to support the amount of revenue Lattice was reporting. As required by GAAP, and as stated in its critical accounting policies, Lattice should have reported these sales as deferred income, and waited until these products were re-sold to end users before claiming them as revenues. As a result, and as CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF Page 14 THE FEDERAL SECURITIES LAWS

Lattice later admitted, the Company’s deferred income account was millions of dollars below the level required to reflect the amount of unsold products in its distributors’ inventory.

39. According to CW8, a former manager in Lattice’s finance department prior to and throughout the Class Period, Lattice had a “subtle culture” which had clear “expectations and perceptions” regarding reporting patterns and trends. CW8 said that if information coming into the finance department did not follow an expected trend, the information would be adjusted to “stay with the trend” and then they would go back and revisit the issue later. For example, CW8 said that if unusual sales information was reported to finance, it would sometimes be attributed to “faulty information systems” including Lattice’s “cheap” financial database, and Lattice would instead “fall back on reporting trends” and adjust the information to what they expected to see, rather than what had been reported internally.

40. Defendants have admitted that each of the quarterly financial statements published by

Lattice during the Class Period misled investors about the amount of revenues it had earned, the amount of unsold products on distributors’ shelves (as reflected in its deferred income account balance), its gross margins, liabilities and EPS. The amount by which defendants have admitted these balances were over- or under-stated is reflected in the difference between the amounts originally reported and the amounts reported in Lattice’s restated financial statements:1

1 Plaintiffs refer to the restated financial information both here and elsewhere in this complaint for purposes of demonstrating that the original information included in Lattice’s financial statements was materially false and misleading. Plaintiffs do not, by these allegations, admit that the restated information is accurate or that it encompasses all adjustments necessary or required as the result of defendants’ fraud.

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Reported & Restated Results ($ millions) 1Q 2Q 3Q Reported Restated Reported Restated Reported Restated Revenues $58.3 $57.3 $58.2 $56.6 $51.0 $43.0 Gross Margin 60% 60% 60% 59% 60% 55% Deferred Inc. $13.1 $13.9 $8.7 $9.6 $6.3 $9.8 Accts. $31.2 $32.5 $28.8 $34.4 Payable & Accrued Expenses EPS ($0.17) ($0.18) ($0.15) ($0.16) ($0.20) ($0.26)

41. Lattice sells its products directly to end users through independent manufacturers’ representatives, and indirectly through independent distributors. Lattice also employs a direct sales management and field applications engineering organization to support its end customers and indirect sales team. Approximately two-thirds of Lattice’s North American sales and the majority of its export sales are made through distributors, including Arrow Electronics, Inc. and Avnet, Inc. in

North America.

42. Lattice protects its North American distributors and some of its foreign distributors against reductions in published prices by permitting unsold products to be repriced or returned for a refund, depending upon the circumstances. For this reason, Lattice claimed during the Class Period that it did not recognize revenues on sales made through distributors until the product was sold by the distributor. By contrast, Lattice said that revenues on direct sales to OEMs and other end customers were generally recognized upon shipment of the products.

43. In its 2002 Annual Report to shareholders, Lattice stated that it recognized revenues pursuant to the following policy:

Revenue from sales to OEM customers is recognized upon shipment provided that persuasive evidence of an arrangement exists, the price is fixed, title has transferred, collection of resulting receivables is probable, there are no customer acceptance requirements and no remaining significant obligations. Certain of our sales are made to distributors under agreements CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF Page 16 THE FEDERAL SECURITIES LAWS

providing price protection and right of return on unsold merchandise. Revenue and cost relating to such distributor sales are deferred until the product is sold by the distributor and related revenue and costs are then reflected in income. Revenue from software sales was not material for the years presented.

44. Sales made through distributors were reflected in Lattice’s deferred income account, which included both the revenues and costs relating to such products. In determining the amount of deferred income to report, Lattice claimed to use retail reports from its distributors, to which it applied certain estimates regarding the sales prices and margins earned by distributors upon sales to end customers.

45. Nevertheless, Lattice reported millions of dollars in revenues during the Class Period based on products shipped to distributors before the distributors had actually sold the products to end customers. As a result, no customer had agreed to purchase these products at the time defendants recognized the revenues. In addition, CW2, a former Lattice regional sales manager, said that during

FY03, Lattice’s customers and distributors had been encouraged to purchase additional inventory above what they would normally purchase – a practice that CW2 said that these practices would have to have been approved by Tsui, Laub or other top members of Lattice’s management. CW2 also said that Lattice then refused to accept returns of excess inventory from these same customers and distributors. These actions misled investors about both the timing and amount of sales of

Lattice’s products.

D. Lattice Restates Its Financial Results and Admits the Fraud that Had Been Perpetrated on Investors

46. Lattice’s actions began to come to light during the year-end audit of its financial statements by its outside auditor, PWC. On January 22, 2004, Lattice stunned investors by announcing a delay in reporting its 4Q03 results due to the “possible overstatement” of revenues.

Lattice told investors that PWC was conducting an internal investigation into the fraud with the CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF Page 17 THE FEDERAL SECURITIES LAWS

assistance of outside counsel, and financial results would be available within the month. Thereafter,

Lattice twice delayed release of the financial results because the investigation had not been completed.

47. On March 18, 2004, Lattice announced that it would restate its financial statements for the first three quarters of 2003 to reduce revenues and earnings and increase its deferred income balances. Lattice’s 4Q03 results, and its FY03 financial statements, were filed on April 1, 2004. On

April 19, 2004, Lattice filed amended quarterly reports on Forms 10-Q/A for the first, second and third quarters of 2003, providing further details of the fraud that had been perpetrated on investors during the Class Period.

48. CW8, who worked closely with Hoyt as a manager in Lattice’s finance department for over five years, including during the entire Class Period, said that Hoyt had made the journal entries that led to the restatement, and had “resigned” as a result. CW1 said that Hoyt was fired.

CW7, a former Lattice employee who also worked directly with Hoyt, also identified Hoyt as the source of the improper journal entries. CW1, CW7 and CW8 all said that Hoyt was rehired by

Lattice as a consultant immediately after purportedly being terminated for his role in the restatement.

According to CW1, who worked in Lattice’s finance department just prior to the Class Period, other former co-workers also identified Hoyt as the person who was blamed by Lattice management for the restatement.

49. According to CW8, Hoyt reported directly to Vice President of Finance Rodney

Sloss, who in turn reported to Skaggs. CW8 said Hoyt had an excellent relationship with upper management, and “felt free to speak his mind” to executives above Sloss, who would respond to him in kind. CW1 said Hoyt was a “yes man” who was extremely intimidated by Tsui, and would have done whatever Tsui told him to, including changing numbers and journal entries, in order to keep his

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job. CW1 “found it very hard to believe” that Hoyt’s journal entries were not being reviewed, and did not believe that Hoyt was the type of person who would have intentionally input wrong numbers

“without a nudge” from someone in senior management. CW7 similarly said that Hoyt had no significant level of authority and could not do anything without the approval of Tsui or Skaggs.

V. MATERIALLY FALSE AND MISLEADING STATEMENTS DURING THE CLASS PERIOD

50. During the Class Period, defendants issued materially false and misleading statements concerning: (i) Lattice’s financial statements, including the revenues, deferred income and EPS reflected therein, the Company’s ability to meet forecast expectations for its performance, its compliance with GAAP, the adequacy of its internal controls and its own critical accounting policies; and (ii) Lattice’s performance in the market, including the success of its FPGA products.

A. False Statements Regarding 1Q03 Performance and Results

1. False Financial Statements and Results

51. On April 22, 2003, Lattice issued a press release reporting its 1Q03 financial results

(“April 22, 2003 press release”). The press release summarized Lattice’s first quarter financial results, and stated in part:

Lattice Semiconductor Corporation today announced financial results for the first quarter of 2003.

Revenue for the quarter was $58.3 million, an increase of one percent from last quarter’s revenue of $57.7 million and down one percent from the $58.9 million reported in the same quarter a year ago. Quarterly revenue from high density CPLD products was $40.7 million, an increase of four percent from last quarter while quarterly revenue from FPGA products was $8.4 million, a decrease of nine percent from last quarter.

On a GAAP basis, net loss for the quarter was $18.8 million ($0.17 per share). This loss includes a $21.1 million charge for amortization of intangible assets.

Non-GAAP income for the quarter was $2.3 million ($0.02 per share). Non- GAAP earnings exclude non-cash acquisition related amortization expenses. CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF Page 19 THE FEDERAL SECURITIES LAWS

Management believes this presentation is useful to investors because it more closely approximates our cash earnings performance. A reconciliation of non-GAAP to GAAP earnings accompanies the financial tables in this earnings release.

“We are pleased to report sequential revenue growth an improvement in our non- GAAP operating income for the second consecutive quarter,” stated Cyrus Y. Tsui, chairman and chief executive officer. “Our CPLD revenue grew nicely and our results reflect the broad leadership position of our innovative product portfolio.”

* * *

Business Outlook - June 2003 Quarter

The Company believes that second quarter revenues will be essentially flat on a sequential basis. Gross margins are expected to remain at approximately 60% of revenue. Operating expenses are expected to be essentially flat on a sequential basis. Intangible asset amortization is expected to decline to approximately $18.6 million. Finally, Other Income is expected to be approximately $1 million.

52. Lattice’s stock rose 2.3% on news of its falsely inflated first quarter earnings, to close at $8.48 from its opening price of $8.22 on April 22. In addition, on April 17, 2003, Lattice’s stock had increased 9.9% from $7.78 to close at $8.54 on increased trading volume of 2.5 million shares, as compared with an increase of just 2.2% in the NASDAQ Composite Index and 4.5% in the

Philadelphia Semiconductor Index. Since no other significant news about the Company was released that day, it appears that the April 17 increase resulted from the pre-announcement of 1Q03 earnings results to a select group of analysts. Had the true facts about the Company and its accounting manipulations been disclosed, Lattice’s stock price would have decreased substantially on news of its 1Q earnings. Investors who purchased Lattice’s stock at these fraud-inflated prices were damaged by paying too much, as confirmed by the decline in price as Lattice revealed details of its accounting investigation and ultimately restated its 1Q03 earnings, as reflected in the price declines of Lattice stock following its January 22, 2004, March 1, 2004 and March 18, 2004 announcements.

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53. The April 22, 2003 press release was followed by an April 22, 2003 investor conference call (the “1Q03 Conference Call”) hosted by Tsui, Laub, Skaggs and Lattice Vice

President of Finance Rodney Sloss, wherein they repeated Lattice’s false 1Q03 financial results.

Skaggs began the call by reviewing Lattice’s 1Q03 financial results and the Company’s projected results for 2Q03. During the call, Skaggs assured one analyst that the change on deferred income on sales to distributors simply reflects the “ordering patterns” of Lattice’s distributors. Skaggs falsely assured the analyst that Lattice does “not report revenue of distribution sales until the actual product is sold off the shelves of our distributors.” In particular, Skaggs stated:

We’ve discussed our inventory levels throughout the downturn, and I think as I mentioned, we’ve been successful for eight consecutive quarters in managing our inventory levels down without taking a one-time write-off in the inventory, and we’ll continue to manage the inventory down consistent with the revenue levels.

So I really think that is a continuation of the trend that we’ve been discussing for the last two years now. David, you did note a minor change on deferred income on sales to distributors. It went up about $1 million sequentially, really just reflects the ordering patterns of our distributors.

Inventory levels in the distribution channel remain under two months, so they’re quite healthy, and as you and I think everybody else knows who follows our company, we do not report revenue of distribution sales until the actual product is sold off the shelves of our distributors.

So really, as long as the inventory levels are healthy, which they are, the absolute inventory amount doesn’t really mean much with respect to our financial results.

Q: (David Duley – Wells Fargo) Any replenishment of inventory levels just because, you know, maybe your distributors feel that the environment is getting slightly better?

A: (Cyrus Tsui – Lattice Semiconductor – Chairman and CEO) I’m – I think the overall environment may be getting slightly better, but fundamental driving force behind the distribution building our inventory is because really the inventories are bone dry out there, so at this level of inventory, it’s relatively difficult to do that sort of fulfillment jobs as a distribution plays a key role in that. So I think that that inventory replenishment is more or less reflecting the need to build a little bit more inventory, even at the subdued level of semiconductor activities.

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54. Lattice’s reported revenue of $58.3 million for 1Q03 purportedly demonstrated sequential growth from the Company’s reported 4Q02 revenues of $57.7 million. This was in line with the guidance defendants had provided to investors during a quarterly conference call held on

January 23, 2003 to discuss Lattice’s FY02 performance. During that call Skaggs told investors to expect 1Q03 revenue to be “flat, just slightly up on a sequential basis” from 4Q02 revenue. In the

April 22, 2003 press release, Lattice specifically noted that “[r]evenue for the quarter was $58.3 million, an increase of one percent from last quarter’s revenue of $57.7 million and down one percent from the $58.9 million reported in the same quarter a year ago.” And Tsui stated, “[w]e are pleased to report sequential revenue growth and an improvement in our non-GAAP operating income for the second consecutive quarter.”

55. On May 12, 2003, Lattice filed its 1Q03 report on Form 10-Q for the quarter ended

March 31, 2003, which was signed by Skaggs. The Form 10-Q included the Company’s false 1Q03 financial statements.

56. The Form 10-Q also contained the following certifications signed by both Tsui and

Skaggs:

I ... certify that:

1. I have reviewed this quarterly report on Form 10-Q of Lattice Semiconductor Corporation;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

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4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

(a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

(c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officer and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

* * *

I ... certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Lattice Semiconductor Corporation on Form 10-Q for the quarter ended March 31, 2003 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of Lattice Semiconductor Corporation.

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57. The April 22, 2003 press release, 1Q03 Conference Call transcript, and 1Q03 report on Form 10-Q were also published on, or available through links to, Lattice’s website, www.lscc.com, where they could be reviewed and downloaded by investors.

58. The April 22, 2003 press release, 1Q03 Conference Call, and 1Q03 report on Form

10-Q each contained false and misleading financial statements and other financial information which materially understated Lattice’s expenses and overstated its revenues for 1Q03.

59. The following chart identifies the false information originally reported in the financial statements and other financial information included with the April 22, 2003 press release, 1Q03

Conference Call, and 1Q03 report on Form 10-Q, and the corrected information for 1Q03 as reported in Lattice’s restated report on Form 10-Q/A for 1Q03:

As Reported As Restated LSCC 1Q03 Results (000s) (000s) Revenue $58,311 $57,297 Deferred Income $13,102 $13,936 Net Loss ($18,835) ($19,669) Net Loss Per Share Diluted ($0.17) ($0.18)

60. In its report on Form 10-K for FY03, Lattice admitted that the financial results originally reported in the April 22, 2003 press release, 1Q03 Conference Call, and the 1Q03 report on Form 10-Q were false when made because revenues were improperly recognized before products had been resold by distributors to end customers, and because Lattice had failed to adhere to its stated accounting policies during 1Q03.

61. Tsui and Skaggs’ certifications that Lattice had adequate internal and disclosure controls to prevent the publication of such errors were also false, as demonstrated, in part, by the disclosure and control deficiencies defendants admitted existed when the restatement was

CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF Page 24 THE FEDERAL SECURITIES LAWS

announced, and the extensive new controls that were put in place thereafter. CW8, a manager in

Lattice’s finance department at the time the 1Q03 results were released, said that Lattice was a very

“cheap” company that lacked adequate personnel or physical resources, such as computer databases, to adequately manage its financial information. Neither Lattice’s general ledger database – called

“Bahn,” which CW8 characterized as a “cheap version of SAP” – or its financial reporting database package, Hyperion, were adequate to keep up with the flow of financial information at the Company.

62. CW8 said that the accountants and other finance personnel were always “working at full speed” to keep up with the amount of work and Hoyt, in particular, always had a “lot of balls in the air” and, eventually, “some are going to drop.” CW8 believed that the “lean resources” committed to accounting at Lattice, including the lack of adequate staff, contributed to the restatement. CW1 said that Tsui lacked respect for finance department personnel, whom he regularly dismissed as “overhead people” who did not contribute to the bottom line. CW8 said that since October 2004, one employee a month has quit Lattice from the accounting department, which indicates the seriousness of the problems in that department.

