**Table of Contents**

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**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

### **FORM 10-Q**

### ** **

**(Mark One)**

 

| **x**      | **Quarterly Report Pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934**  |
|------------|---------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                              |
| ** ** | **For the quarterly period ended August 2, 2008**                                                  |
| ** ** | ** **                                                                                              |
| ** ** | **or**                                                                                                  |
| ** ** | ** **                                                                                              |
| **o**      | **Transition Report Pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934** |

 

**For the transition period from                  to**

** **

**Commission file number: 0-30877**

** **

**Marvell Technology Group Ltd.**

(Exact name of registrant as specified in its charter)

 

| **Bermuda**                     | ** ** | **77-0481679**      |
|---------------------------------|------------|---------------------|
| (State or other jurisdiction of |       | (I.R.S. Employer    |
| incorporation or organization)  |       | Identification No.) |

 

**Canon’sCourt, 22 Victoria Street, Hamilton HM 12, Bermuda**

**(441)296-6395**

(Address, including Zip Code, of principal executive offices and

registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. x Yes o No

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See the definitions of “large accelerated filer,” “accelerated filer,”and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Checkone):

 

| Large accelerated filer  x | Accelerated filer o | Non-accelerated filer o                        | Smaller reporting  company o |
|----------------------------|--------------------------|------------------------------------------------|-----------------------------------|
|                       |                     | (Do not check if a smaller  reporting company) |                              |

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No

 

The number of common shares of the registrantoutstanding as of August 31, 2008 was 610,937,198 shares.

 

 

 

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**TABLEOF CONTENTS**

 
| ** **         | ** **                                                                                                                                | **Page** |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------|----------|
|               | **PART I.FINANCIAL INFORMATION**                                                                                                     |     |
|               | ** **                                                                                                                                |     |
| Item 1.            | Financial  Statements:                                                                                                                    |     |
|               | Unaudited Condensed Consolidated Balance Sheets as of August 2,  2008 and February 2, 2008                                      | 3        |
|               | Unaudited Condensed Consolidated Statements of  Operations for the three and six months ended August 2, 2008 and July 28,  2007 | 4        |
|               | Unaudited Condensed Consolidated Statements of Cash  Flows for the six months ended August 2, 2008 and July 28, 2007            | 5        |
|               | Notes to Unaudited Condensed Consolidated Financial  Statements                                                                           | 6        |
| Item 2.            | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                               | 27       |
| Item 3.            | Quantitative  and Qualitative Disclosures About Market Risk                                                                               | 37       |
| Item 4.            | Controls and  Procedures                                                                                                                  | 39       |
|               |                                                                                                                                      |     |
|               | **PART II.OTHER  INFORMATION**                                                                                                       |     |
|               | ** **                                                                                                                                |     |
| Item 1.            | Legal Proceedings                                                                                                                         | 40       |
| Item 1A.           | Risk Factors                                                                                                                              | 44       |
| Item 2.            | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                              | 61       |
| Item 3.            | Defaults  Upon Senior Securities                                                                                                          | 61       |
| Item 4.            | Submission  of Matters to a Vote of Security Holders                                                                                      | 61       |
| Item 5.            | Other Information                                                                                                                         | 61       |
| Item 6.            | Exhibits                                                                                                                                  | 62       |
| Signatures         | 63                                                                                                                                        |
| Exhibit Index | 64                                                                                                                                        |

 

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**PART I: FINANCIALINFORMATION**

 

**Item 1. *FinancialStatements***

 

**MARVELL TECHNOLOGY GROUP LTD.**

**UNAUDITEDCONDENSED CONSOLIDATED BALANCE SHEETS**

**(In thousands)**

 
| ** **                                         | ** ** | **August 2,****2008** | ** ** | **February 2,****2008** | ** ** |
|----------------------------------------------------|------------|----------------------------|------------|------------------------------|------------|
| ** **                                         |       |                       |       |                         |       |
| **ASSETS**                                         |       |                       |       |                         |       |
| Current assets:                                    |       |                       |       |                         |       |
| Cash and cash equivalents                          |       | $                          | 859,309    |                         | $          | 615,648 |   |
| Restricted cash                                    |       | 24,500                     |       | —                       |       |
| Short-term investments                             |       | 5,089                      |       | 15,254                       |       |
| Accounts receivable, net                           |       | 470,646                    |       | 332,020                      |       |
| Inventories                                        |       | 326,924                    |       | 419,494                      |       |
| Prepaid expenses and other  current assets         |       | 78,587                     |       | 105,809                      |       |
| Deferred income taxes                              |       | 15,516                     |       | 15,516                       |       |
| Total current assets                               |       | 1,780,571                  |       | 1,503,741                    |       |
| Property and equipment, net                        |       | 412,988                    |       | 416,241                      |       |
| Long-term investments                              |       | 40,293                     |       | 45,628                       |       |
| Goodwill                                           |       | 1,994,068                  |       | 1,994,068                    |       |
| Acquired intangible assets,  net                   |       | 363,538                    |       | 433,809                      |       |
| Other non-current assets                           |       | 132,627                    |       | 157,107                      |       |
| Total assets                                       |       | $                          | 4,724,085  |                         | $          | 4,550,594 |   |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**     | ** ** | ** **                 | ** ** | ** **                   | ** ** |
| ** **                                         | ** ** | ** **                 | ** ** | ** **                   | ** ** |
| Current liabilities:                               |       |                       |       |                         |       |
| Accounts payable                                   |       | $                          | 237,039    |                         | $          | 231,135 |   |
| Accrued liabilities                                |       | 84,770                     |       | 122,961                      |       |
| Accrued employee compensation                      |       | 132,859                    |       | 118,101                      |       |
| Income taxes payable                               |       | 37,008                     |       | 39,132                       |       |
| Deferred income                                    |       | 62,005                     |       | 69,420                       |       |
| Current portion of capital lease  obligations      |       | 1,933                      |       | 2,463                        |       |
| Total current liabilities                          |       | 555,614                    |       | 583,212                      |       |
| Capital lease obligations, net  of current portion |       | 3,363                      |       | 4,238                        |       |
| Non-current income taxes  payable                  |       | 116,481                    |       | 108,543                      |       |
| Term loan obligations,  long-term portion          |       | 288,750                    |       | 390,750                      |       |
| Other long-term liabilities                        |       | 53,185                     |       | 52,332                       |       |
| Total liabilities                                  |       | 1,017,393                  |       | 1,139,075                    |       |
| Commitments and contingencies  (Note 7)            |       |                       |       |                         |       |
| Shareholders’ equity:                         |       |                       |       |                         |       |
| Common shares                                      |       | 1,221                      |       | 1,200                        |       |
| Additional paid-in capital                         |       | 4,256,384                  |       | 4,100,659                    |       |
| Accumulated other  comprehensive income (loss)     |       | (1,264                     | )          | 615                          |       |
| Accumulated deficit                                |       | (549,649                   | )          | (690,955                     | )          |
| Total shareholders’ equity                    |       | 3,706,692                  |       | 3,411,519                    |       |
| Total liabilities and  shareholders’ equity   |       | $                          | 4,724,085  |                         | $          | 4,550,594 |   |

 

**See accompanying notes to unaudited condensed consolidated financialstatements.**

 

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**MARVELL TECHNOLOGY GROUP LTD.**

**UNAUDITEDCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(In thousands, except per share amounts)**

 
| ** **                                  | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                  | ** ** | **August 2,****2008**       | ** ** | **July 28,****2007**      | ** ** | **August 2,****2008** | ** ** | **July 28,****2007** | ** ** |
| Net revenue                                 |       | $                                | 842,575    |                           | $          | 656,711 |   | $ | 1,646,650 |   | $ | 1,291,761 |   |
| Operating costs and expenses:               |       |                             |       |                           |       |   |   |   |   |
| Cost of goods sold                          |       | 405,913                          |       | 335,530                        |       | 794,755 |   | 662,947 |   |
| Research and development and  other         |       | 249,714                          |       | 236,194                        |       | 488,189 |   | 470,327 |   |
| Selling and marketing                       |       | 41,834                           |       | 53,942                         |       | 87,922 |   | 104,334 |   |
| General and administrative                  |       | 30,989                           |       | 33,775                         |       | 43,940 |   | 57,763 |   |
| Amortization of acquired  intangible assets |       | 34,988                           |       | 37,293                         |       | 70,235 |   | 74,613 |   |
| Total operating costs and  expenses         |       | 763,438                          |       | 696,734                        |       | 1,485,041 |   | 1,369,984 |   |
| Operating income (loss)                     |       | 79,137                           |       | (40,023                        | )          | 161,609 |   | (78,223 | ) |
| Interest and other income, net              |       | 2,469                            |       | 3,128                          |       | 5,661 |   | 4,447 |   |
| Interest expense                            |       | (5,159                           | )          | (9,942                         | )          | (12,310 | ) | (19,917 | ) |
| Income (loss) before income  taxes          |       | 76,447                           |       | (46,837                        | )          | 154,960 |   | (93,693 | ) |
| Provision for income taxes                  |       | 5,080                            |       | 9,619                          |       | 13,654 |   | 15,591 |   |
| Net income (loss)                           |       | $                                | 71,367     |                           | $          | (56,456 | ) | $ | 141,306 |   | $ | (109,284 | ) |
| Net income (loss) per share:                |       |                             |       |                           |       |   |   |   |   |
| Basic                                       |       | $                                | 0.12       |                           | $          | (0.10 | ) | $ | 0.23 |   | $ | (0.19 | ) |
| Diluted                                     |       | $                                | 0.11       |                           | $          | (0.10 | ) | $ | 0.22 |   | $ | (0.19 | ) |
| Weighted average shares:                    |       |                             |       |                           |       |   |   |   |   |
| Basic                                       |       | 606,860                          |       | 587,534                        |       | 604,041 |   | 587,480 |   |
| Diluted                                     |       | 637,832                          |       | 587,534                        |       | 631,091 |   | 587,480 |   |

 

**See accompanying notes to unaudited condensed consolidated financialstatements.**

 

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**MARVELL TECHNOLOGY GROUP LTD.**

**UNAUDITEDCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In thousands)**

 
| ** **                                                                                          | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                          | ** ** | **August 2,****2008**     | ** ** | **July 28,****2007** | ** ** |
| **Cash flows from operating  activities:**                                                          |       |                           |       |   |   |
| Net income (loss)                                                                                   |       | $                              | 141,306    |   | $ | (109,284 | ) |
| Adjustments to reconcile net  income (loss) to net cash provided by (used in) operating activities: |       |                           |       |   |   |
| Depreciation and amortization                                                                       |       | 56,650                         |       | 52,420 |   |
| Stock-based compensation                                                                            |       | 92,853                         |       | 105,664 |   |
| Amortization of acquired  intangible assets                                                         |       | 70,235                         |       | 74,613 |   |
| Gain from sale of asset under  construction                                                         |       | —                         |       | (5,122 | ) |
| Fair market value adjustment  to Intel inventory sold                                               |       | (10,757                        | )          | (77,641 | ) |
| Interest expense related to  supply contract                                                        |       | —                         |       | 3,023 |   |
| Excess tax benefits from  stock-based compensation                                                  |       | (494                           | )          | (235 | ) |
| Changes in assets and  liabilities, net of assets acquired and liabilities assumed in acquisitions: |       |                           |       |   |   |
| Restricted cash                                                                                     |       | (24,500                        | )          | — |   |
| Accounts receivable                                                                                 |       | (138,626                       | )          | (28,702 | ) |
| Inventories                                                                                         |       | 103,327                        |       | (88,748 | ) |
| Prepaid expenses and other  assets                                                                  |       | 42,810                         |       | 53,992 |   |
| Accounts payable                                                                                    |       | 5,878                          |       | 22,334 |   |
| Accrued liabilities and other                                                                       |       | (33,999                        | )          | (26,199 | ) |
| Accrued employee compensation                                                                       |       | 9,995                          |       | 855 |   |
| Income taxes payable                                                                                |       | 5,814                          |       | 3,928 |   |
| Deferred income                                                                                     |       | (7,415                         | )          | 8,318 |   |
| Net cash provided by (used in)  operating activities                                                |       | 313,077                        |       | (10,784 | ) |
| **Cash flows from investing  activities:**                                                          |       |                           |       |   |   |
| Cash paid in acquisitions, net                                                                      |       | —                         |       | (8,279 | ) |
| Purchases of investments                                                                            |       | (10,172                        | )          | (113,651 | ) |
| Sales and maturities of  investments                                                                |       | 23,793                         |       | 50,021 |   |
| Purchases of technology  licenses                                                                   |       | (1,250                         | )          | (16,850 | ) |
| Purchases of property and  equipment                                                                |       | (46,532                        | )          | (64,513 | ) |
| Proceeds from sale of asset  under construction                                                     |       | —                         |       | 5,122 |   |
| Net cash used in investing  activities                                                              |       | (34,161                        | )          | (148,150 | ) |
| **Cash flows from financing  activities:**                                                          |       |                           |       |   |   |
| Proceeds from the issuance of  common shares                                                        |       | 67,656                         |       | 2,681 |   |
| Principal payments on capital  lease and debt obligations                                           |       | (103,405                       | )          | (7,811 | ) |
| Excess tax benefits from  stock-based compensation                                                  |       | 494                            |       | 235 |   |
| Net cash used in financing  activities                                                              |       | (35,255                        | )          | (4,895 | ) |
| Net increase (decrease) in  cash and cash equivalents                                               |       | 243,661                        |       | (163,829 | ) |
| Cash and cash equivalents at  beginning of period                                                   |       | 615,648                        |       | 568,008 |   |
| Cash and cash equivalents at  end of period                                                         |       | $                              | 859,309    |   | $ | 404,179 |   |

 

**See accompanying notes to unaudited condensed consolidated financialstatements.**

 

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**MARVELL TECHNOLOGY GROUP LTD.**

**NOTES TO UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

 

**Note 1. The Company and its Significant AccountingPolicies**

 

**The Company**

 

 Marvell Technology Group Ltd.(the “Company”), a Bermuda company, is a leading global semiconductor providerof high-performance analog, mixed-signal, digital signal processing andembedded microprocessor integrated circuits. The Company’s diverse productportfolio includes switching, transceivers, wireless, PC connectivity,gateways, communications controllers, storage and power management solutionsthat serve diverse applications used in business enterprise, consumerelectronics and emerging markets.

 

**Basis of presentation**

 

The Company’s fiscal year is the 52- or 53-weekperiod ending on the Saturday closest to January 31. In a 52-week year,each fiscal quarter consists of 13 weeks. The additional week in a 53-week yearis added to the fourth quarter, making such quarter consist of 14 weeks. Fiscal 2009 is comprised of a 52-weekperiod and fiscal 2008 was comprised of a 53-week period.