63. In its report on Form 10-Q/A for 1Q03 which restated Lattice’s financial results for that quarter, Lattice further admitted that its original representations regarding 1Q03 gross margin were false when made. In its original report on Form 10-Q, Lattice falsely stated:

Gross margin:

Gross margin as a percentage of revenue was 60.2% in the first quarter of 2003, as compared to 59.9% for the first quarter of 2002. This slight improvement in margin was due to reductions in our overall manufacturing costs. Reductions in overall manufacturing costs resulted primarily from on-going yield improvements, migration of products to more advanced technologies and reductions in wafer and assembly costs.

64. In its restated report on Form 10-Q (Lattice’s 10-Q/A), Lattice corrected its claim of improved margin being due to reductions in overall manufacturing costs, stating: CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF Page 25 THE FEDERAL SECURITIES LAWS

Gross margin:

Gross margin as a percentage of revenue was 59.8% (restated) in the first quarter of 2003, or approximately flat as compared to the 59.9% gross margin percentage for the first quarter of 2002 as reductions in our overall manufacturing costs were offset by changes in product mix and declining average selling prices. Reductions in overall manufacturing costs resulted primarily from on-going yield improvements, migration of products to more advanced technologies and reductions in wafer and assembly costs.

65. On the 1Q03 Conference Call, Laub specifically told investors to look to Lattice’s gross margin as a sign of its ability to compete with Xilinx:

Q: (Sumit Dhanda, Bank of America Securities) As Xilinx is ramping pretty aggressively on smaller geometries, do you feel your products will remain cost competitive with the ones they are offering? Also, how should we think about the interest and other income line going forward?

A. (Steven Laub) Lattice has always been competitive with respect to computer (phonetic) marketplaces against both of our traditional competitors with respect to our cost competitiveness and cost effectiveness. With respect to smaller geometries and the activities of Xilinx, I think you must make sure you are connecting both the facts with the comments. The fact is that Lattice has demonstrated a higher gross margin over the last couple of years than Xilinx has, much more consistent gross margin. At the same time doing so without writing down any of our inventory like they have demonstrated. When it comes to demonstrating cost competitiveness, I think the best way to judge that is through the financials. I wouldn't get caught up the discussions about smaller geometries and what it does for you. There is no doubt there is values to that in certain ways, but a lot of people have problems with getting good yields and cost effective yields today on the most advanced geometries. We think our cost competitiveness and our strategy has been the most effective in that area.

66. In fact, Lattice’s products were not competitive with those from Xilinx, and its purportedly stable gross margins were simply a product of defendants’ efforts to manage Lattice’s financial statements.

67. By restating its financial results, Lattice has admitted that the financial statements and other financial information originally included in the April 22, 2003 press release, 1Q03 Conference

Call, and 1Q03 report on Form 10-Q were materially false and misleading as the result of a failure to

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include information that was available to defendants at the time those statements were issued, and that the misstatements were material to the financial statements. See Financial Accounting

Standards Board (“FASB”) Accounting Principles Board Opinion (“APB”) No. 20.

68. The following facts, as described in more detail elsewhere in this complaint, when considered in light of the allegations contained in the complaint as a whole, strongly support the inference that, at the time the foregoing statements were made, Lattice, Tsui, Laub, Skaggs and Hoyt each knew or were deliberately reckless to the fact that Lattice’s 1Q03 revenues were materially overstated and its deferred income, current liabilities, net loss and net loss per share materially understated, such that the information reported in the April 22, 2003 press release, 1Q03 Conference

Call, and 1Q03 Form 10-Q report was materially false and misleading at the time it was published:

(a) Defendants were provided with daily, weekly and quarterly financial reports on sales, gross margins, and other results, as described infra, as well as monthly sales reports from distributors, as described in its public announcements regarding the restatement, such that defendants had information about distributor sell through and inventory levels sufficient to report accurate information about its revenues;

(b) Lattice’s decision to restate its 1Q03 financial statements demonstrates that the false information presented therein was contradicted by contemporaneous information that was available to defendants at the time the false statements were originally published;

(c) The nature of the restatement is such that the overstatement of revenues and gross margins and the understatement of deferred income would have been apparent to management in reviewing financial statements before they were publicly filed because the deferred income stated therein was insufficient to support the amount of inventory then known to be sitting on distributors’ shelves;

CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF Page 27 THE FEDERAL SECURITIES LAWS

(d) Tsui and Skaggs’ certifications pursuant to §§302 and 906 of the Sarbanes-

Oxley Act of 2002, and Hoyt’s position as Lattice’s controller, demonstrate that they each had actual knowledge of the true facts at the time the 1Q03 financial results were published by virtue of the information they had purportedly obtained and investigations they had purportedly completed before those results were released to the public, as stated in their certifications, or were deliberately reckless in not having gained such actual knowledge by failing to obtain the information or conduct the investigations described in their certifications;

(e) Tsui, Laub and Skaggs’ hands on “micro-management” of the Company, further supports the inference that they had access to information about the true facts at the time the

1Q03 financial statements were published, including the terms of Lattice’s contracts with its distributors, and distributor sell-through, inventory levels and margins;

(f) Hoyt’s apparent agreement to take the blame for the accounting violations and

Lattice’s agreement to hire him back as a consultant after purportedly firing him as a result of the investigation that led to the restatement;

(g) Lattice, Tsui, Laub and Skaggs were motivated to avoid further extended declines in the price of Lattice stock in order to avoid a goodwill writeoff as well as to achieve the objectives of the stock option exchange program and induce key employees to remain with the

Company; and

(h) Lattice and the Individual Defendants were further motivated to inflate the price of Lattice securities to complete the sale of $230 million of convertible subordinated zero coupon notes in order to pay off Lattice’s higher interest debt and obtain the additional working capital Lattice needed to weather the economic downturn in the semiconductor industry.

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2. False Statements Regarding Lattice’s Performance in the Market During 1Q03

69. Defendants falsely assured investors that Lattice had gained enough of a competitive edge that it could successfully take advantage of the largest market opportunities in its history, and thereby achieve future revenue growth. During the 1Q03 Conference Call, Laub claimed, for example, that “[a]s we enter 2003, Lattice has greater market opportunity available to us than ever before in its history as a more competitive supplier and a substantial foundation for our future growth.” Laub also stated:

We believe that Lattice has the largest market opportunities available to it in its history as a more competitive supplier and has laid the foundation for our revenue growth for the second half of 2003 and 2004.

70. Laub emphasized the Company’s growth expectations in 2003 and 2004:

With respect to growth, the second half of 2004 to 2005 – excuse me, second half of 2003 and for 2004, my comment earlier was just that we believe that with a lot of new products we’ve introduced now over the last, I’d say, 12 to 18 months, that these really should give us a lot of support for growth in the second half of this year and for 2004. We, however, have not put out any forecasts with respect to those particular time periods, but our expectation is that we will be growing and those will be supported by a lot of our new products in that growth.

71. Laub also advised investors that they “should expect that CPLD will see some growth” in sales during the second quarter. With regard to the Company’s faltering FPGA product lines, one defendant assured investors that Lattice is “quite bullish” about these revenues: “We’re seeing a lot of activity and design-ins on the XP products which we recently released. So we’re quite – we’re quite positive and quite bullish with respect to the FPGA revenues.” According to defendants, customers were pleased with the new FPGA products:

Okay. With respect to the software tool acceptance in the FPGA area, actually that has been a – for us, sort of a – I wouldn’t, [sic] a pleasant experience so far. There’s always issues and so forth with respect to software, but overall, the feedback we’ve had from customers and the design activity from customers has been that the

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software tools are intuitive, that the look and feel of the software is very consistent with the type of what their expectations are for FPGA software tools.

72. In the April 22, 2003 press release, Tsui similarly highlighted the potential of

Lattice’s FPGA products: “Despite the sequential decline in our FPGA revenue, we remain confident about ongoing customer design activity and the future prospects for our advanced

FPSC products and our innovative XP products.”

73. The foregoing statements were materially false and misleading because: (i) Lattice was losing market share to its competitors, and was not experiencing growth from its new FPGA or

CPLD products; and (ii) Lattice’s lackluster performance had more to do with its continued loss of market share and inability to successfully compete with semiconductor industry rivals than with seasonal factors or economic conditions.

74. The following facts, as described in more detail elsewhere in this complaint, when considered in light of the allegations contained in the complaint as a whole, strongly support the inference that, at the time the foregoing statements were made, Lattice, Tsui, Skaggs and Laub each knew or were deliberately reckless to the fact that: (i) Lattice was continuing to lose market share to its competitors; and (ii) Lattice was not experiencing expected growth from its new FPGA or CPLD products, or seeing customer acceptance at the levels portrayed in its public statements:

(a) Defendants were provided with daily, weekly and quarterly financial reports on sales, gross margins, and other results, as described infra, as well as monthly sales reports from distributors, weekly and quarterly financial packages, and weekly updates on customer acceptance of new product design wins and other internal reports described infra, such that defendants had contemporaneous information about the purported success of its new FPGA and CPLD products that contradicted the information they were providing to the market;

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(b) Tsui and Skaggs’ 1Q03 Sarbanes-Oxley certifications further demonstrate that they each had actual knowledge of the true facts at the time their false FPGA and CPLD product

“growth” statements were published by virtue of the information they had purportedly obtained and investigations they had purportedly completed before those results were released to the public, as stated in their certifications, or were deliberately reckless in not having gained such actual knowledge by failing to obtain the information or conduct the investigations described in their certifications prior to publishing the false statements about the success of Lattice’s new products;

(c) Tsui, Laub and Skaggs’ hands on “micro-management” of the Company, as described infra, further supports the inference that they had access to information about the true facts at the time their false CPLD and FPGA product “growth” statements were published; and

(d) Lattice, Tsui, Skaggs and Laub were motivated to falsely portray Lattice’s success in the market, thereby preventing further extended declines in the price of Lattice stock, in order to: (i) avoid a goodwill writeoff; (ii) achieve the objectives of the stock option exchange program; and (iii) complete the sale of $230 million of convertible subordinated zero coupon notes.

B. False Statements Regarding 2Q03 Performance and Results

1. False Financial Statements and Results

75. On July 21, 2003, Lattice issued a press release reporting its 2Q03 financial results

(“July 21, 2003 press release”). The press release summarized Lattice’s second quarter financial results and stated in part:

Lattice Semiconductor Corporation today announced financial results for the second quarter of 2003.

Revenue for the quarter was $58.2 million, flat with last quarter’s revenue and an increase of three percent from the $56.5 million reported in the same quarter a year ago. Quarterly revenue from high density CPLD products was $40.3 million, down one percent from last quarter while quarterly revenue from FPGA products was $9.0 million, an increase of seven percent from last quarter. CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF Page 31 THE FEDERAL SECURITIES LAWS

On a GAAP basis, net loss for the quarter was $16.9 million ($0.15 per share). This loss includes an $18.7 million charge for amortization of intangible assets.

Non-GAAP income for the quarter was $1.8 million ($0.02 per share). Non- GAAP earnings exclude non-cash acquisition related amortization expenses and more closely approximates our cash earnings performance. A reconciliation of non- GAAP to GAAP earnings accompanies the financial tables in this earnings release.

* * *

We believe that due to seasonality and general industry conditions, third quarter revenues will be between $52 million and $55 million.

* * *

Business Outlook - September 2003 Quarter

We believe that, due to seasonality and general industry conditions, third quarter revenues will be between $52 million and $55 million.

Gross margins are expected to remain at approximately 60% of revenue.

Total operating expenses are expected to decrease by approximately $1 million to $2 million on a sequential basis.

76. Lattice’s ability to maintain revenues, together with its demonstrated growth over the same period in the previous fiscal year, prevented deterioration in Lattice’s stock price, which closed at $8.04 on July 22, 2003, an increase of 2.8% from its $7.90 opening price on extremely heavy volume of over 5 million shares. Had the true facts about the Company and its accounting manipulations been disclosed, investors would have realized that Lattice’s revenues were decreasing as compared with the prior quarter (1Q03) and flat when compared with the same period in the prior year (2Q02). Investors who purchased Lattice’s stock at these fraud-inflated prices were damaged by paying too much, as confirmed by the decline in price as Lattice revealed details of its accounting investigation and ultimately restated its 2Q03 earnings, as reflected in the price declines of Lattice stock following its January 22, 2004, March 1, 2004 and March 18, 2004 announcements.

CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF Page 32 THE FEDERAL SECURITIES LAWS

77. The July 21, 2003 press release was followed by a July 22, 2003 investor conference call (the “2Q03 Conference Call”) hosted by Tsui, Laub and Skaggs wherein they repeated Lattice’s false 2Q03 financial results and the Company’s projected results for 2Q03.

78. Skaggs also said on the 2Q03 Conference Call that: “Inventory on the distributor shelf is also lower. In fact, inventory from the distributors in the channel is well below two months.”

79. In the 1Q03 Conference Call, Skaggs had told investors to expect 2Q03 revenue to be

“essentially flat on a sequential basis” when compared to 1Q03 revenue of $58.3 million. Once again, as predicted, when the 2Q03 results were announced, Lattice reported revenue of $58.2 million; less than 1% off of 1Q03 revenue and exactly as defendants had predicted. Consistent with its guidance from the previous quarter, in the July 21, 2003 press release, the Company noted that

2Q03 revenue was “flat with last quarter’s revenue.”

80. On August 8, 2003, Lattice filed its 2Q03 report on Form 10-Q or the quarter ended

June 30, 2003, which was signed by Skaggs. The Form 10-Q included the Company’s false 2Q03 financial statements. The Form 10-Q also contained certifications by Tsui and Skaggs which were identical to those attached to the 1Q03 Form 10-Q (supra ¶56).

81. The July 21, 2003 press release, 2Q03 Conference Call transcript, and 2Q03 report on

Form 10-Q were also published on or through links to Lattice’s website, www.lscc.com, where they could be reviewed and downloaded by investors.

82. The July 21, 2003 press release, 2Q03 Conference Call, and 2Q03 report on Form 10-

Q each contained false and misleading financial statements and other financial information which materially understated Lattice’s expenses and overstated its revenues for 2Q03.

83. The following chart identifies the false information originally reported in the financial statements and other financial information included with the July 21, 2003 press release, 2Q03

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Conference Call, and 2Q03 report on Form 10-Q, and the corrected information for 2Q03 as reported in Lattice’s restated report on Form 10-Q/A for 2Q03:

As Reported As Restated LSCC 2Q03 Results (000s) (000s) Revenue $58,178 $56,575 Gross Margin 60% 59% Accts. Payable & Accrued Expenses $31,238 $32,538 Deferred Income $8,753 $9,604$ Net Loss ($16,925) ($18,232) Net Loss Per Share Diluted ($0.15) ($0.16)

84. In its report on Form 10-K for FY03, Lattice admitted that the financial results originally reported in the July 21, 2003 press release, 2Q03 Conference Call, and 2Q03 report on

Form 10-Q were false when made because revenues were improperly recognized before products had been resold by distributors to end customers, and because Lattice had failed to adhere to its stated accounting policies during 2Q03.

85. In its report on Form 10-Q/A for 2Q03 which restated Lattice’s financial results for that quarter, Lattice further admitted that its representations regarding 2Q03 revenue from sales of new products were false when made. In its original report on Form 10-Q, Lattice falsely stated:

Beginning in 2001, the semiconductor and PLD markets experienced a significant downturn, which has continued into 2003. The slight revenue increase in the second quarter and first six months of 2003 as compared to the second quarter and first six months of 2002 was primarily due to revenue from the sale of new products. Nonetheless, overall revenue levels for all periods presented remain substantially depressed from earlier periods and reflect the continued downturn and resultant overall decrease in demand for our products. On July 21, 2003, we announced that we expected revenues for the quarter ended September 30, 2003 to be between $52 million and $55 million.

CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF Page 34 THE FEDERAL SECURITIES LAWS

86. In its restated report on Form 10-Q (Lattice’s 10-Q/A), Lattice admitted that its claim of revenue growth from new product sales was false:

Beginning in 2001, the semiconductor and PLD markets experienced a significant downturn, which has continued into 2003. The revenue decrease in the first six months of 2003 as compared to the first six months of 2002 reflects this continued downturn, with the decline in overall demand more than offsetting increased revenue from the sale of new products. Overall revenue levels for all periods presented remain substantially depressed from earlier periods.

87. By restating its financial results, Lattice has admitted that the financial statements and other financial information originally included in the July 21, 2003 press release, 2Q03 Conference

Call, and 2Q03 report on Form 10-Q were materially false and misleading as the result of a failure to include information that was available to defendants at the time those statements were issued, and that the misstatements were material to the financial statements. See APB No. 20.