 

The unaudited interim condensed consolidatedfinancial statements have been prepared in accordance with accounting principles generally acceptedin the United States (“GAAP”) for interim financial information and with theinstructions to Form 10-Q and Article 10 of Regulation S-X.Accordingly, they do not include all of the information and notes required byGAAP for annual financial statements. Inthe opinion of management, all adjustments consisting of normal and recurringentries considered necessary for a fair statement of the results for theinterim periods have been included in the Company’s financial position as of August 2,2008, the results of its operations for the three and six months ended August 2,2008 and July 28, 2007, and its cash flows for the six months ended August 2,2008 and July 28, 2007. The February 2, 2008 condensed consolidatedbalance sheet data was derived from audited consolidated financial statementsincluded in the Company’s 2008 Annual Report on Form 10-K but does notinclude all disclosures required by GAAP.

 

These condensed consolidated financial statementsand related notes are unaudited and should be read in conjunction with theCompany’s audited financial statements and related notes for the year ended February 2,2008 included in the Company’s Annual Report on Form 10-K as filed on March 28,2008 with the Securities and Exchange Commission (“SEC”).  The results of operations for the three and sixmonths ended August 2, 2008 are not necessarily indicative of the resultsthat may be expected for any other interim period or for the full fiscal year.

 

**Use ofestimates**

 

The preparation of consolidated financial statementsin conformity with GAAP in the United States requires management to makeestimates, judgments and assumptions that affect the reported amounts ofassets, liabilities, revenues and expenses and related disclosure of contingentassets and liabilities. On an on-going basis, the Company evaluates itsestimates, including those related to performance based compensation,uncollectible receivables, inventory excess and obsolescence, the useful livesof long-lived assets including property and equipment, investment fair values,goodwill and other intangible assets, income taxes and contingencies. Inaddition, the Company uses assumptions when employing the Black-Scholes optionvaluation model to calculate the fair value of stock-based awards granted. TheCompany bases its estimates of the carrying value of certain assets andliabilities on historical experience and on various other assumptions that arebelieved to be reasonable under the circumstances, when these carrying valuesare not readily available from other sources. Actual results could differ fromthese estimates, and such differences could affect the results of operationsreported in future periods.

 

**Principlesof consolidation**

 

The unaudited condensed consolidated financial statements include theaccounts of the Company and its wholly-owned subsidiaries. All significantintercompany accounts and transactions have been eliminated. The functionalcurrency of the Company and its significant subsidiaries is the United Statesdollar.

 

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**Cash andcash equivalents**

 

The Company considers all highly liquid investments with a maturity ofthree months or less from the date of purchase to be cash equivalents. Cash andcash equivalents also consist of cash on deposit with banks, money market fundsand commercial deposits.

 

**Investments**

 

The Company’s marketable investments are classified as available-for-salesecurities and are reported at fair value. Unrealized gains and losses arereported, net of tax, if any, in accumulated other comprehensive income, acomponent of shareholders’ equity. Realized gains and losses and declines invalue judged to be other than temporary on available-for-sale securities areincluded in interest and other income, net.

 

The Company also has equity investments in privately-held companies.These investments are recorded at cost and are included in other non-currentassets.  The Company accounts for theseinvestments under the cost method because its ownership is less than 20% and itdoes not have the ability to exercise significant influence over the operationsof these companies. The Company monitors these investments for impairment andmakes appropriate reductions in carrying value when impairment is deemed to beother than temporary.

 

**Concentrationof credit risk**

 

Financial instruments that potentially subject the Company tosignificant concentration of credit risk consist principally of cashequivalents, short-term investments and accounts receivable. The Company placesits cash primarily in checking and money market accounts. Cash equivalents andshort-term investment balances are maintained with high quality financial institutions,the composition and maturities of which are regularly monitored by management.The Company believes that the concentration of credit risk in its tradereceivables with respect to its served markets, as well as the limited customerbase located primarily in the Far East, are substantially mitigated by theCompany’s credit evaluation process, relatively short collection terms and thehigh level of credit worthiness of its customers. The Company performs ongoingcredit evaluation of its customers’ financial condition and limits the amountof credit extended when deemed necessary based upon payment history and thecustomer’s current credit worthiness, but generally requires no collateral. TheCompany regularly reviews the allowance for bad debt and doubtful accounts byconsidering factors such as historical experience, credit quality, age of theaccount receivable balances and current economic conditions that may affect acustomer’s ability to pay.

 

**Inventories**

 

Inventories are stated at the lower of cost ormarket, cost being determined under the first-in, first-out method. Appropriateconsideration is given to obsolescence, excessive levels, deterioration andother factors in evaluating net realizable value.

 

**Propertyand equipment, net**

 

Property and equipment, including capital leases and leaseholdimprovements, are stated at cost less accumulated depreciation andamortization. Depreciation is computed using the straight-line method over theestimated useful lives of the assets, which ranges from three to five years.Buildings are depreciated over an estimated useful life of thirty years andbuilding improvements are depreciated over estimated useful lives of fifteenyears. Land is not depreciated. Assets held under capital leases and leaseholdimprovements are amortized over the shorter of term of lease or their estimateduseful lives.

 

**Goodwilland acquired intangible assets**

 

Goodwill is recorded when the consideration paid for a businessacquisition exceeds the fair value of net tangible and intangible assetsacquired. Acquisition-related identified intangible assets are amortized on astraight-line basis over their estimated economic lives of one to seven yearsfor purchased technology, one to eight years for core technology and four toseven years for customer contracts.

 

Goodwill is measured and tested for impairment on an annual basis ormore frequently if the Company believes indicators of impairment exist. Theperformance of the test involves a two-step process. The first step requirescomparing the fair value of the reporting unit to its net book value, includinggoodwill. The Company has one reporting unit. The fair value of the reportingunit is 

 

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determined by taking themarket capitalization of the reporting unit as determined through quoted marketprices. A potential impairment exists if the fair value of the reporting unitis lower than its net book value. The second step of the process is onlyperformed if a potential impairment exists, and it involves determining thedifference between the fair value of the reporting unit’s net assets other thangoodwill and the fair value of the reporting unit. If the difference is lessthan the net book value of goodwill, impairment exists and is recorded. In theevent that the Company determines that the value of goodwill has becomeimpaired, the Company will record an accounting charge for the amount of impairmentduring the fiscal quarter in which the determination is made. The Company hasnot been required to perform this second step of the process since itsimplementation of Statement of Financial Accounting Standards (“SFAS”) No. 142,“Goodwill and Other Intangible Assets” because the fair value of the reportingunit has exceeded its net book value at every measurement date.

 

**Impairmentof long-lived assets**

 

Long-lived assets include equipment, furniture and fixtures, privatelyheld equity investments and intangible assets. Whenever events or changes incircumstances indicate that the carrying amount of long-lived assets may not berecoverable, the Company estimates the future cash flows, undiscounted andwithout interest charges, expected to result from the use of those assets andtheir eventual cash position. If the sum of the expected future cash flows isless than the carrying amount of those assets, the Company recognizes animpairment loss based on the excess of the carrying amount over the fair valueof the assets.

 

**Reclassifications**

 

Certain reclassifications have been made to the prior period balancesin the Statements of Cash Flows in order to conform to the current period’spresentation.

 

**Revenue recognition**

 

The Company accounts for its revenues under the provisions of StaffAccounting Bulletin (“SAB”) No. 104, “Revenue Recognition in FinancialStatements.” Under these provisions, the Company recognizes revenues when thereis persuasive evidence of an arrangement, delivery has occurred, the fee is fixedor determinable, and collection is reasonably assured.