88. The following facts, as described in more detail elsewhere in this complaint, when considered in light of the allegations contained in the complaint as a whole, strongly support the inference that, at the time the foregoing statements were made, Lattice, Tsui, Laub, Skaggs and Hoyt each knew or were deliberately reckless to the fact that Lattice’s 2Q03 revenues were materially overstated and its deferred income, accounts payable and accrued expenses, current liabilities, net loss and net loss per share materially understated, such that the information reported in the July 21,

2003 press release, 2Q03 Conference Call, and the 2Q03 Form 10-Q report was materially false and misleading at the time it was published:

(a) Defendants have admitted that Hoyt made unsubstantiated journal entries to manipulate Lattice’s 2Q03 financial statements, thereby demonstrating that Hoyt had actual knowledge of the false information contained in those statements;

(b) Tsui and Skaggs’ certifications pursuant to §§302 and 906 of the Sarbanes-

Oxley Act of 2002, as well as their hands-on style of micro-managing Lattice, strongly support the CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF Page 35 THE FEDERAL SECURITIES LAWS

inference that Hoyt would not have made the journal entries without the knowledge or consent of

Tsui or Skaggs, nor would Hoyt have any apparent individual motive, not shared by the other

Individual Defendants, to manipulate the financial statements in that manner on his own without the knowledge or consent of Tsui, Skaggs or other members of Lattice’s senior management;

(c) Tsui and Skaggs’ Sarbanes-Oxley certifications further demonstrate that they each had actual knowledge of the true facts at the time the 2Q03 financial results were published by virtue of the information they had purportedly obtained and investigations they had purportedly completed before those results were released to the public, as stated in their certifications, or were deliberately reckless in not having gained such actual knowledge by failing to obtain the information or conduct the investigations described in their certifications;

(d) Tsui and Skaggs’ hands on “micro-management” of the Company, as described infra, further supports the inference that they had access to information about the true facts at the time the 2Q03 financial statements were published, including the terms of Lattice’s contracts with its distributors, and distributor sell-through, inventory levels and margins;

(e) Defendants were provided with daily, weekly and quarterly financial reports on sales, gross margins, and other results, as described infra, as well as monthly sales reports from distributors, as described in its public announcements regarding the restatement, such that defendants had information about distributor sell through and inventory levels sufficient to report accurate information about its revenues;

(f) Lattice’s decision to restate its 2Q03 financial statements demonstrates that the false information presented therein was contradicted by contemporaneous information that was available to defendants at the time the false statements were originally published;

CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF Page 36 THE FEDERAL SECURITIES LAWS

(g) The nature of the restatement is such that the overstatement of revenues and gross margins and the understatement of deferred income would have been apparent to management in reviewing financial statements before they were publicly filed because the deferred income stated therein was insufficient to support the amount of inventory then known to be sitting on distributors’ shelves;

(h) Hoyt’s apparent agreement to take the blame for the accounting violations and

Lattice’s agreement to hire him back as a consultant after purportedly firing him as a result of the investigation that led to the restatement;

(i) Lattice, Tsui, Laub and Skaggs were motivated to avoid further extended declines in the price of Lattice stock in order to avoid a goodwill writeoff as well as to achieve the objectives of the stock option exchange program and induce key employees to remain with the

Company; and

(j) Lattice and the Individual Defendants were further motivated to inflate the price of Lattice securities to complete the registration for the public sale of the convertible subordinated zero coupon notes, and any common stock issued pursuant to exercise of the conversion rights thereunder, as required under the terms and conditions of the private placement used to pay off Lattice’s higher interest debt and obtain the additional working capital Lattice needed to weather the economic downturn in the semiconductor industry.

2. False Statements Regarding Lattice’s Performance in the Market During 2Q03

89. In Lattice’s July 21, 2003 press release, Tsui falsely assured investors that the customer success of Lattice’s new product initiatives would drive the Company’s continued growth:

CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF Page 37 THE FEDERAL SECURITIES LAWS

Since 2002, we have brought to market five major new product families: our advanced field programmable system chips (FPSC), our technologically differentiated ispXP products, our innovative ispPAC POWR devices, our low power ispMACH 4000Z CPLDs and our third generation BFW III CPLDs. While the collective revenue of these new products is still relatively small, it grew very rapidly on a sequential basis. In addition, these new products accounted for well over a third of our customer design activity last quarter. We believe this positive customer reception will drive continued growth for these products.

90. In the 2Q03 Conference Call defendants again falsely assured investors that Lattice’s

FPGA and CPLD were a success with customers. Specifically, Laub stated:

Clearly, our new products are generating lots of enthusiasm from the customer base, as they are setting records for new designs wins. Based on the design-in success we are experiencing, we expect that the FPGA marketplace, our FPGA revenues will continue to increase on an annual basis. As we have stated in the past, since the business is a mix of production and prototyping orders, it is non- linear. Therefore, while we expect those to grow annually, it will not necessarily do so each and every quarter.

In the CPLD area, we expect to continue to grow our business in the low voltage CPLD part of the marketplace. We are specially [sic] encouraged by the positive reception of customers to the recently released ispMACH 4,000/Z ultra-low power product family. Furthermore, we’re encouraged by the strong design activity of our other new product families and are confident of the revenue ramp of the products.

91. On the 2Q03 Conference Call, Laub stated that “Lattice has today the largest market opportunities available to it in its history, is a more competitive supplier, and is well positioned for eventually [sic] industry upturn.”

92. The foregoing statements were materially false and misleading because: (i) Lattice’s market share was declining faster than revenues from its new FPGA or CPLD products were increasing; and (ii) Lattice’s lackluster performance had more to do with its continued loss of market share and inability to successfully compete with semiconductor industry rivals than with seasonal factors or then current economic conditions.

CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF Page 38 THE FEDERAL SECURITIES LAWS

93. The following facts, as described in more detail elsewhere in this complaint, when considered in light of the allegations contained in the complaint as a whole, strongly support the inference that, at the time the foregoing statements were made, Lattice, Tsui, Skaggs and Laub each knew or were deliberately reckless to the fact that: (i) Lattice was continuing to lose market share to its competitors; and (ii) Lattice was not experiencing expected growth from its new FPGA or CPLD products, or seeing customer acceptance at the levels portrayed in its public statements:

(a) Lattice was provided with sales reports from distributors weekly and quarterly financial packages, weekly updates on customer acceptance of new product design wins and other internal reports as described infra, such that defendants had contemporaneous information about the purported success of its new FPGA and CPLD products that contradicted the information they were providing to the market;

(b) Tsui and Skaggs’ 2Q03 Sarbanes-Oxley certifications further demonstrate that they each had actual knowledge of the true facts at the time their false FPGA and CPLD product

“growth” statements were published by virtue of the information they had purportedly obtained and investigations they had purportedly completed before those results were released to the public, as stated in their certifications, or were deliberately reckless in not having gained such actual knowledge by failing to obtain the information or conduct the investigations described in their certifications prior to publishing the false statements about the success of Lattice’s new products;

(c) Tsui, Laub and Skaggs’ hands on “micro-management” of the Company, as described infra, further supports the inference that they had access to information about the true facts at the time their false CPLD and FPGA product “growth” statements were published; and

(d) Lattice, Tsui, Skaggs and Laub were motivated to falsely portray Lattice’s success in the market, thereby preventing further extended declines in the price of Lattice stock, in

CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF Page 39 THE FEDERAL SECURITIES LAWS

order to: (i) avoid a goodwill writeoff; (ii) achieve the objectives of the stock option exchange program; and (iii) successfully complete the registration for the public sale of the convertible subordinated zero coupon notes, and any common stock issued pursuant to exercise of the conversion rights thereunder.

C. False and Misleading Registration Statements to Permit Resale of Zero Coupon Bonds

94. On August 13, 2003, Lattice registered its zero coupon subordinated notes (including up to 15.255 million shares of common stock potentially issuable upon exercise of the conversion rights contained therein) pursuant to a Form S-3 registration statement filed by the Company with the SEC. The registration statement was amended on August 26, 2003 under form S-3/A.

95. The August 13, 2003 registration statement was signed by defendants Tsui, Laub and

Skaggs, and the August 26, 2003 amended registration statement was signed by Skaggs. These registration statements incorporated by reference Lattice’s financial statements for the first and second quarters of 2003, filed on May 12, 2003 and August 8, 2003, which, as detailed herein, were misstated and not prepared in accordance with GAAP and SEC rules.

96. Plaintiffs have alleged herein, and defendants have admitted in their restated 1Q03 and 2Q03 quarterly reports on Form 10-Q/A, that Lattice’s original financial statements for 1Q03 and 2Q03, which were incorporated into the registration statements, were misstated because Lattice artificially inflated its revenues by improperly recording revenue on products which defendants knew had not been sold off distributors’ shelves. This practice artificially inflated Lattice’s results making Lattice’s operating results throughout the Class Period neither indicative of Lattice’s underlying business nor indicative of the business trends investors could expect based on those results. Lattice’s failure to disclose its improper practices was a violation of GAAP and SEC rules.

CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF Page 40 THE FEDERAL SECURITIES LAWS

D. False Statements Regarding 3Q03 Performance and Results

1. False Financial Statements and Results

97. On October 20, 2003, Lattice issued a press release reporting its 3Q03 financial results (“October 20, 2003 press release”). The press release summarized Lattice’s third quarter financial results and stated in part:

Lattice Semiconductor Corporation today announced financial results for the third quarter of 2003.

Revenue for the quarter was $51.0 million, down 12 percent from the $58.2 million reported last quarter and a decrease of nine percent from the $56.1 million reported in the same quarter a year ago.

Quarterly revenue from FPGA products was $9.2 million, an increase of three percent from last quarter while quarterly revenue from high density CPLD products was $34.8 million, down 14 percent from last quarter.

New product revenue growth grew 41 percent sequentially and now accounts for 12 percent of total quarterly revenue. Mainstream product revenue declined four percent sequentially and now accounts for 44 percent of quarterly new revenue, while Mature product revenue declined 27 percent sequentially and now accounts for 44 percent of quarterly revenue.

On a GAAP basis, net loss for the quarter was $21.9 million ($0.20 per share). This loss includes an $18.7 million charge for amortization of intangible assets.

Non-GAAP loss for the quarter was $3.2 million ($0.03 per share). This loss includes a $5.7 million non-recurring charge associated with the early call of our previously outstanding 4 3/4 percent convertible notes. Non-GAAP earnings exclude non-cash acquisition related amortization expenses and more closely approximates our cash earnings performance. A reconciliation of non-GAAP to GAAP earnings accompanies the financial tables in this earnings release.

* * *

Business Outlook - December 2003 Quarter

Revenue is expected to be approximately flat.

Gross margins are expected to be approximately flat as a percentage of revenue.

Total operating expenses are expected to be approximately flat.

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98. Lattice’s stock closed at $7.58 on October 21, 2003, on increased volume in excess of

2 million shares, a one day increase of nearly 6% from its $7.05 opening price, as compared with a

2% hike in the Philadelphia Semiconductor Index and a 0.3% decline in the NASDAQ Composite

Index. Had the true facts about the Company and its accounting manipulations been disclosed, investors would have realized that the decline from the prior quarter’s revenues was nearly twice as great as Lattice claimed ($13.6 million v. $7.2 million), and that sales of new products had been insufficient to offset declining demand for Lattice’s legacy CPLD and SPLD products. Investors who purchased Lattice’s stock at these fraud-inflated prices were damaged by paying too much, as confirmed by the decline in price as Lattice revealed details of its accounting investigation and ultimately restated its 3Q03 earnings, as reflected in the price declines of Lattice stock following its

January 22, 2004, March 1, 2004 and March 18, 2004 announcements.

99. The October 20, 2003 press release was followed by a October 21, 2003 investor conference call (the “3Q03 Conference Call”) hosted by Laub and Skaggs wherein defendants repeated Lattice’s false 3Q03 financial results. Skaggs began the call by reviewing Lattice’s 3Q03 financial results and the Company’s projected results for 4Q03.

100. On November 12, 2003, Lattice filed its 3Q03 report on Form 10-Q for the quarter ended September 27, 2003, signed by Skaggs. The Form 10-Q included the Company’s false 2Q03 financial statements. The Form 10-Q also contained the following certifications, signed by Tsui and

Skaggs:

I ... certify that:

1. I have reviewed this Form 10-Q of Lattice Semiconductor Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF Page 42 THE FEDERAL SECURITIES LAWS

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

* * *

I ... certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Lattice Semiconductor Corporation on Form 10-Q for the quarter ended September 30, 2003 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF Page 43 THE FEDERAL SECURITIES LAWS

fairly presents, in all material respects, the financial condition and results of operations of Lattice Semiconductor Corporation.

101. The October 20, 2003 press release, 3Q03 Conference Call transcript, and 3Q03

Report on Form 10-Q were also published on or through links to Lattice’s website, www.lscc.com, where they could be reviewed and downloaded by investors.

102. The October 20, 2003 press release, 3Q03 Conference Call, and 3Q03 report on Form

10-Q each contained false and misleading financial statements and other financial information which materially understated Lattice’s expenses and overstated its revenues for 3Q03.

103. The following chart identifies the false information originally reported in the financial statements and other financial information included with the October 20, 2003 press release,

October 21, 2003 Conference Call, and 3Q03 report on Form 10-Q, and the corrected information for 3Q03 as reported in Lattice’s restated report on Form 10-Q/A for 3Q03:

As Reported As Restated LSCC 3Q03 Results (000s) (000s) Revenue $51,038 $43,033 Gross Margin 60% 55% Accts. Payable & Accrued Expenses $28,846 $34,356 Deferred Income $6,361 $9,766 Net Loss ($21,887) ($28,661) Net Loss Per Share Diluted ($0.20) ($0.26)

104. In its report on Form 10-K for FY03, Lattice admitted that the financial results originally reported in the October 20, 2003 press release, 3Q03 Conference Call, and 3Q03 report on

Form 10-Q were false when made because revenues were improperly recognized before products had been resold by distributors to end users, and because Lattice had failed to adhere to its stated accounting policies during 3Q03.

CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF Page 44 THE FEDERAL SECURITIES LAWS

105. In its report on Form 10-Q/A for 3Q03 which restated Lattice’s financial results for that quarter, Lattice further admitted that its representations regarding the actual cause for declining

3Q03 revenue were false when made. In its original report on Form 10-Q, Lattice falsely stated:

The steeper revenue decline in the third quarter reflects a continued softening in demand and declining average selling prices for our SPLD and certain CPLD products, which more than offset increased revenue from sales of our FPGA and new CPLD products.

In its restated report on Form 10-Q (Lattice’s 10-Q/A), Lattice corrected its claim of improved revenue being due to new product sales, stating:

The steeper revenue decline in the third quarter reflects sales allowances and price protection credited to distributors during the quarter and to a lesser extent a continued softening in demand and declining average selling prices for our SPLD and certain CPLD products, which more than offset increased revenue from sales of our FPGA and new CPLD products.

106. Likewise, in its report on Form 10-Q/A for 3Q03, Lattice admitted that its representations regarding the actual cause for decreased deferred income on sales to distributors in

3Q03 were false when made. In its original report on Form 10-Q, Lattice falsely stated:

Deferred income on sales to distributors decreased by $5.6 million, or 47%, as compared to the balance at December 31, 2002. This decrease was primarily due to lower shipments and billings to the distributors, resulting in lower inventories at the distributors.

In its restated report on Form 10-Q (Lattice’s 10-Q/A), Lattice corrected its claim of decreased deferred income being due to lower shipments and billings to the distributors, stating:

Deferred income on sales to distributors decreased by $2.2 million, or 19% (restated) at September 30, 2003, as compared to the balance at December 31, 2002. This decrease was primarily due to a reduction in estimated salable and returnable inventories at distributors. The balance at September 30, 2003, reflects a $3.4 million restatement (increase) as compared to the balance previously reported on our Form 10-Q for the quarter ended September 30, 2003 and filed on November 12, 2003 and reflects both a correction of an error and change in estimate related to this balance as further described in Note 15 to our Condensed Consolidated Financial Statements.

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107. By restating its financial results, Lattice has admitted that the financial statements and other financial information originally included in the October 20, 2003 press release, 3Q03

Conference Call, and 3Q03 report on Form 10-Q were materially false and misleading as the result of a failure to include information that was available to defendants at the time those statements were issued, and that the misstatements were material to the financial statements. See APB No. 20.