 

Product revenue is generally recognized upon shipmentof product to customers, net of accruals for estimated sales returns andallowances. However, some of the Company’s sales are made through distributorsunder agreements allowing for price protection and limited rights of return onproduct unsold by the distributors. Although title passes to the distributorupon shipment terms and payment by the Company’s distributors is not contingenton resale of the product, product revenue on sales made through distributorswith rights of return and price protection is deferred until the distributorssell the product to end customers because the Company’s selling price is notfixed and determinable and the Company is not able to estimate futurereturns.  The Company does not believethat there is any significant exposure related to impairment of deferred costof sales, as its historical returns have been minimal and inventory turnoverfor its distributors generally ranges from 60 to 90 days.  The Company’s sales to direct customers aremade primarily pursuant to standard purchase orders for delivery of products.The Company generally allows customers to cancel or change purchase orders withlimited notice prior to the scheduled shipment dates and from time to time italso may request a customer to accept a shipment of product before its originalrequested delivery date, in which case, revenue is not recognized until thereis written confirmation from the customer accepting early shipment, deliveryhas occurred, the fee is fixed or determinable, and collection is reasonablyassured. Additionally, collection is not deemed to be “reasonably assured” orfixed and determinable if customers receive extended payment terms. As aresult, revenue on sales to customers with payment terms substantially greaterthan the Company’s normal payment terms is deferred and is recognized asrevenue as the payments become due. Deferred revenue less the related cost ofthe inventories is reported as deferred income.

 

The provision for estimated sales returns andallowances on product sales is recorded in the same period the related revenuesare recorded. These estimates are based on historical sales returns, analysisof credit memo data and other known factors. Actual returns could differ fromthese estimates.

 

The Company also enters into development agreementswith some of its customers. Under these development agreements, product revenueis recognized under the proportionate performance method.  Revenue is recognized as related costs tocomplete the contract are incurred. These costs are included in research anddevelopment expense.

 

The provisions of the Emerging Issues Task Force (“EITF”)Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables,” applyto sales arrangements with multiple arrangements that include a combination ofhardware, software and /or 

 

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services. Formultiple element arrangements, revenue is allocated to the separate elementsbased on fair value. If an arrangement includes undelivered elements that arenot essential to the functionality of the delivered elements, the Companydefers the fair value of the undelivered elements and the residual revenue isallocated to the delivered elements. If the undelivered elements are essentialto the functionality of the delivered elements, no revenue is recognized.Undelivered elements typically are software warranty and maintenance services.

 

In arrangements that include a combination of hardwareand software products that are also sold separately, where software is morethan incidental and essential to the functionality of the product being sold,the Company follows the guidance in EITF Issue No. 03-05, “Applicabilityof AICPA Statement of Position 97-2 to Non-Software Deliverables in anArrangement Containing More-Than-Incidental Software,” accounts for the entirearrangement as a sale of software and software-related items and follows therevenue recognition criteria in SOP No. 97-2, “Software RevenueRecognition,” and related interpretations.

 

Revenue from licensed software is recognized whenpersuasive evidence of an arrangement exists and delivery has occurred,provided that the fee is fixed or determinable and collectibility is probable.Revenue from post-contract customer support and any other future deliverablesis deferred and earned over the support period or as contract elements aredelivered.

 

The Company accounts for rebates in accordance withEITF Issue No. 01-9, “Accounting for Consideration Given by a Vendor to aCustomer (Including a Reseller of the Vendor’s Products*)*,” and, accordingly, records reductionsto revenue for rebates in the same period that the related revenue is recorded.The amount of these reductions is based upon the terms included in the Company’svarious rebate agreements.

 

**Research and development and other**

 

Research and development and other costs consistof $249.7 million and $236.2 million of research and development costs for thethree months ended August 2, 2008 and July 28, 2007, respectively,and includes $4.1 million and $4.1 million of costs related to patentinvestigation and filings for the three months ended August 2, 2008 and July 28,2007, respectively.

 

Research and development and other costs consist of $488.2 million and$470.3 million of research and development costs for the six months ended August 2,2008 and July 28, 2007, respectively, and includes $9.2 million and $7.1million of costs related to patent investigation and filings for the six monthsended August 2, 2008 and July 28, 2007, respectively.  Researchand development costs are expensed as incurred.

 

**Stock-based compensation**

 

The Company makes share-based payment awardsto its employees and directors that are fully described in Notes 8 and 9. Thestock-based compensation expenses are recorded in accordance with SFAS No. 123(revised 2004), “Share Based Payment” (“SFAS 123R”).

 

**Accounting for income taxes**

 

The Companyaccounts for income taxes in accordance with SFAS No. 109, “Accounting forIncome Taxes.” Under this method, the Company determines deferred tax assetsand liabilities based upon the difference between the income tax bases ofassets and liabilities and their respective financial reporting amounts atenacted tax rates in effect for the periods in which the differences areexpected to reverse. The tax consequences of most events recognized in thecurrent year’s financial statements are included in determining income taxes currently payable. However, becausetax laws and financial accounting standards differ in their recognition andmeasurement of assets, liabilities, equity, revenues, expenses, gains andlosses, differences arise between the amount of taxable income and pretaxfinancial income for a year and between the tax bases of assets or liabilitiesand their reported amounts in the financial statements. Because it is assumedthat the reported amounts of assets and liabilities will be recovered orsettled, a difference between the tax basis of an asset or liability and itsreported amount on the balance sheet will result in a taxable or a deductibleamount in some future years when the related liabilities are settled or assetsare recovered, hence giving rise to a deferred tax liability or asset,respectively. The Company then assesses the likelihood that its deferred taxassets will be recovered from future taxable income and to the extent theCompany believes that recovery is not likely, the Company establish a valuationallowance. The Company accounts for uncertain tax positions in accordance withthe Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accountingfor Uncertainty in Tax Positions” (“FIN 48”). The Company classifies accruedinterest and penalties as part of the accrued FIN 48 liability and records theexpense within the provision for income taxes.

 

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The application of incometax law is inherently complex. Laws and regulations in this area are voluminousand are often ambiguous. As such, the Company is required to make manysubjective assumptions and judgments regarding its income tax exposures.Interpretations of and guidance surrounding income tax laws and regulations aresubject to change over time. As such, changes in its subjective assumptions andjudgments can materially affect amounts recognized in the consolidated balancesheets and statements of income. See Note 10 - Income Taxes of the notes tounaudited condensed consolidated financial statements for additional detail onthe Company’s uncertain tax positions.

 

**Warranty**

** **

The Company’s products are generally subject to warranty, whichprovides for the estimated future costs of repair, replacement or customeraccommodation upon shipment of the product in the accompanying statements ofoperations. The Company’s products typically carry a standard 90-day warranty,with certain exceptions in which the warranty period can range from one to fiveyears. The warranty accrual is estimated based on historical claims compared tohistorical revenues and assumes that the Company will have to replace productssubject to a claim. For new products, the Company uses a historical percentagefor the appropriate class of product.

 

**Note 2. Recent AccountingPronouncements**

 

In December 2007, the FASB issued SFAS No. 141(revised 2007), “Business Combinations” (“SFAS 141R”). The objective of SFAS141R is to improve the relevance, representational faithfulness, andcomparability of the information that a company provides in its financialreports about a business combination and its effects. Under SFAS 141R, a companyis required to recognize the assets acquired, liabilities assumed, contractualcontingencies and any estimate or contingent consideration measured at theirfair value at the acquisition date.  Itfurther requires that research and development assets acquired in a businesscombination that have no alternative future use be measured at theiracquisition-date fair value and then immediately charged to expense, and thatacquisition-related costs be recognized separately from the acquisition andexpensed as incurred.  Among otherchanges, this statement also requires that any “negative goodwill” berecognized in earnings as a gain attributable to the acquisition, and anydeferred tax benefits resulting from a business combination be recognized inincome from continuing operations in the period of the combination.SFAS 141R is effective for business combinations for which the acquisitiondate is on or after the beginning of the first annual reporting periodbeginning on or after December 15, 2008. The Company expects that SFAS141R will have an impact on its financial position and results of operations,but the nature and magnitude of the impact will depend on the nature, terms andsize of any future business combinations or adjustments to prior business combinations.

 

In December 2007, the FASB issued SFAS No. 160, “NoncontrollingInterests in Consolidated Financial Statements—an amendment of ARB No. 51”(“SFAS 160”).  The objective of SFAS 160is to improve the relevance, comparability and transparency of the financialinformation that a company provides in its consolidated financial statements.SFAS 160 requires a company to clearly identify and present ownership interestsin subsidiaries held by parties other than the company in the consolidatedfinancial statements within the equity section but separate from the company’sequity.  It also requires the amount ofconsolidated net income attributable to the parent and to the noncontrollinginterest be clearly identified and presented on the face of the consolidatedstatement of income; changes in ownership interest be accounted for similarly,as equity transactions; and when a subsidiary is deconsolidated, any retainednoncontrolling equity investment in the former subsidiary and the gain or losson the deconsolidation of the subsidiary be measured at fair value. SFAS 160 iseffective for fiscal years, and interim periods within those fiscal years,beginning on or after December 15, 2008. The Company does not expect SFAS160 will have a significant impact on its financial position and results ofoperations.

 

In February 2008, the FASB issued FASB Staff Position No. FAS 157-2,“Effective Date of FASB Statement No. 157”(“FSP 157-2”),” to partially defer SFAS No. 157, “Fair Value Measurements”(“SFAS 157”).  FSP157-2 defers the effective date of SFAS 157 fornon-financial assets and non-financial liabilities, except those that arerecognized or disclosed at fair value in the financial statements on arecurring basis (at least annually), to fiscal years, and interim periodswithin those fiscal years, beginning after November 15, 2008. The Companydoes not believe the adoption of FSP157-2 will have a material impact on itsfinancial position and results of operations.

 

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities”(“SFAS 161”). SFAS 161 amends and expands the disclosure requirements of SFAS No. 133,“Accounting for Derivative Instrumentsand Hedging Activities”**andrequires qualitative disclosures about objectives and strategies for usingderivatives, quantitative disclosures about fair value amounts of and gains andlosses on derivative instruments, and disclosures about credit-risk-relatedcontingent features in derivative agreements. SFAS 161 is effective forfinancial statements issued for fiscal years and interim periods beginningafter November 15, 2008, with early application encouraged.  The Company will adopt SFAS 161 in the firstquarter of fiscal 2010 and does not anticipate that SFAS 161 will have asignificant impact on its financial position and results of operations.

 

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In April 2008, the FASB issued FSP FAS 142-3, “Determinationof Useful Life of Intangible Assets” (“FSP FAS 142-3”). FSP FAS 142-3amends the factors that should be considered in developing the renewal orextension assumptions used to determine the useful life of a recognizedintangible asset under FAS 142, “Goodwill and Other Intangible Assets.”FSP FAS 142-3 also requires expanded disclosure related to thedetermination of intangible asset useful lives. FSP FAS 142-3 is effectivefor fiscal years beginning after December 15, 2008. Earlier adoption isnot permitted. The Company does not anticipate that FSP FAS 142-3 willhave a significant impact on its financial position and results of operations.

 

In May 2008, the FASB issued Statement of Financial AccountingStandards No. 162, “The Hierarchyof Generally Accepted Accounting Principles” (“SFAS 162”).SFAS 162 identifies the sources of accounting principles and the frameworkfor selecting the principles used in the preparation of financial statements ofnongovernmental entities that are presented in conformity with generallyaccepted accounting principles. SFAS 162 will become effective 60 daysfollowing the SEC’s approval of the Public Company Accounting Oversight Boardamendments to AU Section 411, “TheMeaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.”  The Company does not expect theadoption of SFAS 162 will have a significant impact on its financial positionand results of operations.

 

**Note3. Supplemental Financial Information**

 

**Available-for-sale investments(in thousands)**

 

| ** **                          | ** ** | **As of August 2, 2008** | ** ** |
|-------------------------------------|------------|----------------------------------------------|------------|
| ** **                          | ** ** | **Amortized  Cost**                          | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Fair Value** | ** ** |
| Short-term investments:             |       |                                         |       |   |   |   |   |   |   |
| U.S. Federal debt securities        |       | $                                            | 5,088      |   | $ | 1 |   | $ | — |   | $ | 5,089 |   |
| Total short-term investments        |       | $                                            | 5,088      |   | $ | 1 |   | $ | — |   | $ | 5,089 |   |
|                                |       |                                         |       |   |   |   |   |   |   |
| Long-term investments:              |       |                                         |       |   |   |   |   |   |   |
| Auction rate securities             |       | $                                            | 42,150     |   | $ | — |   | $ | (1,857 | ) | $ | 40,293 |   |
| Total long-term investments         |       | $                                            | 42,150     |   | $ | — |   | $ | (1,857 | ) | $ | 40,293 |   |
| Total available-for-sale securities |       | $                                            | 47,238     |   | $ | 1 |   | $ | (1,857 | ) | $ | 45,382 |   |

 

| ** **                          | ** ** | **As of February 2, 2008** | ** ** |
|-------------------------------------|------------|------------------------------------------------|------------|
| ** **                          | ** ** | **Amortized  Cost**                            | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Fair Value** | ** ** |
| Short-term investments:             |       |                                           |       |   |   |   |   |   |   |
| U.S. Federal debt securities        |       | $                                              | 15,231     |   | $ | 23 |   | $ | — |   | $ | 15,254 |   |
| Total short-term investments        |       | $                                              | 15,231     |   | $ | 23 |   | $ | — |   | $ | 15,254 |   |
|                                |       |                                           |       |   |   |   |   |   |   |
| Long-term investments:              |       |                                           |       |   |   |   |   |   |   |
| Auction rate securities             |       | $                                              | 45,628     |   | $ | — |   | $ | — |   | $ | 45,628 |   |
| Total long-term investments         |       | $                                              | 45,628     |   | $ | — |   | $ | — |   | $ | 45,628 |   |
| Total available-for-sale securities |       | $                                              | 60,859     |   | $ | 23 |   | $ | — |   | $ | 60,882 |   |

 

As of August 2, 2008, the Company’s investmentportfolio included $42.2 million in par value of auction rate securities.  Auction rate securities are usually found inthe form of municipal bonds, preferred stock, pools of student loans orcollateralized debt obligations with contractual maturities generally between20 to 30 years and whose interest rates are reset every 7 to 35 daysthrough an auction process. At the end of each reset period, investors can sellor continue to hold the securities at par. The Company’s auction ratesecurities are all backed by student loans originated under the Federal FamilyEducation Loan Program and are over-collateralized, insured and guaranteed bythe United States Federal Department of Education (the “DOE”).  All auction rate securities held by theCompany are rated by the major independent rating agencies as either AAA or Aaaat the time of purchase and their current ratings are still within the guidelinesof the Company’s investment policy.