108. The following facts, as described in more detail elsewhere in this complaint, when considered in light of the allegations contained in the complaint as a whole, strongly support the inference that, at the time the foregoing statements were made, Lattice, Tsui, Laub, Skaggs and Hoyt each knew or were deliberately reckless to the fact that Lattice’s 3Q03 revenues were materially overstated and its deferred income, accounts payable and accrued expenses, current liabilities, net loss and net loss per share materially understated, such that the information reported in the October

20, 2003 press release, 3Q03 Conference Call, and 3Q03 Form 10-Q report was materially false and misleading at the time it was published:

(a) Defendants have admitted that Hoyt made unsubstantiated journal entries to manipulate Lattice’s 3Q03 financial statements, thereby demonstrating that Hoyt had actual knowledge of the false information contained in those statements;

(b) Tsui and Skaggs’ certifications pursuant to §§302 and 906 of the Sarbanes-

Oxley Act of 2002, as well as their hands-on style of micro-managing Lattice, strongly support the inference that Hoyt would not have made the journal entries without the knowledge or consent of

Tsui or Skaggs, nor would Hoyt have any apparent individual motive, not shared by the other

Individual Defendants, to manipulate the financial statements in that manner on his own without the knowledge or consent of Tsui, Skaggs or other members of Lattice’s senior management;

CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF Page 46 THE FEDERAL SECURITIES LAWS

(c) Tsui and Skaggs’ Sarbanes-Oxley certifications further demonstrate that they each had actual knowledge of the true facts at the time the 3Q03 financial results were published by virtue of the information they had purportedly obtained and investigations they had purportedly completed before those results were released to the public, as stated in their certifications, or were deliberately reckless in not having gained such actual knowledge by failing to obtain the information or conduct the investigations described in their certifications;

(d) Tsui and Skaggs’ hands on “micro-management” of the Company, as described infra, further supports the inference that they had access to information about the true facts at the time the 3Q03 financial statements were published, including the terms of Lattice’s contracts with its distributors, and distributor sell through, inventory levels and margins;

(e) Defendants were provided with daily, weekly and quarterly financial reports on sales, gross margins, and other results, as described infra, as well as monthly sales reports from distributors, as described in its public announcements regarding the restatement, such that defendants had information about distributor sell through and inventory levels sufficient to report accurate information about its revenues;

(f) Lattice’s decision to restate its 3Q03 financial statements demonstrates that the false information presented therein was contradicted by contemporaneous information that was available to defendants at the time the false statements were originally published;

(g) The nature of the restatement is such that the overstatement of revenues and gross margins and the understatement of deferred income would have been apparent to management in reviewing financial statements before they were publicly filed because the deferred income stated therein was insufficient to support the amount of inventory then known to be sitting on distributors’ shelves;

CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF Page 47 THE FEDERAL SECURITIES LAWS

(h) Hoyt’s apparent agreement to take the blame for the accounting violation and

Lattice’s agreement to hire him back as a consultant after purportedly firing him as a result of the investigation that led to the restatement;

(i) Lattice, Tsui, Laub and Skaggs were motivated to avoid further extended declines in the price of Lattice stock in order to avoid a goodwill writeoff;

(j) Lattice, Tsui, Laub and Skaggs were also motivated to inflate the price of

Lattice’s stock in order to preserve the value of the new options which had just been issued on

September 21, 2003 to them and other employees with an exercise price of $8.21 pursuant to the tender offer, and which could begin to be exercised on or after December 21, 2003, providing significant financial compensation to them and other employees and preventing the loss of key employees; and

(k) Lattice and the Individual Defendants were further motivated to inflate the price of Lattice securities to complete the registration for the public sale of the convertible subordinated zero coupon notes, and any common stock issued pursuant to exercise of the conversion rights thereunder, as required under the terms and conditions of the private placement used to pay off Lattice’s higher interest debt and obtain the additional working capital Lattice needed to weather the economic downturn in the semiconductor industry.

2. False Statements Regarding Lattice’s Performance in the Market During 3Q03

109. On September 12, 2003, David Wu, CFA, and analyst with Wedbush Morgan

Securities, noted as a “key point” in his analysis of Lattice “LSCC’s relative weakness in FPGAs to its 2 larger competitors – no low cost FPGAs and no traction yet in its proprietary mid range FPGA offering (management expect results in 1HCY04).” Wu concluded that Lattice is “Still

CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF Page 48 THE FEDERAL SECURITIES LAWS

Disappointing” and as a result, Wedbush Morgan Securities would be “Lowering [its] Estimates” for

Lattice.

110. In a September 24, 2003 interview with Electronics Weekly – shortly after millions of new options had been issued to Tsui and other executives - Tsui dismissed competitors’ claims that

Lattice was losing market share. “The Vantis acquisition was highly successful because its product family is number two in CPLDs and we’re gaining market share in CPLDs from Altera,” says Tsui.

In the same article, Tsui falsely touted the success of Lattice’s FPGA and CPLD product lines, stating “Success in CPLDs gives us the critical mass to get into FPGAs” and “Now we’re growing market share in FPGA”

111. Thereafter, Lattice sought to reassure investors further by reiterating, and then raising, its 4Q03 guidance to analysts. Lattice first told investors during a November 13, 2003 JP Morgan presentation that it was on track to meet 4Q03 earnings projections. On or about December 11,

2003, Lattice communicated further with analysts, advising them to expect increased 4Q03 revenues, which caused analysts to raise their ratings on the Company. When 4Q03 earnings were released, the Company surprised investors by announcing a quarterly loss of $0.04 per share, as compared with the loss of just $0.01 investors had been led to expect.

112. In the 3Q03 Conference Call, defendants falsely assured analysts and investors that

Lattice would experience growth in its faltering FPGA product line and that the business as a whole

“is growing.” Laub similarly stated that “[d]espite short-term business conditions, the company is in good shape. It is making excellent progress in growing its new products, the results of which I expect we will see even greater impact this coming year. The management team is seasoned, stable, and experienced. I’m very confident regarding Lattice’s future prospects.” Laub also announced

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his resignation from Lattice during the call. Regarding FPGA, Laub responded as follows to analysts:

Q: (Sumit Dhanda – Banc of America Securities – Analyst) Also on the FPGA side of the business, it seems like if I go back four quarters to the December quarter, you were averaging about 9 million or so; and you are still at that level. With is it going to take for Lattice to break the 10 million mark here? It seems to be a real hurdle the last couple of quarter.

A: (Steve Laub – Lattice Semiconductor – President) I think there is nothing magical about 9 million or 10 million. It is really just a number that it adds up to. We are experiencing growth on the FPGAs. As I mentioned, it has grown over 20 percent over the past year. We expect that the FPGA business will grow over the next year.

So with that, I would expect that you’ll see in 2004 a growth that should put us over the 10 million mark. But again, this is a business that is growing; it is a business that will be nonlinear in its growth. But again you should expect that it will experience and show that type of growth for us.

113. In the October 20, 2003 press release, Tsui again claimed that Lattice’s products were being well-received by customers:

“While disappointed with our overall revenue performance last quarter, we remain encouraged about the acceptance of our new products,” stated Cyrus Y. Tsui, chairman and chief executive officer. “Our recently introduced products once again generated a record level of design activity during the last quarter and continue to be well received by our worldwide customer base. These new products now account for over 50 percent of our new design-ins. Unfortunately the sequential revenue growth of our new products and our FPGA business was more than offset by the sequential revenue decline of our mature product families.”

114. Defendants similarly assuaged analysts’ concerns regarding Lattice’s operating margin and cost structure by assuring them that Lattice’s business would improve and Lattice’s investments in FPGA would result in substantial gains for the Company:

Q: (Neil Jacobs – Baudry Capital Management Analyst) Assuming that your goal is still a 20 percent operating margin, you are about 60 percent more in revenue with your current cost structure to get to that 20 percent. At what point do you began to reassess the cost structure you have?

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A: (Steve Laub – Lattice Semiconductor – President) It is a fair question you are asking, from the standpoint of given a certain revenue level and so forth of the company and the investments we’re making. Now as you know, one of the key things that that is going to depend on is really a perception of two different areas; one being, do we think that the business tone is going to improve or the business tone is going to stay the same.

And while our outlook is flat, there is some indication that the business tone is beginning to improve. So, we do believe that next year will be a better year than the last few have been. So that gives us indication that perhaps we will see some growth in the top-line, which will help relieve or alleviate some of the issues with respect to margins.

The other thing is that, one of the key reasons we have restructured some of those expenses is that we’re making very substantial investments in the FPGA area. The FPGA opportunity for us is an enormous one. We only recently entered this marketplace. We have critical mass in this company to be able to compete effectively in that marketplace. And we think that it is in the best interest of ourselves and of our shareholders that we continue to make the investments necessary to assure a very successful position in that marketplace. And that to cut, at a time when we are in the midst of making those investments, and in the midst of seeing success from our investments, would be very short-term guided. So that is our position today, and it is something that we do reassess, being thoughtful businessmen. But that is our position today.

115. The foregoing statements were materially false and misleading because:

(a) Lattice was not competing effectively with its traditional rivals in the semiconductor industry and, in fact, was losing market share, was not experiencing growth from its new FPGA products, and its performance had more to do with its continued loss of market share and inability to successfully compete with semiconductor industry rivals, than with seasonal factors or then current economic conditions.

116. The following facts, as described in more detail elsewhere in this complaint, when considered in light of the allegations contained in the complaint as a whole, strongly support the inference that, at the time the foregoing statements were made, Lattice, Tsui, Skaggs and Laub each knew or were deliberately reckless to the fact that: (i) Lattice was continuing to lose market share to

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its competitors; and (ii) Lattice was not experiencing expected growth from its new FPGA or CPLD products, or seeing customer acceptance at the levels portrayed in its public statements:

(a) Defendants were provided with daily, weekly and quarterly financial reports on sales, gross margins, and other results, as described infra, as well as monthly sales reports from distributors, as described in its public announcements regarding the restatement, and weekly updates on customer acceptance of new product design wins (as described by CW4), such that defendants had contemporaneous information about the purported success of its new FPGA and CPLD products that contradicted the information they were providing to the market;

(b) Tsui and Skaggs’ 3Q03 Sarbanes-Oxley certifications further demonstrate that they each had actual knowledge of the true facts at the time their false FPGA and CPLD product

“growth” statements were published by virtue of the information they had purportedly obtained and investigations they had purportedly completed before those results were released to the public, as stated in their certifications, or were deliberately reckless in not having gained such actual knowledge by failing to obtain the information or conduct the investigations described in their certifications prior to publishing the false statements about the success of Lattice’s new products;

(c) Tsui, Laub and Skaggs’ hands on “micro-management” of the Company, as described infra, further supports the inference that they had access to information about the true facts at the time their false CPLD and FPGA product “growth” statements were published;

(d) Lattice, Tsui, Skaggs and Laub were motivated to falsely portray Lattice’s success in the market, thereby inflating Lattice’s stock price, in order to: (i) avoid a goodwill writeoff; (ii) achieve the objectives of the stock option exchange program; (iii) continue to successfully register the zero coupon notes and any shares converted therefrom for public sale; and

(iv) preserve the value of the new options which had just been issued on September 21, 2003 to them

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and other employees with an exercise price of $8.21 pursuant to the tender offer, and which could begin to be exercised on or after December 21, 2003, providing significant financial compensation to them and other employees and preventing the loss of key employees.

VI. THE TRUTH BEGINS TO EMERGE

117. On January 22, 2004, Lattice issued a press release announcing a delay in the release of its 4Q03 and FY03 financial results until February 2004. The press release stated in part:

Lattice Semiconductor Corporation today announced that it now plans to release its fourth quarter and fiscal year 2003 financial results in the second half of February, 2004.

Recently, management became aware of a possible overstatement of the Company’s Deferred Income account. Deferred Income is a balance sheet account representing the Company’s judgment as to the potential gross margin on inventory held by the Company’s distributors. Because the Company’s accounting policy is to delay recognition of sales to distributors until the product is resold to end customers, a common practice in the semiconductor industry, the Company must use a variety of estimates to determine the Deferred Income account balance. The Company is reviewing such estimates and will defer the release of earnings until this review is complete. As of September 30, 2003, the reported balance in the account was $6.4 million.

At this time it is too early to determine if any adjustments to previously reported financial statements will be required and whether such adjustments, if needed, would be material.

118. On this news, the price of Lattice’s common stock declined from an opening price of

$13.25 on January 22 to open at $11.11 on January 23, losing 16% of its market value in one day on elevated trading volumes of 5.6 million shares. Lattice’s stock continued to trade at elevated volumes over the next several days before closing at $10.73 on January 30, 2004. The loss would have been even greater, but for Lattice’s efforts to falsely downplay the accounting manipulations by falsely characterizing it as an “overstatement” of deferred income that had resulted from incorrect estimates that had been used over a period of years. Lattice did not reveal that the accounting fraud was the result of the intentional manipulation of journal entries by its controller, nor did it alert

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investors that reversal of those improper entries could potentially have an impact on millions of dollars of its previously reported revenues and earnings.

119. On March 1, 2004, the Company issued a press release announcing a further delay in

Lattice’s financial results (this time until March 18, 2004), causing its shares to again fall by more than 6% on increased trading. The release stated in part:

Lattice Semiconductor Corporation today announced that it plans to release fourth quarter and 2003 year end financial results in mid-March. The Company has set March 18, 2004 as the preliminary date for release of its financial results.

As previously announced, a detailed review of the Deferred Income account is being conducted under the direction of the Audit Committee. In the event the account is determined to have been overdepleted, the review will also consider appropriate corrective measures.

Deferred income is the balance sheet account that represents the Company’s judgment as to the potential gross margin, plus credits that may be due, on inventory held by the Company’s distributors. Because the Company’s accounting policy is to defer recognition of sales to distributors until the product is resold to end customers, a common practice in the semiconductor industry, the Company must use a variety of estimates to determine the Deferred Income account balance. As of September 30, 2003, the reported balance in the account was $6.4 million.

The Company today also provided a revenue outlook for the first quarter of 2004. Management believes fourth quarter revenue is within the range stated in its business outlook statement, published on the Company’s website on December 11, 2003. Additionally, based on current business activity, management expects first quarter 2004 revenue to grow approximately 6 to 10 percent on a sequential basis.

120. To counteract the negative impacts on Lattice’s stock price resulting from this announcement, Lattice preceded it with an announcement to analysts that its revenues were expected to grow 6%-10% in 1Q04. Although management also told analysts that 4Q03 revenues were on track, they made no mention of the delay in the 4Q03 financials until later in the day. Following the announcement, Lattice’s stock fell to $10 at the market close on March 2 and to $9.70 overnight – a decline of more than 6.5% of its value, as compared with a 0.9% drop in the NASDAQ Composite

Index and a 0.6% decline in the Philadelphia Semiconductor Index over the same period. But for the

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positive earnings announcement issued earlier in the day, the drop would have been even steeper on news of the continued delay in releasing its 4Q03 and FY03 financial results.

121. On March 18, 2004, the Company delayed its reported financial results for a third time, while announcing that it would restate all of the quarterly results it reported in 2003 to reduce reported revenues by $10 million to $11 million. This news caused NASDAQ to halt trading of the stock after it began to decline dramatically in after-hours trading from its intra-day high of $9.17 on March 18. When trading resumed, Lattice’s stock price continued to tumble, dropping as low as $7.95 on heightened trading volumes before finally closing at $8.67 on March 19.

122. The press release Lattice issued on March 18, 2004, was entitled “Lattice

Semiconductor Announces Delay of Earnings Release and Anticipated Restatement; Company also provides updated first quarter 2004 business outlook” and stated, in part:

Lattice Semiconductor Corporation today announced that it had not yet completed its deferred income accounting review. Consequently, the release of year end earnings has been delayed.

As previously announced, a detailed review of the Deferred Income account is being conducted under the direction of the Audit Committee. Deferred Income is the balance sheet account that represents the estimated future gross margin, including credits that may be due, related to inventory held by the Company’s distributors that is expected to be either resold to end users or returned to the Company for a credit. During the course of the review, the Company has concluded that the deferred income account became overdepleted in 2003.

Consequently, the Company anticipates the restatement of its first, second and third quarter 2003 financial statements. The Company currently believes the restatement will result in a reduction of 2003 year-to-date revenue of approximately $10 to $11 million, a reduction of 2003 year-to-date cost of sales approximately $1.5 to $2 million and an increase of 2003 year-to-date net loss of approximately $8.5 to $9.5 million. The review will also conclude upon appropriate corrective measures.

The Company currently anticipates release of earnings by the end of March 2004. In addition, the Company currently anticipates filing its 2003 Annual Report on Form 10-K by April 2, 2004, under a filing extension pursuant to SEC Rule 12b- 25.

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123. Simultaneously, on March 18, 2004, Dow Jones Newswire published an article entitled “Lattice Semiconductor Announces Delay of Earnings Release and Anticipated

Restatement” which stated, in part:

Lattice Semiconductor Corp.’s review into its deferred income found that account was overdepleted during 2003, which will lead to a restatement and loss for the first nine months of the year.

The Company again delayed the release of its fourth-quarter earnings report because of the accounting review, but increased its revenue projections for the first quarter.

Lattice began its review into the deferred income account in January, delaying its fourth-quarter earnings report at that time and then again on March 1. The deferred income account represents Lattice’s estimate on the potential gross margin on inventory held by distributors.

In a press release Thursday, Lattice said it expects to restate results for the first, second and third quarters of 2003. The restatement is expected to cut nine- month revenue by $10 million to $11 million and widen its loss for the period by $8.5 million to $9.5 million.

Lattice previously reported a nine-month loss of $5 million, before a benefit for income taxes, and net income of $819,000. Revenue for the period was $167.5 million.

Lattice’s shares were recently halted in after-hours trading at $8.90.

Lattice Semiconductor expects to release its fourth-quarter and 2003 results by the end of March and file its annual report by April 2.

124. On March 24, 2004, the Company issued a press release entitled “Lattice

Semiconductor Reports Fourth Quarter and 2003 Year End Financial Results and Restatement of

First, Second and Third Quarter 2003 Financial Statements; Company reiterates first quarter 2004 business outlook.” The press release stated in part:

Lattice Semiconductor Corporation today announced financial results for the fourth quarter and year ended December 2003.

In addition, the Company announced that it has completed a review of its deferred income accounting. Deferred income is the balance sheet account which represents the estimated future gross margin, including credits that may be due, CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF Page 56 THE FEDERAL SECURITIES LAWS

related to inventory held by the Company’s distributors that is expected to be either resold to end users or returned to the Company for a credit. As the Company’s distributors have price protection and limited return rights, the Company’s policy is to defer recognition of revenue for sales through distribution until the distributor resells the Company’s products to an end customer. However, upon shipment of product to distributors, the Company records a receivable and credits deferred income while also relieving its inventory account and offsetting the cost of inventory shipped against deferred income. The receivable and deferred income accounts are also adjusted for estimated credits that may be due distributors.

As previously disclosed, the Company has concluded that its deferred income account became overdepleted during 2003. After review by the Audit Committee and the Company’s independent auditor, the Company has determined restatement of the March, June and September quarter 2003 financial statements is necessary to correct errors and a failure to record a change in accounting estimate related to deferred income. The restatement resulted from inappropriate accounting entries made by an individual in the Company’s finance department and deficiencies in the design and operation of internal accounting controls related to the deferred income account.

For the September 2003 quarter, the restatement:

• reduces revenue, originally reported as $51.0 million, by $8.0 million to $43.0 million;

• reduces cost of sales, originally reported as $20.7 million, by $1.2 million to $19.4 million;

• increases net loss, originally reported as $21.9 million ($0.20 per share), by $6.8 million ($0.06 per share) to $28.7 million ($0.26 per share);

• increases the originally reported deferred income balance sheet account by $3.4 million to $9.8 million;

• increases the originally reported accounts payable and other accrued liabilities balance sheet account by $5.5 million to $34.4 million; and

• reduces the originally reported retained earnings balance sheet account by $8.9 million to $28.6 million.

For the June 2003 quarter, the restatement:

• reduces revenue, originally reported as $58.2 million, by $1.6 million to $56.6 million;

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• reduces cost of sales, originally reported as $23.3 million, by $0.3 million to $23.0 million;

• increases net loss, originally reported as $16.9 million ($0.15 per share), by $1.3 million ($0.01 per share) to $18.2 million ($0.16 per share);

• increases the originally reported deferred income balance sheet account by $0.8 million to $9.6 million;

• increases the originally reported accounts payable and other accrued liabilities balance sheet account by $1.3 million to $32.5 million; and

• reduces the originally reported retained earnings balance sheet account by $2.1 million to $57.3 million.

For the March 2003 quarter, the restatement:

• reduces revenue, originally reported as $58.3 million, by $1.0 million to $57.3 million;

• reduces cost of sales, originally reported as $23.2 million, by $0.2 million to $23.0 million;

• increases net loss, originally reported as $18.8 million ($0.17 per share), by $0.8 million ($0.01 per share) to $19.7 million ($0.18 per share);

• increases the originally reported deferred income balance sheet account by $0.8 million to $13.9 million; and

• reduces the originally reported retained earnings balance sheet account by $0.8 million to $75.5 million.

* * *

The Company currently anticipates filing amended Quarterly Reports on Form 10-Q for the first, second and third quarters of 2003, which will contain the restated financial results discussed above, and its 2003 Annual Report on Form 10-K by April 2, 2004.

“We are disappointed with the restatement of our 2003 quarterly financial results,” stated Cyrus Y. Tsui, chairman and chief executive officer. “However, we have performed an accounting review, made improvements in our method of accounting for Deferred Income and are pursuing improvements in our internal controls under the guidance of our Audit Committee.”

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125. On March 24, 2004, Lattice held a conference call for analysts and investors, during which Skaggs admitted that:

During 2003, our distributor inventory levels reached a multiyear low. After review, we have concluded that our deferred income account fell slightly below the level that was required to support the inventory on our distributors’ shelves as of March 2003. Or in other words, it became over-depleted. The account remained below the required level in the June quarter, and then fell substantially below the required level in the September quarter.

We have determined that the deferred income account became over-depleted during the first quarter due to a small error in the estimate we use to calculate revenue from distributors retail reports. Although in retrospect this estimate has turned out to be slightly off for 2003; however, it was consistent with the estimates we used historically. We have also included that several specific nonrecurring transactions combined to substantially over-deplete the account during the third quarter.

During January, senior management was made aware by an individual in our finance department of inappropriate accounting entries he made during the June and September quarters to restore the deferred income account by offsetting accrued expenses to the balance that was originally reported for those quarters. Had management been aware of the situation in a contemporaneous manner, rather than making the offsetting entries to accrued expense, we would have recorded a change in accounting estimate and restored the deferred income to a proper balance.

Therefore, we are now restating our first, second and third quarter financial statements to correct this error and reflect a change in estimate. Our press release details the specifics of the restatement for each affected quarter. However, I will point out that there is no cash impact. Additionally, during our review we refined our estimates of deferred income, and have used this more conservative estimate to recalculate the restated deferred income balance for each quarter of 2003. Finally, we have already implemented certain internal control and system enhancements and will implement other audit committee directives that have resulted from this review.

126. The restatement caused Lattice’s gross margin in 2Q03 and 3Q03 to drop from 60% to 59% and 55%, respectively. The 4Q03 financials released at the same time revealed that gross margin for that quarter was also 55%. This was in stark contrast to the long track record of 60% gross margins that Lattice had pointed to as a sign of stability and strength of its business.

According to a March 25, 2004 JP Morgan report, “[t]he sharp drop off in Lattice’s 3Q03 gross

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margins was attributed to a broad price protection plan granted which resulted in a significant amount of credit refunded to its distributors.”

127. During the March 24, 2004 conference call, Skaggs continued to hide the extent to which Lattice had been using its deferred income to manage its gross margins, by deflecting analysts questions regarding the disparity between restated revenues and costs:

(Summit Dhanda – Banc of America – Analyst) The final question I had for you – it seems like you restated your net revenues by about $10.5 million or so, but the impact on COGS is slightly less than 2 million. Could you explain that discrepancy?

A: (Steve Skaggs – Lattice Semiconductor – President) Sure. I’d be happy to. We did adjust the deferred income balance, as I mentioned. The way you do that is adjust both revenues and cost of sales. As I mentioned in my prepared remarks, deferred income represents the gross margin and the credits that may be due on inventory held for our customers by our distributors. So that’s why you are really seeing a discrepancy; the adjustment includes both the gross margin and credits on the deferred income adjustment, which is why you would calculate a gross margin that is higher than what you would expect to see, I think.

In fact, the discrepancy between the restated revenue and COGS numbers was a further indication of

Lattice’s prior efforts to manage its gross margins, and the unequal restatement resulted from the fact that the amount of reported deferred revenues and costs had been independently manipulated for a long period of time to achieve desired gross margins.

128. When its 4Q03 results were announced, Lattice also revealed that it had taken an unspecified amount of “one time” charges relating to the restatement. During the March 24 conference call, Skaggs explained that there were three components to the charge: (i) a “one-time sales allowance to accommodate a major customer during the quarter”; (ii) Lattice “refined our distributor inventory costing to a more conservative methodology”; and (iii) a “catch-up charge to account for amortization of an OEM software contract we entered into in Q3.” Lattice’s failure to disclose the precise amount of each of these charges violated GAAP standards of compatibility, and prevented investors from seeing the true impact of the restatement. CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF Page 60 THE FEDERAL SECURITIES LAWS

129. Thereafter, on April 1, 2004, Lattice filed reports on Form 10-K, which attempted to explain the restatement as follows:

In January 2004, management learned of certain incorrect accounting entries relating to our deferred income accounting for sales to distributors in the quarters ended June 30, 2003 and September 30, 2003. Pursuant to our accounting principles for revenue recognition, we defer reporting revenue from sales to distributors until the period in which the distributors resell our product to their customers. The Audit Committee of our Board of Directors undertook an investigation of this matter with the assistance of our independent auditor and outside legal counsel. That investigation is complete and the Audit Committee has recommended the adoption of certain internal control and system enhancements. We are currently implementing these Audit Committee directives. As a result of the investigation, we have determined that entries made in the second and third quarters of 2003 which reduced Accrued Expenses in the amount of $1.3 million and $4.2 million, respectively, were inappropriate. We also determined that our systems, procedures and controls surrounding (1) our estimation of resale by our distributors and (2) our determination of deferred revenue related to distributor inventories needed to be improved. During the investigation, we carried out additional procedures to (1) refine our estimate of the amount of distributor resale revenue and (2) refine our method for estimating deferred revenue related to distributor inventories. As a result of those additional procedures, we believe our Consolidated Balance Sheet Deferred Income account was understated at March 31, 2003, June 30, 2003 and September 30, 2003 by amounts requiring an adjustment of approximately $1.0 million, $1.6 million and $8.0 million, respectively to reduce Revenues previously recognized and approximately $0.2 million, $0.3 million and $1.3 million, respectively, to reduce Cost of Products Sold previously recognized. As previously noted, approximately $1.3 million and $4.2 million of the resulting adjustments to the Deferred Income account were incorrectly restored to the Deferred Income account in our June 30, 2003 and September 30, 2003 balance sheet, respectively, through an entry to Accrued Expenses instead of the Consolidated Statement of Operations. The Deferred Income account balance fell below the minimum required level to support inventory on distributors shelves primarily due to (1) non recurring transactions in the September 30, 2003 quarter related to distributor price adjustments and incorrect distributor reporting of resales in previously reported quarterly financial statements, and (2) over-estimates of revenue related to resales occurring in the current fiscal year. We have already implemented certain of the internal control and systems enhancements recommended by the Audit Committee and are currently implementing other Audit Committee directives that resulted from its investigation.

130. In the amended Form 10-Q for 3Q03 (filed several weeks later), Lattice further revealed that: “The steeper revenue decline in the third quarter reflects sales allowances and price

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protection credited to distributors during the quarter.” These admissions reveal that the huge 3Q03 restatement occurred because defendants had prematurely recognized revenues on products that were not sold. The unsold products appear to consist primarily of Lattice’s SPLD products, as reflected by the Company’s amended Form 10-Q for the quarter, which revealed that SPLD sales had represented only 10% of the products sold for the quarter, rather than the 14% originally reported.

131. On April 8, 2004, Lattice announced that Larry Sonsini, a director since 1991, had resigned from the board of directors. Sonsini is the managing partner and chairman of Wilson

Sonsini Goodrich & Rosati, P.C. During its FY03 conference call on April 23, 2004, Lattice claimed that Sonsini had resigned because his role as Lattice’s outside counsel conflicted with his independence as a director. At the time of Sonsini’s resignation, he was serving as both director and outside legal counsel for five other publicly traded companies: Brocade Communications Systems,

Inc. (since 1999), Echelon Corporation (since 1993), LSI Logic Corporation (since 2000), PIXAR,

Inc. (since 1995), and Silicon Valley Bancshares (since 2003). Sonsini has not resigned his positions with any of those five companies, and continues to serve in the dual capacity of director and outside legal counsel for each.

132. On April 19, 2004, Lattice issued Forms 10-Q/A for the first three quarters of 2003, which included the restated financial results previously described. In addition, significant revisions were made to the text of each Form 10-Q/A report, which further revealed the extent to which

Lattice’s performance had been hindered by declining prices and diminishing demand for its core products which – in contrast to the statements made by Lattice during the Class Period – had not been offset by increased sales of FPGA and other new products.

133. For example, Lattice’s restated Form 10-Q report for 1Q03 revealed that purported margin improvements achieved due to reductions in manufacturing costs had been entirely “offset by

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changes in product mix and declining average selling prices.” Similarly, Lattice’s restated Form 10-

Q report for 2Q03 revealed that a purported sequential revenue increase achieved in the quarter had in fact been “more than offset[]” by “the decline in overall demand” for Lattice’s products. The amended Form 10-Q report for 2Q03 further revealed that Lattice had lost even more market share to its competitors then previously reported, as its U.S. sales represented just 34% of its revenues during the first half of the year, as compared with the 37% originally reported and the 42% achieved for the same period in 2002. The amended Form 10-Q for the 3Q03 presented a stark picture of the extent to which lessened demand had hurt Lattice’s performance, revealing that it had suffered a 23% decline in revenue as compared with the same period in the prior year, which was “attributable to units sold since average selling prices only declined slightly.”

134. Lattice’s restated and amended 1Q03, 2Q03, and 3Q03 reports on Forms 10-Q and

FY03 report on Form 10-K also admitted that, contrary to the Sarbanes-Oxley certifications attached to the original copies of those reports, the Company did not have adequate internal controls to prevent accounting fraud during the Class Period. In its report on Form 10-K for FY03, Lattice stated:

Th[e] investigation is complete and the Audit Committee has recommended the adoption of certain internal control and system enhancements. We are currently implementing these Audit Committee directives.... We also determined that our systems, procedures and controls surrounding (1) our estimation of resales by our distributors and (2) our determination of deferred revenue related to distributor inventories needed to be improved. During the investigation, we carried out additional procedures to (1) refine our estimate of the amount of distributor resale revenue and (2) refine our method for estimating deferred revenue related to distributor inventories.... We have already implemented certain of the internal control and systems enhancements recommended by the Audit Committee and are currently implementing other Audit Committee directives that resulted from its investigation.

135. Similarly, each of Lattice’s amended Form 10-Q reports for 2003 stated:

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After reviewing the restatement adjustments and performing an evaluation of our controls and disclosure procedures, management concurs with the Audit Committee that improvements to internal controls are needed relating to: (1) separation of duties and (2) establishment of standards for review and approval of journal entries as well as related file documentation.

We received notice from our independent auditor that, in connection with the 2003 year-end audit, the auditor has identified a material weakness relating to our internal controls and procedures. Certain of these internal control deficiencies may also constitute deficiencies in our disclosure controls....

The incremental steps that we have taken as a result of the aforementioned control deficiencies to ensure that all material information about our company is accurately disclosed in this report include:

1. Performed an analytical review of all journal entries processed for the year;

2. Applied additional methods and techniques to evaluate the accuracy of the deferred income account balance;

3. Instituted an additional level of approval for non recurring journal entries;

4. Strengthened segregation of duties by adding an additional level of review for authorization and review of significant transactions; and

5. Made appropriate personnel changes.

Based in part on the steps listed above, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported accurately within the time periods specified in Securities and Exchange Commission rules and forms.

In addition, in order to address further the deficiencies described above and to improve our internal disclosure and control procedures for future periods, we will:

1. Review, select and implement available improvements to information systems for distribution accounting;

2. Separate responsibilities for preparing financial statements and maintaining accounts in the company’s general ledger;

3. Perform a review of internal controls and procedures in connection with Section 404 of Sarbanes Oxley legislative requirements;

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4. Perform more detailed quarterly reconciliations and analyses of the company’s deferred revenue accounts related to its distributors;

5. Enhance quarterly accounting review procedures requiring an independent review of material general ledger accounts;

6. Require all non recurring journal entries to be approved by an independent reviewer; and

7. Enhance staffing to provide sufficient resources to accomplish the foregoing objectives.

These steps will constitute significant changes in internal controls. We will continue to evaluate the effectiveness of our disclosure controls and internal controls and procedures on an ongoing basis, and will take further action as appropriate.