 

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Beginning in February 2008, liquidity issues inthe global credit markets resulted in failure of the auctions representing allof the auction rate securities held by the Company, as the amount of securitiessubmitted for sale in those auctions exceed the amount of bids.  These failures are not believed to be acredit issue, but rather caused by a lack of liquidity. Observable marketprices were not available for the valuation of these investments.  Accordingly, the Company used a discountedcash flow model to estimate the fair value of the auction rate securities as ofAugust 2, 2008.  The assumptionsused in preparing the discounted cash flow model included estimates for theamount and timing of future interest and principal payments, thecollateralization of underlying security investments, the credit worthiness ofthe issuer of the securities, the probability of full repayment consideringthe guarantees by the DOE of the underlying student loans, guaranteesby other third parties, additional credit enhancements included in thesecurities, and the rate of return required by investors to own thesesecurities in the current environment. Utilizing these assumptions, the Company found that its auction ratesecurities had a fair value of $40.3 million, which indicated an impairment ofapproximately $1.9 million. During the six months ended August 2, 2008, theCompany recorded a temporary impairment charge for this amount in accumulatedother comprehensive (loss), a component of shareholders’ equity.  When evaluating whether the impairment istemporary or other than temporary, the Company reviewed factors such as thelength of time and extent to which fair value has been below cost basis, thefinancial condition and near-term prospects of the issuer, and the Company’sability and intent to hold the investment for a period of time which may besufficient for anticipated recovery in the market value.  The Company specifically noted that it hadapproximately 5% of its total cash invested in these auction rate securities, acash balance of approximately $859.3 million in investments other than auctionrate securities, and that the Company continues to generate positive cash flowon a quarterly basis.

 

While the recent auction failures limit the Company’sability to liquidate these investments, the Company does not believe that theauction failures will materially impact its ability to fund its working capitalneeds, capital expenditures or other business requirements, and that it has theability to hold these securities for a period longer than 12 months. However, at the reporting date, it is not certain when liquidity willreturn to the markets or if any other secondary markets will become available,and the Company has continued to classify its auction rate securities inlong-term investments as of August 2, 2008.

 

The Company will continue to evaluate the impact ofthese failed auctions on the fair value of its auction rate securities.  If the issuer of the auction rate securitiesis unable to successfully close future auctions or does not redeem the auctionrate securities, or the United States government fails to support its guarantyof the obligations, the Company may be required to adjust the carrying value ofthe auction rate securities and record other-than-temporary impairment chargesin future periods, which could materially affect its results of operations andfinancial condition.

 

The contractualmaturities of available-for-sale debt securities at August 2, 2008 and February 2,2008 are presented in the following table (in thousands):

 
| ** **                     | ** ** | **August 2, 2008** | ** ** | **February 2, 2008** | ** ** |
|--------------------------------|------------|------------------------------|------------|--------------------------------|------------|
| ** **                     | ** ** | **Amortized  Cost**          | ** ** | **Estimated  Fair Value** | ** ** | **Amortized  Cost** | ** ** | **Estimated  Fair Value** | ** ** |
| Due in one year or less        |       | $                            | 5,088      |                           | $          | 5,089 |   | $ | 15,231 |   | $ | 15,254 |   |
| Due between one and five years |       | —                       |       | —                         |       | — |   | — |   |
| Due over five years            |       | 42,150                       |       | 40,293                         |       | 45,628 |   | 45,628 |   |
|                           |       | $                            | 47,238     |                           | $          | 45,382 |   | $ | 60,859 |   | $ | 60,882 |   |

 

The following table shows the investments’ grossunrealized losses and fair value, aggregated by investment category and lengthof time that individual securities have been in a continuous unrealized lossposition (in thousands):

 
| ** **              | ** ** | **August 2, 2008**       | ** ** |
|-------------------------|------------|------------------------------------|------------|
| ** **              | ** ** | **Less than  12 months** | ** ** | **Total** | ** ** |
| ** **              | ** ** | **Fair  Value**                    | ** ** | **Unrealized  Loss** | ** ** | **Fair  Value** | ** ** | **Unrealized  Loss** | ** ** |
| Auction rate securities |       | $                                  | 40,293     |   | $ | 1,857 |   | $ | 40,293 |   | $ | 1,857 |   |
| Total securities        |       | $                                  | 40,293     |   | $ | 1,857 |   | $ | 40,293 |   | $ | 1,857 |   |

 

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**Inventories (in thousands)**

 
| ** **      | ** ** | **August 2,****2008** | ** ** | **February 2,****2008** | ** ** |
|-----------------|------------|----------------------------|------------|------------------------------|------------|
| Work-in-process |       | $                          | 207,266    |                         | $          | 270,449 |   |
| Finished goods  |       | 119,658                    |       | 149,045                      |       |
|            |       | $                          | 326,924    |                         | $          | 419,494 |   |

 

**Prepaid expenses and othercurrent assets (in thousands)**

 
| ** **                        | ** ** | **August 2,****2008** | ** ** | **February 2,****2008** | ** ** |
|-----------------------------------|------------|----------------------------|------------|------------------------------|------------|
| Prepayments for foundry  capacity |       | $                          | 18,400     |                         | $          | 23,200 |   |
| Prepayments for wafers            |       | —                     |       | 13,938                       |       |
| Receivable from foundry           |       | 13,344                     |       | 10,240                       |       |
| Other                             |       | 46,843                     |       | 58,431                       |       |
|                              |       | $                          | 78,587     |                         | $          | 105,809 |   |

 

**Property and equipment, net (in thousands)**

 
| ** **                                      | ** ** | **August 2,** | ** ** | **February 2,** | ** ** |
|-------------------------------------------------|------------|--------------------|------------|----------------------|------------|
| ** **                                      | ** ** | **2008**           | ** ** | **2008**             | ** ** |
| **Property and equipment:**                     |       |               |       |                 |       |
| Machinery and equipment                         |       | $                  | 331,534    |                 | $          | 315,797 |   |
| Computer software                               |       | 74,973             |       | 72,736               |       |
| Furniture and fixtures                          |       | 22,941             |       | 22,303               |       |
| Leasehold improvements                          |       | 34,001             |       | 33,659               |       |
| Buildings                                       |       | 107,601            |       | 105,091              |       |
| Building improvements                           |       | 44,686             |       | 44,340               |       |
| Land                                            |       | 71,198             |       | 61,096               |       |
| Construction in progress                        |       | 36,817             |       | 32,287               |       |
|                                            |       | 723,751            |       | 687,309              |       |
| Less: Accumulated depreciation and amortization |       | (310,763           | )          | (271,068             | )          |
|                                            |       | $                  | 412,988    |                 | $          | 416,241 |   |

 

**Other non-current assets (inthousands)**

 
| ** **                                  | ** ** | **August 2,****2008** | ** ** | **February 2,****2008** | ** ** |
|---------------------------------------------|------------|----------------------------|------------|------------------------------|------------|
| Long term prepayments for  foundry capacity |       | $                          | 15,600     |                         | $          | 22,800 |   |
| Cost investments in private  companies      |       | 7,058                      |       | 7,058                        |       |
| Severance fund                              |       | 48,981                     |       | 50,235                       |       |
| Technology licenses                         |       | 22,635                     |       | 25,209                       |       |
| Deferred tax assets,  non-current           |       | 22,975                     |       | 22,975                       |       |
| Other                                       |       | 15,378                     |       | 28,830                       |       |
|                                        |       | $                          | 132,627    |                         | $          | 157,107 |   |