VII. LATTICE’S MATERIALLY FALSE ACCOUNTING AND FINANCIAL REPORTING

A. Overview

136. GAAP are those principles recognized by the accounting profession as the conventions, rules, and procedures necessary to define accepted accounting practice at a particular time. As set forth in FASB Statement of Concepts (“Concepts Statement”) No. 1, one of the fundamental objectives of financial reporting is that it provide accurate and reliable information concerning an entity’s financial performance during the period being presented. Concepts Statement

No. 1, ¶42, states:

Financial reporting should provide information about an enterprise’s financial performance during a period. Investors and creditors often use information about the past to help in assessing the prospects of an enterprise. Thus, although investment and credit decisions reflect investors’ and creditors’ expectations about future enterprise performance, those expectations are commonly based at least partly on evaluations of past enterprise performance.

137. Regulation S-X [17 C.F.R. §210.4-01(a)(1)] states that financial statements filed with the SEC that are not prepared in conformity with GAAP are presumed to be misleading and inaccurate. Defendants’ representations that Lattice’s financial statements were prepared in accordance with GAAP were materially false and misleading because the financial statements CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF Page 65 THE FEDERAL SECURITIES LAWS

materially inflated and distorted the Company’s true financial performance during the Class Period, as the Company has now admitted.

B. Lattice’s Improper Recognition, Accounting and Reporting of Revenue

138. GAAP provides that revenue should not be recognized until it is realized or realizable and earned. See Concepts Statement No. 5, ¶83. The conditions for revenue recognition ordinarily are met when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s price is fixed or determinable, collectibility of the sales price is reasonably assured and when the entity has substantially performed the obligations which entitle it to the benefits represented by the revenue. Generally, revenue should not be recognized until an exchange has occurred and the earnings process is complete. A transfer of risk has to occur in order to effect an “exchange” for the purposes of revenue recognition. See SEC Staff Accounting Bulletin

(“SAB”) No. 101; Concept Statement Nos. 2 and 5; FASB Statement of Financial Accounting

Standards (“SFAS”) No. 48; Accounting Research Bulletin (“ARB”) No. 43; APB No. 10; American

Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) 97-2.

139. Moreover the SEC’s SAB No. 101 provides, in pertinent part, that:

(a) If a Company’s “business practice [is to] requir[e] a written sales agreement, for this class of customer, persuasive evidence of an arrangement would require a final agreement that has been executed by the properly authorized personnel of the customer.” SAB No. 101,

Question 1.

(b) “Delivery generally is not considered to have occurred unless the customer has taken title and assumed the risks and rewards of ownership of the products specified in the customer’s purchase order or sales agreement.... Delivery generally is not considered to have

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occurred unless the product has been delivered to the customer’s place of business or another site specified by the customer.” SAB No. 101, Question 3.

(c) “The sales prices in arrangements that are cancelable by the customer are neither fixed nor determinable until the cancellation privileges lapse.” SAB No. 101, Question 4,

Fixed or Determinable Sales Price.

140. Lattice told investors that it maintained the following critical accounting policies relating to revenue recognition during the Class Period:

Revenue recognition. Revenue from direct customers is recognized upon shipment provided that persuasive evidence of a sales arrangement exists, the price is fixed, title has transferred, collection of resulting receivables is probable, there are no customer acceptance requirements and no remaining significant obligations. 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 the distributor and related revenue and costs are then reflected in income.

Deferred income. In determining the amount of deferred income related to sales to distributors, we make estimates regarding sales prices and margins to be earned by our distributors upon sales to our end customers.

Inventory. We value inventory at the lower of cost or market on a quarterly basis. In addition, we write down unproven, excess and obsolete inventories to net realizable value. To value our inventory, we make a number of estimates and assumptions including future price declines and forecasted demand for our products.

141. As defendants knew or recklessly ignored, Lattice recognized revenue in direct contravention of GAAP, SAB No. 101 and its own publicly stated policy of revenue recognition during the Class Period. Defendants knew or recklessly ignored that the representations by Lattice concerning its policy of revenue recognition in SEC filings during the Class Period were materially false and misleading as the Company recognized revenue: (i) before persuasive evidence of a sales agreement existed; (ii) prior to delivery to end customers; (iii) before the sales price was fixed and determinable; and (iv) before the sales price was reasonably assured.

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142. Lattice’s practice of recording revenue on shipments of PLDs that were delivered to distributors or end customers awaiting a bona fide agreement to purchase the PLDs violated GAAP and the Company’s publicly disclosed revenue recognition policy. Such practices evidence defendants’ intent to mislead investors because these practices were employed for no reason other than to misleadingly inflate the Company’s reported sales and earnings during the Class Period.

143. The requirements to permit revenue recognition were not met. Because Lattice offered price protection guarantees, the price of its products was not fixed or determinable. Because

Lattice permitted distributors to return unsold products, and because end users had not yet agreed to purchase products shipped to distributors or accept the risks and rewards of ownership, the sales process was not complete. Accordingly, the collectibility of the sales price was not reasonably assured and an exchange for purposes of revenue recognition did not occur at the time Lattice recognized and reported revenue on such transactions, thereby resulting in improper revenue recognition. SAB No. 101, Topic 13.3 states, “[a]fter delivery of a product or performance of a service, if uncertainty exists about customer acceptance, revenue should not be recognized until acceptance occurs.”

144. At the time Lattice recognized revenue on such product shipments during the Class

Period, defendants knew or recklessly disregarded that Lattice’s practice of improperly recognizing revenue prior to customer acceptance was in direct contravention of GAAP, and could have served no purpose other than to manipulate Lattice’s reported operating results.

145. In the above ways, Lattice improperly recognized revenue: (i) before persuasive evidence of a sales agreement existed; (ii) prior to delivery to an end customer; and (iii) before the sales price was reasonably assured, in violation of GAAP. In so doing, Lattice also violated the

Company’s publicly stated policy of revenue recognition.

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C. Lattice’s Improper Reporting of Gross Margins

146. Gross margin is the difference between revenue and cost of sales, expressed as a percentage of sales. Because Lattice wanted it to appear that its margins were stable even while they were declining, Lattice embarked on a scheme to manipulate its deferred income (balance sheet) account downward in order to improperly bolster the margin reported on its income statement. In this manner, Lattice was able to report a margin of exactly 60% for at least seven consecutive quarters, through the end of 3Q03. After the restatement, the margin suddenly plummeted to 55% in

3Q03 and 55% in 4Q03.

147. Lattice’s concealment of the manipulations of its deferred income balance sheet account and the resulting margin inflation, throughout the Class Period and to this day, violates a basic and longstanding GAAP principle: the prohibition against offsetting assets and liabilities. As a result, Lattice’s artificially reduced deferred income balances (balance sheet) were concealed from the market.

148. Deferred income reported by Lattice was purportedly the difference between revenue and cost of sales (distributor inventory) for unsold product held by distributors. Each of these components was required by GAAP to be reported separately, in gross dollars, rather than offset against one another to report a smaller, net amount. According to APB No. 10, “it is a general principle of accounting that the offsetting of assets and liabilities in the balance sheet is improper except where a right of offset exists.”2

2 A “right of offset” is a contractual agreement to discharge amounts owed between two parties for the net amount owed. A “right of offset” did not exist at Lattice because the inventory costs were owed to Lattice’s vendors and not their distributors. As such, there was nothing to offset.

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149. For distributor inventory, Lattice was required to defer gross revenue and gross costs, but not gross margin, pursuant to paragraphs 6 and 8 of SFAS No. 48, Revenue Recognition When

Right of Return Exists. According to SAB No. 101, Revenue Recognition in Financial Statements:

The staff reminds registrants that if a transaction fails to meet all of the conditions of paragraphs 6 and 8 in SFAS No. 48, no revenue may be recognized until those conditions are subsequently met or the return privilege has substantially expired, whichever occurs first.44 Simply deferring recognition of the gross margin on the transaction is not appropriate.

150. In order to inflate its reported net income and gross margin, not only did Lattice improperly recognize revenue for unsold inventory sitting on its distributors’ shelves, but it failed to recognize a sufficient amount of costs for the revenue it improperly reported. In this manner, Lattice shifted profit and margin that properly should have been included on Lattice’s balance sheet to its income statement, which artificially inflated reported net income and margin, and reduced the balance sheet deferred income account. In addition, because the distributor inventory was not separately reported, it was impossible for investors, including plaintiff and members of the proposed

Class, to tell the amount of inventory risk from returnable inventory in the possession of Lattice’s distributors.

151. If Lattice had properly reported deferred revenue and costs separately, investors would have been alerted to the fact that the deferred margin percentage (the difference expressed as a percentage of gross revenue) was suspiciously low, and questioned the basis for the deferred margin percentage. In fact, by netting the amounts together, Lattice prevented investors and analysts from determining the deferred margin percentage and asking awkward questions that would have revealed the fraud sooner.

152. As set forth in tables in this complaint, Lattice also violated GAAP by materially understating its liability for accounts payable and accrued expenses. To help conceal its improper

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reduction of deferred income used to improve gross margin and net income, Lattice made improper adjustments which reduced accounts payable and accrued expenses in order to hide the understatement of deferred income. This violated various provisions of GAAP, including Concepts

Statements 2 and 6 and ARB 43, Chapter 3A.

D. Lattice’s Admission that It Issued False Financial Statements During the Class Period

153. Lattice’s ineffective and/or the intentional overriding of its internal controls caused

Lattice’s Class Period financial statements to be presented in violation of GAAP, as it has now admitted. The following tables illustrate the effect of the defendants’ manipulation of the

Company’s Class Period financial statements:

QUARTER ENDED MARCH 31, 2003

As Reported As Restated % overstated ($1,000s) ($1,000s) (understated) Revenue 58,311 57,297 1.8% Deferred Income 13,102 13,936 (6.4%) Net Loss (18,835) (19,669) (4.4%)

QUARTER ENDED JUNE 28, 2003

As Reported As Restated % overstated ($1,000s) ($1,000s) (understated) Revenue 58,178 56,575 2.8% Accts. Payable & 31,238 32,538 (4.2%) Accrued Expenses Gross Margin 60% 59% 1% Deferred Income 8,763 9,604 (9.6%) Net Loss (16,925) (18,232) (7.7%)

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QUARTER ENDED SEPTEMBER 27, 2003

As Reported As Restated % overstated ($1,000s) ($1,000s) (understated) Revenue 51,038 43,033 18.6% Accts. Payable & 28,846 34,356 (16.0%) Accrued Expenses Gross Margin 60% 55% 5% Deferred Income 6,361 9,766 (34.9%) Net Loss (21,887) (28,661) (23.6%)

154. The SEC’s SAB No. 99 provides that the staff believes that there are numerous circumstances in which misstatements below 5% could well be material. Qualitative factors may cause misstatements of quantitatively small amounts to be material, as stated in the auditing literature:

As a result of the interaction of quantitative and qualitative considerations in materiality judgments, misstatements of relatively small amounts that come to the auditor’s attention could have a material effect on the financial statements.

Among the considerations that may well render material a quantitatively small misstatement of a financial statement item are:

1) whether the misstatement arises from an item capable of precise measurement or whether it arises from an estimate and, if so, the degree of imprecision inherent in the estimate

2) whether the misstatement masks a change in earnings or other trends

3) whether the misstatement hides a failure to meet analysts’ consensus expectations for the enterprise

4) whether the misstatement changes a loss into income or vice versa

5) whether the misstatement concerns a segment or other portion of the registrant’s business that has been identified as playing a significant role in the registrant’s operations or profitability

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6) whether the misstatement affects the registrant’s compliance with regulatory requirements

7) whether the misstatement affects the registrant’s compliance with loan covenants or other contractual requirements

8) whether the misstatement has the effect of increasing management’s compensation, for example, by satisfying requirements for the award of bonuses or other forms of incentive compensation

9) whether the misstatement involves concealment of an unlawful transaction.

This is not an exhaustive list of the circumstances that may affect the materiality of a quantitatively small misstatement.

155. The Company’s fraudulent accounting practices resulted in a restatement of every financial statement during the Class Period. The financial statement accounts restated by Lattice also evidence the defendants’ intent to manipulate Lattice’s operating results during the Class

Period.

156. As a result of the accounting manipulations noted above, and its failure to comply with GAAP, Lattice was able to falsely inflate its reported results during the Class Period. Had

Lattice complied with GAAP, its reported financial results would have been materially different.

157. The fact that Lattice restated its financial statements for 1Q03, 2Q03 and 3Q03 is an admission that the financial statements originally issued were false based on information available to defendants at the time the results were originally reported, and that the misstatements contained therein were material. Indeed, GAAP provides that previously issued financial statements which are misstated as a result of an oversight or a misuse of facts that existed at the time are to be retroactively restated. See, e.g., APB Nos. 20 and 9 and the AICPA’s Statement on Auditing

Standards No. 53.

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158. GAAP requires a restatement to occur when the originally issued financial statements were based on fraudulent accounting practices.3 As set forth in APB No. 20, the type of restatement announced by Lattice was for a “correction of an error in its previously issued financial statements.”

See APB No. 20, ¶¶7, 13. Although Lattice made an oblique reference to a change in accounting methodology for estimating distribution inventory, the truth of the matter is that the restated amount was what should have been repriced originally, regardless of the estimation methodology used. APB

No. 20 defines “errors” as “mathematical mistakes, mistakes in the application of accounting principles, or oversight or misuse of facts that existed at the time the financial statements were prepared.” See APB No. 20, ¶¶7-13.

159. Interpreting the same GAAP provision, the SEC expressed the same position regarding restatements in an amicus brief submitted in In re Sunbeam Sec. Litig., No. 98-8258-Civ.-

Middlebrooks (S.D. Fla. Jan. 31, 2002):

[T]he Commission often seeks to enter into evidence restated financial statements, and the documentation behind those restatements, in its securities fraud enforcement actions in order, inter alia, to prove the falsity and materiality of the original financial statements [and] to demonstrate that persons responsible for the original misstatements acted with scienter ....

* * *

[R]estatements should not be used to make any adjustments to take into account subsequent information that did not and could not have existed at the time the original financial statements were prepared. That is, GAAP does not allow a change in an accounting estimate resulting from new information or subsequent developments to be accounted for as a restatement of previous financial statements. See APB Opinion 20, ¶31. The APB has defined the kind of “errors” that may be

3 In general, restatement of past financial statements is disfavored because it dilutes investors’ confidence in the financial statements and makes it difficult to compare financial statements. GAAP therefore provides that financial statements should only be restated in limited circumstances. See APB No. 20, ¶14.

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corrected through a restatement: “Errors in financial statements result from mathematical mistakes, mistakes in the application of accounting principles, or oversight or misuse of facts that existed at the time that the financial statements were prepared.” See id. at ¶¶13, 36-37 (emphasis added). In accordance with APB Opinion 20, the Commission does not condone the use of restatements by public companies or auditors to make any adjustments (particularly to judgmental reserves) to take into account subsequent information that did not and could not have existed at the time the original financial statements were prepared.

E. Other GAAP Violations

160. In addition to the accounting violations noted above, Lattice presented its financial statements in a manner which also violated at least the following provisions of GAAP:

(a) The concept that financial reporting should provide information that is useful to present and potential investors and creditors and other users in making rational investment, credit and similar decisions (Concepts Statement No. 1, ¶34);

(b) The concept that financial reporting should provide information about the economic resources of an enterprise, the claims to those resources, and the effects of transactions, events and circumstances that change resources and claims to those resources (Concepts Statement

No. 1, ¶40);

(c) The concept that financial reporting should provide information about how management of an enterprise has discharged its stewardship responsibility to owners (stockholders) for the use of enterprise resources entrusted to it. To the extent that management offers securities of the enterprise to the public, it voluntarily accepts wider responsibilities for accountability to prospective investors and to the public in general (Concepts Statement No. 1, ¶50);

(d) The concept that financial reporting should provide information about an enterprise’s financial performance during a period. Investors and creditors often use information about the past to help in assessing the prospects of an enterprise. Thus, although investment and credit decisions reflect investors’ expectations about future enterprise performance, those CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF Page 75 THE FEDERAL SECURITIES LAWS

expectations are commonly based at least partly on evaluations of past enterprise performance

(Concepts Statement No. 1, ¶42);

(e) The concept that financial reporting should be reliable in that it represents what it purports to represent. That information should be reliable as well as relevant is a notion that is central to accounting (Concepts Statement No. 2, ¶¶58-59);

(f) The concept of completeness, which means that nothing is left out of the information that may be necessary to ensure that it validly represents underlying events and conditions (Concepts Statement No. 2, ¶79);

(g) The concept that conservatism be used as a prudent reaction to uncertainty to try to ensure that uncertainties and risks inherent in business situations are adequately considered.