 

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**Accrued liabilities (inthousands)**

 
| ** **                              | ** ** | **August 2,  2008** | ** ** | **February 2,  2008** | ** ** |
|-----------------------------------------|------------|--------------------------|------------|----------------------------|------------|
|                                    |       |                     |       |                       |       |
| Term loan obligations, current portion  |       | $                        | 4,000      |                       | $          | 4,000 |   |
| Accrued royalties                       |       | 8,639                    |       | 8,859                      |       |
| Accrued rebates                         |       | 19,683                   |       | 22,756                     |       |
| Accrued legal and professional services |       | 23,329                   |       | 25,562                     |       |
| Accrued contingent consideration        |       | —                   |       | 27,000                     |       |
| Other                                   |       | 29,119                   |       | 34,784                     |       |
|                                    |       | $                        | 84,770     |                       | $          | 122,961 |   |

 

**Other long-term liabilities(in thousands)**

 
| ** **                                | ** ** | **August 2,  2008** | ** ** | **February 2,  2008** | ** ** |
|-------------------------------------------|------------|--------------------------|------------|----------------------------|------------|
|                                      |       |                     |       |                       |       |
| Accrued severance                         |       | $                        | 51,180     |                       | $          | 49,819 |   |
| Long-term facilities consolidation charge |       | 932                      |       | 1,326                      |       |
| Other                                     |       | 1,073                    |       | 1,187                      |       |
|                                      |       | $                        | 53,185     |                       | $          | 52,332 |   |

 

**Net income (loss) per share**

 

TheCompany reports both basic net income (loss) per share, which is based upon theweighted average number of common shares outstanding excluding contingentlyissuable or returnable shares, and diluted net income (loss) per share, whichis based on the weighted average number of common shares outstanding anddilutive potential common shares. The computations of basic and diluted netincome (loss) per share are presented in the following table (in thousands,except per share amounts):

 

| ** **                                            | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                            | ** ** | **August 2,****2008**       | ** ** | **July 28,****2007**      | ** ** | **August 2,****2008** | ** ** | **July ****28,****2007** | ** ** |
| Numerator:                                            |       |                             |       |                           |       |   |   |   |   |
| Net income (loss)                                     |       | $                                | 71,367     |                           | $          | (56,456 | ) | $ | 141,306 |   | $ | (109,284 | ) |
| Denominator:                                          |       |                             |       |                           |       |   |   |   |   |
| Weighted average shares of common  shares outstanding |       | 606,860                          |       | 587,534                        |       | 604,041 |   | 587,480 |   |
| Weighted average shares —  basic                 |       | 606,860                          |       | 587,534                        |       | 604,041 |   | 587,480 |   |
| Effect of dilutive securities-                        |       |                             |       |                           |       |   |   |   |   |
| Warrants                                              |       | —                           |       | —                         |       | 631 |   | — |   |
| Common share options and other                        |       | 30,972                           |       | —                         |       | 26,419 |   | — |   |
| Weighted average shares —  diluted               |       | 637,832                          |       | 587,534                        |       | 631,091 |   | 587,480 |   |
| Net income (loss) per share                           |       |                             |       |                           |       |   |   |   |   |
| Basic                                                 |       | $                                | 0.12       |                           | $          | (0.10 | ) | $ | 0.23 |   | $ | (0.19 | ) |
| Diluted                                               |       | $                                | 0.11       |                           | $          | (0.10 | ) | $ | 0.22 |   | $ | (0.19 | ) |

 

Options to purchase 59,606,901 common shares at aweighted average exercise price of $20.29 have been excludedfrom the computation of diluted net income per share for the three months endedAugust 2, 2008 based on the treasury stock method calculation.  The anti-dilutive effects of warrants, common shareoptions, restricted stock and other securities totaling 41,056,440 shares wereexcluded from diluted net loss per share for the three months ended July 28,2007.

 

Options to purchase 59,976,003 common shares at a weighted average exercise price of $20.41 have been excluded from the computation of diluted net income per sharefor the six months ended August 2, 2008 using the treasury stock methodcalculation. The anti-dilutive effects of warrants, common stock options,restricted stock and other securities totaling 42,493,261 were excluded fromdiluted net loss per share for the six months ended July 28, 2007.

 

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**Comprehensive income (loss) (inthousands)**

 

| ** **                                                                      | ** ** | **Three Months Ended** | ** ** | **Six**** Months Ended** | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------------------|------------|------------------------------------|------------|
| ** **                                                                      | ** ** | **August 2,****2008**       | ** ** | **July 28,****2007**          | ** ** | **August 2,  2008** | ** ** | **July 28,****2007** | ** ** |
| Net income (loss)                                                               |       | $                                | 71,367     |                               | $          | (56,456 | ) | $ | 141,306 |   | $ | (109,284 | ) |
| Other comprehensive income  (loss):                                             |       |                             |       |                               |       |   |   |   |   |
| Unrealized (loss) gain on  available-for-sale investments and other, net of tax |       | (181                             | )          | 129                                |       | (1,879 | ) | 324 |   |
| Total comprehensive income  (loss)                                              |       | $                                | 71,186     |                               | $          | (56,327 | ) | $ | 139,427 |   | $ | (108,960 | ) |

 

Accumulated other comprehensive income (loss), as presented in theaccompanying unaudited condensed consolidated balance sheets, consists of theunrealized gains and losses on available-for-sale investments and other, net oftax.

 

**Note 4. Fair Value Measurements**

 

Effective February 3, 2008, the Companyadopted SFAS 157, except as itapplies to the nonfinancial assets and nonfinancial liabilities subject to FSP157-2. SFAS 157 clarifies that fair value is an exit price, representing theamount that would be received to sell an asset or paid to transfer a liabilityin an orderly transaction between market participants. As such, fair value is amarket-based measurement that should be determined based on assumptions thatmarket participants would use in pricing an asset or a liability. As a basisfor considering such assumptions, SFAS 157 establishes a three-tier valuehierarchy, which prioritizes the inputs used in the valuation methodologies inmeasuring fair value:

 

Level 1- Observable inputs that reflect quoted prices (unadjusted) for identicalassets or liabilities in active markets.

 

Level 2****-Include other inputs that are directly or indirectly observable in themarketplace.

 

Level 3****-Unobservable inputs that are supported by little or no market activity.

 

The fair value hierarchy also requires an entityto maximize the use of observable inputs and minimize the use of unobservableinputs when measuring fair value.

 

In accordance with SFAS 157, we measure our cashequivalents and marketable securities at fair value. Our cash equivalents andmarketable securities are primarily classified within Level 1 with theexception of our investments in auction rate securities, which are classifiedwithin Level 3. Cash equivalents and marketable securities are valued primarilyusing quoted market prices utilizing market observable inputs.  The Company’s investments in auction ratesecurities are classified within Level 3 because there are no active marketsfor the auction rate securities and therefore the Company is unable to obtainindependent valuations from market sources. Therefore, the auction rate securities were valued using a discountedcash flow model (see Note 3).  Some ofthe inputs to the cash flow model are unobservable in the market. The totalamount of assets measured using Level 3 valuation methodologies represented 1%of total assets as of August 2, 2008.