The best way to avoid injury to investors is to try to ensure that what is reported represents what it purports to represent (Concepts Statement No. 2, ¶¶95, 97);

(h) GAAP’s requirements which provide, inter alia, the recognition of a loss resulting from an impairment in the value of a long-lived asset, such as property and equipment, is generally required when the fair value of the asset becomes less than its original cost less accumulated depreciation, or reported carrying value (SFAS No. 144).

161. The Company’s Class Period reports on Forms 10-Q filed with the SEC were also materially false and misleading in that they failed to disclose known trends, demands, commitments, events, and uncertainties that were reasonably likely to have a materially adverse effect on the

Company’s liquidity, net sales, revenues and income from continuing operations, as required by Item

303 of Regulation S-K.

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VIII. ADDITIONAL MOTIVE AND SCIENTER ALLEGATIONS

A. Option Exchange Program

162. At the end of FY02, Lattice’s officers and employees held more than 24 million shares under stock option plans which had a cumulative weighted average exercise price of $15.83 – nearly twice the year-end closing price of $8.77. Hence, the majority of the outstanding stock options issued by the Company were deep underwater. In an effort to retain its employees, Lattice adopted a stock option exchange program permitting employees to exchange, on a 7-for-4 basis, their existing options in exchange for new options with a lower exercise price, to be issued in

September. The exchange was completed on March 14, 2003.

163. The program permitted employees to exchange any options having an exercise price of $12 or more for new options to be issued at Lattice’s current market price, which was $6.89 on

February 13, 2003, the day the program was announced. The newly-issued options would completely vest in just two years. Under the new vesting schedule, employees would be permitted to exercise and sell up to 12.5% of the shares in just three months, with an additional 12.5% becoming exercisable every three months thereafter.

164. In order to avoid treating the options as variable awards, which would have required

Lattice to record substantial compensation expenses for the new options if the Company’s stock price increased, the new options were not issued until six months and one day after the old options were cancelled. This meant that the new options were issued on September 21, 2003 – just weeks before the false and misleading 3Q03 financial results were published.

165. In a Company-wide presentation held in February 2003, Lattice employees were told that the option exchange program was being initiated because:

the majority of options held by our employees are “underwater,” and thus not a performance or retention incentive. We believe this Stock Option Exchange Program CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF Page 77 THE FEDERAL SECURITIES LAWS

will foster retention of our employees and better align the interests of our employees and our stockholders to maximize stockholder value. We also want to decrease our option “overhang.”

166. These sentiments were echoed in a memo Tsui sent to Lattice employees on February

13, 2003, which stated, in part:

Employee stock options are a valuable motivation and retention tool and, as such, help to align the interests of our employees with our stockholders. Unfortunately, at present, the majority of our currently outstanding employee stock options are “underwater,” meaning that the per share exercise prices of these stock options are greater than the current market price of our common stock. The Stock Option Exchange Program, approved by our Board of Directors, has been structured to accomplish three important objectives:

• Ensure that our employees are appropriately motivated to continue to work diligently to grow our business and meet our objectives; and

• Reduce the number of outstanding employee stock options as a percentage of outstanding shares and thus reduce potential future stockholder dilution; and

• Implement an exchange of the majority of our currently outstanding, underwater, employee stock options, without adverse accounting consequences.

Our Stock Option Exchange Program will provide each eligible employee with the opportunity to exchange certain eligible underwater stock options for new stock options.

167. Lattice was also motivated to keep the price of its stock inflated above the exercise price in its newly issued employee options in order to induce key employees to remain with the

Company rather than fleeing to its competitors. During the Class Period, Lattice specifically warned investors that:

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.

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168. CW1 confirmed that the option exchange program was primarily intended to retain employees. CW1 said that, prior to the option exchange, employee morale at Lattice was extremely low and many employees were actively looking for other jobs. In or around April 2001, Lattice had initiated a wage freeze, and also stopped matching employee 401(k) contributions. In addition, employees were forced to take at least one week off every quarter, which required most employees to take two weeks of unpaid leave off every year, since they were only provided with two weeks of paid vacation. CW3, a former employee in Lattice’s shipping department, also said that employee morale was low, and said that the Company had stopped giving raises as a result of declining sales.

CW4 also said that Lattice had an extremely negative work environment during the Class Period, and recalled that at one point every employee in the department s/he worked in was actively looking for another job.

169. Pursuant to the option exchange program, employees turned in 11.2 million option shares, which were exchanged for 6.4 million shares of new options on September 21, 2003 at an exercise price of $8.21. CW1 stated that approximately 90% of Lattice’s employees participated in the option exchange program. More than 6 million underwater option shares, with an average exercise price of $23.20, were exchanged by senior executives of the Company, and nearly half of these were turned in by defendants Tsui, Skaggs and Laub:

Number of Avg. Exercise Number of New Exercise Employee Position Options Price @ Time Options Granted Price of New Cancelled of Cancellation Options Cyrus Tsui Chairman, CEO 2,343,375 $23.61 1,339,072.00 $8.21 Stephen Skaggs President 624,900 $23.61 357,086.00 $8.21 Jan Johannessen VP & CFO 160,000 $17.08 91,429.00 $8.21 Frank Barone VP Product Ops. 130,000 $25.19 74,286.00 $8.21 Stephen Donovan VP Sales 185,712 $21.72 106,123.00 $8.21 Steven Laub Former President 1,051,834 $24.20 601,052.00 $8.21 Jonathan Yu VP Corp. Dev. 183,780 $25.67 105,019.00 $8.21

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Martin Baker VP Gen’l Counsel 186,543 $23.24 106,599.00 $8.21 Rodney Sloss VP Finance 205,519 $23.24 117,443.00 $8.21 Kenneth Yu VP & Managing 218,995 $21.15 125,141.00 $8.21 Director - Lattice Asia Randy Baker VP Manufacturing 240,844 $21.86 127,627.00 $8.21 Albert Chan VP & Gen’l Mgr - 238,331 $21.09 136,190.00 $8.21 Lattice Silicon Valley Thomas Kangzett VP Quality 153,093 $21.79 87,484.00 $8.21 Assurance Stanley Kopec VP Corp. Marketing 161,093 $21.45 92,055.00 $8.21 TOTALS 6,084,019 $23.20 3,466,606 $8.21

170. Primarily as a result of this exchange, the weighted average exercise price for all of the Company’s outstanding options at the end of FY03 dropped to $8.71.

171. During the Class Period, Tsui and Skaggs, along with other senior Company executives and employees, were motivated to inflate the price of Lattice stock in order to prevent their newly issued options from again falling deeply underwater.

B. Qualification for Incentive Compensation

172. Defendants also had an incentive to falsify financial results in an effort to maximize their bonus potential. Prior to the Class Period, Lattice had amended its executive incentive plan which governs grants of bonus payments to senior executives, including the CEO, president and certain vice presidents and directors of Lattice. Each executive’s annual bonus was determined by four factors: (i) the Company’s overall performance as measured by its quarterly operating income;

(ii) the executive’s individual performance as determined by defendant Tsui; (iii) the executive’s position; and (iv) the executive’s base salary. The plan was weighted to provide proportionally more compensation to the CEO (Tsui) and president (Laub, and later Skaggs).

173. The total bonus amount available is 7% of the Company’s operating income, excluding in process research and development expenses and intangible asset amortization charges.

Under this formula, Lattice had a small operating profit during both 1Q03 and 2Q03, based on the

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false numbers reported in its original financial statements for those quarters, thereby providing a potential pool of bonus money for distribution to these executives. Following the restatement, however, it was revealed that there had been no operating profit, and no money was available for distribution under the bonus plan.

C. Lattice Raises Capital Through Private Offering

174. By the end of FY02, Lattice’s cash and short term investments had fallen to $277 million – the lowest level in three years, and barely half the level it had reported at the end of the prior fiscal year ($532 million). Lattice’s total working capital had similarly fallen from $629 million to $349 million between FY01 and FY02, primarily as the result of the $250 million in cash used to acquire Agere’s FPGA business. These declines were of significant concern, given the substantial amount of cash needed to operate its business. Lattice’s costs and expenses, including its manufacturing, research and development, and overhead expenses totaled $328.7 million in FY02,

$320.6 million in FY01, and $457.8 million in FY00. Moreover, the Company had not turned a profit since FY00, and reported net losses of $109.5 million for FY01 and $175.2 million for FY02.

175. During the Class Period, Lattice was motivated to inflate the price of its stock so that it could sell up to $230 million of convertible subordinated zero coupon notes and obtain the additional working capital it needed to weather the economic downturn in the semiconductor industry. On June 16, 2003, Lattice announced that it had agreed to sell up to $230 million in convertible subordinated notes in a private offering. The notes were sold in a private placement completed June 20, 2003, netting proceeds to the Company of $195 million. In a June 16, 2003 announcement, Lattice said it intended to use the proceeds to “redeem all of its outstanding 4 ¾ %

Convertible Subordinated Notes due 2006, for working capital and for other general corporate

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purposes.” The private purchaser was permitted to resell the notes, or any shares of common stock issued upon conversion of the notes.

176. On June 17, 2003, the Company issued a press release entitled “Lattice

Semiconductor Prices $200 Million Convertible Subordinated Notes Offering.” The press release stated in part:

Lattice Semiconductor Corporation today announced the pricing of its offering of $200 million of Zero Coupon Convertible Subordinated Notes due July 1, 2010 to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”). Lattice has also granted the initial purchaser a 30-day option to purchase up to an additional $30 million in principal amount of notes in connection with the offering. The offering is expected to close on June 20, 2003, subject to customary closing conditions.

177. The zero coupon notes were convertible into Lattice common stock at a conversion price equal to $12.06 per share. On August 13, 2003, Lattice filed a self registration statement to permit resale of the notes, which was amended on August 26, 2003. Commencing on September 10,

2003, and from time to time thereafter, Lattice issued prospectus supplements to permit resale of the notes sold in the private offering, or any common shares issued pursuant to the conversion rights thereunder.

IX. APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD-ON- THE-MARKET DOCTRINE

178. At all relevant times, the publicly traded securities issued by Lattice traded in an efficient market. All purchasers of Lattice’s common stock during the Class Period suffered similar injury through their purchase of Lattice’s common stock at prices artificially inflated and maintained by defendants’ fraud as confirmed by the decline in price when Lattice restated its false earnings.

Under these circumstances, a presumption of reliance applies.

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179. Lattice’s common stock met the requirements for listing, and was listed and actively traded on the NASDAQ, which is a highly efficient and automated market. As a regulated issuer,

Lattice filed periodic public reports with the SEC and the NASDAQ.

180. Lattice regularly communicated with public investors via established market communication mechanisms, including through regular disseminations of press releases on the national circuits of major news wire services and through other wide-ranging public disclosures, such as communications with the financial press and other similar reporting services. Significant developments affecting Lattice or the industries in which it operates are regularly reported by the national and local media, whose reports were publicly available and entered the public marketplace.

181. During the Class Period, Lattice was followed by at least twelve securities analysts who were employed by major brokerage firms including: Banc of America Securities LLC, Bear,

Stearns & Co., J.P. Morgan Securities, Merriman Curhan Ford & Co., Morgan Stanley, Pacific Crest

Securities, Piper Jaffray & Co., RBC Dain Rauscher, Inc., Ragen MacKenzie, SG Cowen & Co.,

Value Line, and Wells Fargo Securities. These analysts wrote reports which were distributed to the sales force and certain customers of their respective brokerage firms during the Class Period. Each of these reports was publicly available and entered the public marketplace.

182. The price of Lattice’s publicly traded securities reflected the public information reported about the Company in its SEC filings and press releases and in public reports issued by analysts, news media or others. As a result of the foregoing, the market for Lattice’s common stock promptly digested current information regarding Lattice from all publicly available sources and reflected such information in the price of Lattice’s common stock.

183. The efficiency of the market for publicly traded securities issued by Lattice, and the damages suffered by the Class in reliance on that efficiency, are demonstrated, in part, by the

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movement in the price of Lattice common stock and the increased trading volumes following or immediately preceding significant news about the Company, including, but not limited to, the release of information regarding the Company’s accounting manipulations on January 22, 2004, March 1,

2004 and March 18, 2004:4

4 The charts that follow are illustrative. Determination of the precise amount of the fraud- related impact on the stock price will be the subject of expert inquiry and analyses, which may depend on additional information not reflected herein. To take into account the effect of after-hours trading, the stated percentages reflect the difference between the opening price on the day indicated and the opening price on the next trading day, as indicated in the “Next” column. The comparative percentage change in the NASDAQ Composite Index is calculated in the same way.

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Lattice Daily Stock Prices % Change Date Open Next Volume Lattice NASDAQ 22-Jan-04 $13.25 $11.11 5,603,300 -16.2% -1.0% 2-Mar-04 $10.38 $9.70 1,757,700 -6.6% -0.9% 18-Mar-04 $9.03 $8.20 1,149,500 -9.2% -0.3%

X. ADDITIONAL GROUP PLEADING AND CONTROL PERSON ALLEGATIONS

184. Because of the Individual Defendants’ positions with the Company, they had access to the adverse undisclosed information about its business, operations, products, operational trends, financial statements, markets and present and future business prospects via access to internal corporate documents (including the Company’s operating plans, budgets and forecasts and reports of actual operations compared thereto), conversations and connections with other corporate officers and employees, attendance at management and/or board of directors meetings and committees thereof and via reports and other information provided to them in connection therewith. The Individual

Defendants were provided with or had unlimited access to copies of the Company’s reports, press releases, public filings and other statements alleged by plaintiffs to be misleading prior to and/or shortly after these statements were issued and had the ability to prevent the issuance of the statements or cause the statements to be corrected.

185. The Individual Defendants were high-level executives and/or directors at the

Company during the Class Period and members of the Company’s management team or had control thereof. Each of these defendants, by virtue of his responsibilities and activities as a senior officer and/or director of the Company was privy to and participated in the creation, development and reporting of the Company’s internal budgets, plans, projections and/or reports. Each of these defendants enjoyed significant personal contact and familiarity with the other defendants and was advised of and had access to other members of the Company’s management team, internal reports

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and other data and information about the Company’s finances, operations, and sales at all relevant times. Each of these defendants was aware of the Company’s dissemination of information to the investing public which they knew or recklessly disregarded was materially false and misleading.

186. CW2, a former Lattice sales manager, said that Lattice was operated as a reflection of

Tsui’s personality, whom s/he characterized as a “dictator.” CW1, who worked in Lattice’s finance department, similarly characterized Tsui as an “overbearing, domineering, power hungry micro- manager” who constantly prowled Lattice’s offices, and maintained a richly appointed penthouse suite in Lattice’s new building, which was connected to its old offices (where Lattice’s finance, information technology and accounting departments were located) by a walkway. Tsui’s office was located on the third floor of the new building, where Lattice’s sales department was located. CW1 said that Tsui constantly involved himself in minute details of the Company’s operations, including reviewing and approving hiring decisions for even extremely low level employees. CW7 similarly described Tsui as “controlling, demeaning, abusive and vindictive,” and recalled an incident where he berated the vice president of sales in front of at least 15 people using extremely obscene and abusive language. CW7 also said that all decisions at Lattice went through top management, and nothing would be approved without the input or direct supervision of Tsui. CW8 agreed that Tsui was a “micro-manager.” CW1 said that Laub had many of the same characteristics as Tsui, and operated as Tsui’s “right hand man” until he left at the end of 2003.

187. CW8 said that financial review meetings were held on a monthly and quarterly basis to discuss Lattice’s financial performance, and were attended by Tsui, Skaggs, Sloss and Hoyt. Hoyt and Sloss also had very frequent one-on-one meetings to discuss financial matters. Lattice also held

“pre-closing” and “closing” meetings in connection with the preparation of earnings releases, which

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were attended by the same group of people. In addition, Tsui’s daughter worked as an accountant in

Lattice’s finance department.

188. Aside from reports generated from its financial systems (Hyperion and Bahn), CW8 said that there were “lots of internal and custom spreadsheets” that were generated outside of those databases. CW8 said that Lattice regularly generated reports that were specifically designed to report on Lattice’s gross margin, and others which summarized all journal entries that Lattice had made, which would have reflected the balance sheet adjustments by Hoyt. CW8 said that Tsui received both standard and custom reports on a daily and weekly basis, and that a package of financial reports was regularly provided to Tsui, Sloss, Skaggs and Laub.

189. CW4, who worked in Lattice’s sales department until the late fall of 2003, in close proximity to the offices of Tsui and other top executives also said that Tsui, Laub, Skaggs and other executives, received regular weekly sales and other reports regarding the status of Lattice’s business.

CW4 and CW7 said the reports were delivered to Tsui every Monday, even on holidays, and covered all aspects of the Company’s business. CW4 said that similar quarterly reports were also prepared.

190. According to CW4, many of the weekly and quarterly reports were based on databases Lattice maintained so that upper management could track all of Lattice’s products. CW7 said that Lattice also maintained an internal website that contained detailed information regarding the Company’s sales which was available to all Lattice employees, with differing levels of access and detail provided depending upon the level of the employee in the organization. These databases included those referred to as “Design Tracker” and “CSS.” These databases included sales data provided by the finance department and design information provided by the marketing department.

The databases were specifically designed to track the status of new product development efforts, including FPGA and new CPLD products. New products would initially be developed by Lattice’s

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sales managers and field application engineers in response to customers’ needs, and entered in the database as a “Design Opportunity.” Once a customer had agreed to purchase a product, it would be designated in the system as “Design In.” By reviewing this database and the reports generated therein, Lattice’s senior management, including Tsui, Laub and Skaggs, were constantly apprised during the Class Period of the level of success being achieved by Lattice’s new products.

191. It is appropriate to treat the Individual Defendants as a group for pleading purposes and to presume that the false, misleading and incomplete information conveyed in the Company’s public filings, press releases and other publications as alleged herein are the collective actions of the narrowly defined group of defendants identified above. Each of the above officers of Lattice, by virtue of their high-level positions with the Company, directly participated in the management of the

Company, was directly involved in the day-to-day operations of the Company at the highest levels and was privy to confidential proprietary information concerning the Company and its business, operations, products, growth, financial statements, and financial conditions, as alleged herein. Said defendants were involved in drafting, producing, reviewing and/or disseminating the false and misleading statements and information alleged herein, were aware, or recklessly disregarded, that the false and misleading statements were being issued regarding the Company, and approved or ratified these statements, in violation of the federal securities laws.

192. As officers and controlling persons of a publicly held company whose common stock was, and is, registered with the SEC pursuant to the Exchange Act, traded on the NASDAQ, and governed by the provisions of the federal securities laws, the Individual Defendants each had a duty to promptly disseminate accurate and truthful information with respect to the Company’s financial condition and performance, growth, operations, financial statements, business, products, markets, management, earnings, and present and future business prospects, and to correct any previously

CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF Page 88 THE FEDERAL SECURITIES LAWS

issued statements that had become materially misleading or untrue, so that the market price of the

Company’s publicly traded common stock would be based upon truthful and accurate information.

The Individual Defendants’ misrepresentations and omissions during the Class Period violated these specific requirements and obligations.

193. The Individual Defendants participated in the drafting, preparation and/or approval of the various press releases, conference calls, SEC filings, and other communications complained of herein and were aware of, or recklessly disregarded, the misstatements contained therein and omissions therefrom, and were aware of their materially false and misleading nature. Because of their board membership and/or executive and managerial positions with Lattice, each of the

Individual Defendants had access to the adverse undisclosed information about Lattice’s business, prospects, and financial condition as particularized herein and knew (or recklessly disregarded) that these adverse facts rendered the positive representations made by or about Lattice and its business issued or adopted by the Company materially false and misleading.

194. Lattice and each of the Individual Defendants are liable as participants in a fraudulent scheme and course of business that operated as a fraud or deceit on purchasers of Lattice common stock by disseminating materially false and misleading statements and/or concealing material adverse facts. The scheme deceived the investing public regarding Lattice’s business, operations, management and the intrinsic value of Lattice common stock.

XI. CLASS ACTION ALLEGATIONS

195. Plaintiffs bring this action as a class action pursuant to Federal Rule of Civil

Procedure 23(a) and (b)(3) on behalf of a class consisting of purchasers of Lattice’s publicly traded securities during the Class Period who were damaged thereby (the “Class”). Excluded from the

Class are defendants, the officers and directors of the Company, members of their immediate

CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF Page 89 THE FEDERAL SECURITIES LAWS

families and their legal representatives, heirs, successors or assigns and any entity in which defendants have or had a controlling interest.

196. The members of the Class are so numerous that joinder of all members is impracticable. Throughout the Class Period, Lattice’s common stock was actively traded on the

NASDAQ market. While the exact number of Class members is unknown to plaintiffs at this time and can only be ascertained through appropriate discovery, plaintiffs believe that there are thousands of members in the proposed Class. Record owners and other members of the Class may be identified from records maintained by Lattice or its transfer agent and may be notified of the pendency of this action by mail, using the form notice similar to that customarily used in securities class actions.

197. Plaintiffs’ claims are typical of the claims of the members of the Class as all members of the Class are similarly affected by defendants’ wrongful conduct in violation of federal law that is complained of herein.

198. Plaintiffs will fairly and adequately protect the interests of the members of the Class and have retained counsel competent and experienced in class and securities litigation.

199. Common questions of law and fact exist as to all members of the Class and predominate over any questions solely affecting individual members of the Class. Among the questions of law and fact common to the Class are:

(a) whether the federal securities laws were violated by defendants’ acts as alleged herein;

(b) whether statements made by defendants to the investing public during the

Class Period misrepresented material facts about the business, operations and management of

Lattice; and

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(c) to what extent the members of the Class have sustained damages and the proper measure of damages.

200. A class action is superior to all other available methods for the fair and efficient adjudication of this controversy since joinder of all members is impracticable. Furthermore, as the damages suffered by individual Class members may be relatively small, the expense and burden of individual litigation make it impossible for members of the Class to individually redress the wrongs done to them. There will be no difficulty in the management of this action as a class action.

FIRST CLAIM FOR RELIEF

For Violation of §10(b) of the Exchange Act and Rule 10b-5 (Against All Defendants)

201. Plaintiffs repeat and reallege each and every allegation contained above as if fully set forth herein.

202. During the Class Period, defendants disseminated or approved the false statements specified above, which they knew or recklessly disregarded were materially false and misleading in that they contained material misrepresentations and failed to disclose material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.

203. Defendants violated §10(b) of the Exchange Act and Rule 10b-5 in that they:

(a) Employed devices, schemes, and artifices to defraud;

(b) Made untrue statements of material facts or omitted to state material facts necessary in order to make statements made, in light of the circumstances under which they were made, not misleading; or

CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF Page 91 THE FEDERAL SECURITIES LAWS

(c) Engaged in acts, practices, and a course of business that operated as a fraud or deceit upon plaintiffs and others similarly situated in connection with their purchases of Lattice common stock during the Class Period.

204. Defendants, individually and in concert, directly and indirectly, by the use, means or instrumentalities of interstate commerce and/or of the mails, engaged and participated in a continuous course of conduct to conceal adverse material information about the business, operations and future prospects of Lattice as specified herein.

205. These defendants employed devices, schemes and artifices to defraud, while in possession of material, adverse, non-public information and engaged in acts, practices, and a course of conduct as alleged herein in an effort to assure investors of Lattice’s value and performance and continued substantial growth, which included the making of, or the participation in the making of, untrue statements of material fact and omitting to state material facts necessary in order to make the statements made about Lattice and its business operations and future prospects, in the light of the circumstances under which they were made, not misleading, as set forth more particularly herein, and engaged in transactions, practices and a course of business which operated as a fraud and deceit upon the purchasers of Lattice securities during the Class Period.

206. The defendants had actual knowledge of the misrepresentations and omissions of material fact set forth herein, or were deliberately reckless to the truth in that they failed to ascertain and to disclose such facts, even though such facts were available to them. Defendants’ material misrepresentations and/or omissions were made knowingly or with deliberate recklessness for the truth, and for the purpose and effect of concealing Lattice’s operating condition and future business prospects from the investing public and supporting the artificially inflated price of its publicly traded securities.

CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF Page 92 THE FEDERAL SECURITIES LAWS

207. As a result of the dissemination of the materially false and misleading information and failure to disclose material facts, as set forth above, the market price of Lattice’s publicly traded securities was artificially inflated during the Class Period. In ignorance of the fact that the market price of Lattice’s publicly traded securities was artificially inflated, and relying directly or indirectly on the false and misleading statements made by defendants, or upon the integrity of the market in which the stock trades, and/or on the absence of material adverse information that was known to or recklessly disregarded by defendants but not disclosed in public statements by defendants during the

Class Period, plaintiffs and the other members of the Class acquired Lattice securities during the

Class Period at artificially high prices and were damaged thereby as demonstrated, in part, by the declines in the price of Lattice’s stock following its January 22, 2004, March 1, 2004 and March 18,

2004 announcements regarding its accounting fraud.

208. At the time of said misrepresentations and omissions, plaintiffs and other members of the Class were ignorant of their falsity, and believed them to be true. Had plaintiffs and the other members of the Class and the marketplace known the truth regarding the problems that Lattice was experiencing, which were not disclosed by defendants, plaintiffs and other members of the Class would not have purchased or otherwise acquired their Lattice securities, or, if they had acquired such securities during the Class Period, would not have done so at the artificially inflated prices which they paid.

209. By virtue of the foregoing, defendants have violated §10(b) of the Exchange Act, and

Rule 10b-5 promulgated thereunder.

210. As a direct and proximate result of these defendants’ wrongful conduct, plaintiffs and the other members of the Class suffered damages in connection with their purchases of Lattice common stock during the Class Period.

CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF Page 93 THE FEDERAL SECURITIES LAWS

SECOND CLAIM FOR RELIEF

For Violation of §20(a) of the Exchange Act Against All Defendants

211. Plaintiffs repeat and reallege each and every allegation contained above as if fully set forth herein.

212. Defendants Lattice, Tsui, Laub, Skaggs, and Hoyt acted as controlling persons of

Lattice within the meaning of §20(a) of the Exchange Act as alleged herein. Lattice controlled all of its employees and each of the Individual Defendants. By virtue of their high-level positions, and their ownership and contractual rights, participation in and/or awareness of the Company’s operations and/or intimate knowledge of the false financial statements filed by the Company with the

SEC and disseminated to the investing public, the Individual Defendants had the power to influence and control and did influence and control, directly or indirectly, the decision-making of the

Company, including the content and dissemination of the various statements which plaintiffs contend are false and misleading.

213. In particular, each of these defendants had direct and supervisory involvement in the day-to-day operations of the Company and, therefore, is presumed to have had the power to control or influence the particular transactions giving rise to the securities violations as alleged herein, and exercised the same.

214. As set forth above, Lattice and the Individual Defendants each violated §10(b) and

Rule 10b-5 by their acts and omissions as alleged in this complaint. By virtue of their positions as controlling persons, defendants are liable pursuant to §20(a) of the Exchange Act. As a direct and proximate result of defendants’ wrongful conduct, plaintiffs and other members of the Class suffered damages in connection with their purchase of the Company’s securities during the Class Period.

CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF Page 94 THE FEDERAL SECURITIES LAWS

PRAYER FOR RELIEF

WHEREFORE, plaintiffs pray for relief and judgment, as follows:

A. Determining that this action is a proper class action, and certifying plaintiffs as Class representatives under Rule 23 of the Federal Rules of Civil Procedure;

B. Restitution of investors’ monies of which they were defrauded;

C. Awarding compensatory damages in favor of plaintiffs and the other Class members against all defendants, jointly and severally, for all damages sustained as a result of defendants’ wrongdoing, in an amount to be proven at trial, including interest thereon;

D. Awarding plaintiffs and the Class their reasonable costs and expenses incurred in this action, including counsels’ fees and expert fees; and

E. Such other and further relief as the Court may deem just and proper.

JURY DEMAND

Plaintiffs demand a trial by jury on all issues.

DATED: January 27, 2005 LERACH COUGHLIN STOIA GELLER RUDMAN & ROBBINS LLP

/s/ Dennis J. Herman DENNIS J. HERMAN [email protected] 100 Pine Street, Suite 2600 San Francisco, CA 94111 Telephone: 415/288-4545 415/288-4534 (fax) – and –

CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF Page 95 THE FEDERAL SECURITIES LAWS

WILLIAM S. LERACH [email protected] DARREN J. ROBBINS [email protected] 401 B Street, Suite 1600 San Diego, CA 92101 Telephone: 619/231-1058 619/231-7423 (fax) – and – TAMARA J. DRISCOLL [email protected] 700 Fifth Avenue, Suite 5600 Seattle, WA 98104 Telephone: 206/749-5544 206/749-9978 (fax)

Lead Counsel for Plaintiffs

GRENLEY, ROTENBERG, EVANS, BRAGG & BODIE, P.C. GARY I. GRENLEY [email protected] DAVID E. DEAN [email protected] PAUL H. TRINCHERO [email protected] 1211 S. W. Fifth Avenue, Suite 1100 Portland, OR 97204 Telephone: 503/241-0570 503/241-0914

Liaison Counsel

T:\CasesSF\Lattice Semi\CPT00017565.doc

CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF Page 96 THE FEDERAL SECURITIES LAWS

DECLARATION OF SERVICE BY MAIL

I, the undersigned, declare:

1. That declarant is and was, at all times herein mentioned, a citizen of the United States and employed in the City and County of San Francisco, over the age of 18 years, and not a party to or interest in the within action; that declarant’s business address is 100 Pine Street, Suite 2600, San

Francisco, California 94111.

2. That on January 27, 2005, declarant served the CONSOLIDATED CLASS

ACTION COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS by depositing a true copy thereof in a United States mailbox at San Francisco, California in a sealed envelope with postage thereon fully prepaid and addressed to the parties listed on the attached

Service List.

3. That there is a regular communication by mail between the place of mailing and the places so addressed.

I declare under penalty of perjury that the foregoing is true and correct. Executed this 27th day of January, 2005, at San Francisco, California.

/s/ Juvily P. Catig JUVILY P. CATIG

LATTICE SEMICONDUCTOR Service List - 1/27/2005 Page 1 of 2 (04-0426)

Counsel For Defendant(s)

Robert E.L. Bonaparte Barnes H. Ellis Shenker & Bonaparte, LLP Frederick N. Saal One S.W. Columbia Street, Suite Lois O. Rosenbaum 475 Stoel Rives LLP Portland, OR 97258 900 S.W. Fifth Avenue, Suite 2300 503/242-0005 Portland, OR 97204-1268 503/323-7360(Fax) 503/224-3380 503/220-2480(Fax)

Steven M. Schatz Peri B. Nielsen Wilson Sonsini Goodrich & Rosati, P.C. 650 Page Mill Road Palo Alto, CA 94304-1050 650/493-9300 650/493-6811(Fax)

Counsel For Plaintiff(s)

Jonathan M. Plasse Gary I. Grenley Emily C. Komlossy David E. Dean Christopher J. Keller Paul H. Trinchero Goodkind Labaton Rudoff & Grenley, Rotenberg, Evans, Bragg & Sucharow LLP Bodie, P.C. 100 Park Avenue, 12th Floor 1211 SW Fifth Avenue, Suite 1100 New York, NY 10017-5563 Portland, OR 97204-3730 212/907-0700 503/241-0570 212/818-0477(Fax) 503/241-0914(Fax)

Dennis J. Herman Tamara J. Driscoll Lerach Coughlin Stoia Geller Lerach Coughlin Stoia Geller Rudman & Rudman & Robbins LLP Robbins LLP 100 Pine Street, Suite 2600 700 Fifth Avenue, Suite 5600 San Francisco, CA 94111-5238 Seattle, WA 98104 415/288-4545 206/749-5544 415/288-4534(Fax) 206/749-9978(Fax)

LATTICE SEMICONDUCTOR Service List - 1/27/2005 Page 2 of 2 (04-0426)

William S. Lerach Darren J. Robbins Lerach Coughlin Stoia Geller Rudman & Robbins LLP 401 B Street, Suite 1600 San Diego, CA 92101-4297 619/231-1058 619/231-7423(Fax)