 

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The table belowsets forth, by level, our financial assets that were accounted for at fairvalue as of August 2, 2008.  Thetable does not include assets and liabilities which are measured at historicalcost or any basis other than fair value (in thousands):

 
| ** **                                                 | ** ** | **Portion of  Carrying  Value  Measured at  Fair Value** | ** ** | ** **       | ** ** | ** **       | ** ** |
|------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                 | ** ** | **August 2,**                                                      | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                 | ** ** | **2008**                                                                | ** ** | **Level 1** | ** ** | **Level 3** | ** ** |
| **Items measured at fair value on a recurring  basis:**    |       |                                                                    |       |             |       |             |       |
|                                                       |       |                                                                    |       |             |       |             |       |
| Cash equivalents:                                          |       |                                                                    |       |             |       |             |       |
| U.S. Treasury bills                                        |       | $                                                                       | 128,864    |             | $          | 128,864          |       | $ | — |   |
| Money market funds                                         |       | 20,004                                                                  |       | 20,004           |       |             |       |
| Short-term investments:                                    |       |                                                                    |       |             |       |             |       |
| U.S. Federal, State, county and municipal debt  securities |       | 5,089                                                                   |       | 5,089            |       | —           |       |
| Long-term investments:                                     |       |                                                                    |       |             |       |             |       |
| Auction rate securities                                    |       | 40,293                                                                  |       | —           |       | 40,293           |       |
| Total                                                      |       | $                                                                       | 194,250    |             | $          | 153,957          |       | $ | 40,293 |   |

 

The following table summarizes the change in fair values forLevel 3 items for the six months ended August 2, 2008:

 
| ** **                                                                        | ** ** | **Level 3** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------|------------|
| **Changes in fair value during the period ended  August 2, 2008 (pre-tax):** | ** ** | ** **       | ** ** |
|                                                                              |       |             |       |
| Beginning Balance at February 3, 2008                                        |       | $                | 45,628     |   |
| Purchases                                                                         |       | 10,000           |       |
| Sales                                                                             |       | (13,478          | )          |
| Unrealized loss included in other comprehensive  income                           |       | (1,857           | )          |
| Ending Balance at August 2, 2008                                             |       | $                | 40,293     |   |

 

**Note 5. Business Combinations**

 

During fiscal 2008, the Company completed theacquisition of two unrelated private companies. One of the companies wasacquired for $9.7 million and designs and develops software for opticalstorage applications. The second company was acquired for $13.4 millionand provides IP Multimedia Subsystem middleware and applications for multi-modecellular mobile devices. Under the purchase method of accounting, the totalpurchase price of these acquisitions was allocated to net tangible and intangibleassets based on their fair values.  Inconjunction with these acquisitions, the Company recorded acquired net tangibleassets of $4.1 million, deferred tax assets of $0.9 million, deferredtax liabilities of $3.8 million, amortizable intangible assets of$9.2 million and goodwill of $12.7 million. The intangible assets arebeing amortized over their useful lives ranging from one to seven years.

 

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**Note 6.Acquired Intangible Assets, Net**

 
| ** **                   | ** ** | **As of August 2, 2008** | ** ** | **As of February 2, 2008** | ** ** |
|------------------------------|------------|----------------------------------------------|------------|------------------------------------------------|------------|
| ** **                   | ** ** | **Gross  Carrying  Amount**                  | ** ** | **Accumulated  Amortization**                  | ** ** | **Net  Carrying  Amount** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Carrying  Amount** | ** ** |
| Purchased technology         |       | $                                            | 708,398    |                                           | $          | (572,236 | ) | $ | 136,162 |   | $ | 708,398 |   | $ | (538,765 | ) | $ | 169,633 |   |
| Core technology              |       | 212,650                                      |       | (81,834                                        | )          | 130,816 |   | 212,650 |   | (62,758 | ) | 149,892 |   |
| Trade name                   |       | 350                                          |       | (176                                           | )          | 174 |   | 350 |   | (130 | ) | 220 |   |
| Customer contracts           |       | 183,300                                      |       | (87,529                                        | )          | 95,771 |   | 183,300 |   | (70,029 | ) | 113,271 |   |
| Supply contract              |       | 900                                          |       | (704                                           | )          | 196 |   | 900 |   | (642 | ) | 258 |   |
| Non-competition              |       | 700                                          |       | (281                                           | )          | 419 |   | 700 |   | (165 | ) | 535 |   |
| Total intangible assets, net |       | $                                            | 1,106,298  |                                           | $          | (742,760 | ) | $ | 363,538 |   | $ | 1,106,298 |   | $ | (672,489 | ) | $ | 433,809 |   |

 

Purchased technologies are amortized on a straight-line basis overtheir estimated useful lives of one to six years.  Core technologies are amortized on astraight-line basis over their estimated useful lives of one to eightyears.  Trade names are amortized on astraight-line basis over their estimate useful lives of one to five years.  Customer contracts and related relationshipsare amortized on a straight-line basis over their estimated useful lives offour to seven years.  The supply contractis amortized on a straight-line basis over its estimated useful life of fouryears.  Non-competition is amortized on astraight-line basis over three years. The aggregate amortization expense of identified intangible assets was$35.0 million for the three months ended August 2, 2008 and $37.3 millionfor the three months ended July 28, 2007, $70.2 million for the six monthsended August 2008 and $74.6 million for the six months ended July 28,2007. Amortization expense is expected to be $67.6 million for the remainingsix months of fiscal 2009, $113.5 million in fiscal 2010, $83.3 million infiscal 2011, $41.7 million in fiscal 2012, $35.0 million in fiscal 2013, $21.9million in fiscal 2014 and $0.6 million in fiscal 2015.

 

**Note 7. Commitments and Contingencies**

 

**Performance-basedcompensation**

 

The Company hasadopted various performance-based compensation plans for employees andexecutives, which are comprised of cash and equity components.  TheCompany evaluates performance against plan metrics on a quarterly basis andaccrues a liability in cash and stock-based compensation expense if performancemetrics are met.  The Company may adjustamounts previously accrued if it becomes unlikely that long term performancemetrics will be achieved.

 

**Warranty obligations**

 

The following table presents changes in the warranty accrual includedin accrued liabilities during the three and six months ended August 2,2008 and July 28, 2007 (in thousands):

 
| ** **                                          | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                          | ** ** | **August 2,  2008**         | ** ** | **July 28,  2007**        | ** ** | **August 2,  2008** | ** ** | **July 28,  2007** | ** ** |
| Warranty accrual (included in accrued liabilities): |       |                             |       |                           |       |   |   |   |   |
| Beginning balance                                   |       | $                                | 2,541      |                           | $          | 2,534 |   | $ | 2,532 |   | $ | 2,567 |   |
| Accruals                                            |       | 308                              |       | 151                            |       | 820 |   | 359 |   |
| Settlements                                         |       | (328                             | )          | (305                           | )          | (831 | ) | (546 | ) |
| Ending balance                                      |       | $                                | 2,521      |                           | $          | 2,380 |   | $ | 2,521 |   | $ | 2,380 |   |

 

***Purchase commitments***

 

In connection with the acquisition of the communication and application processor business ofIntel Corporation, the Company entered into a product supply agreement withIntel. Although the Company has met the contractual obligations under theoriginal supply agreement and has transitioned certain products to itsfabrication partners, the Company anticipates that it will continue to sourcecertain legacy application processor cellular and handset inventory from Intel.Under terms of an amendment to the supply agreement, the Company has committedto purchase an additional minimum number of wafers through December 2008.The amendment had no impact on the accounting for the original acquisition.  As of August 2, 2008, the Company hadnon-cancellable purchase ordersoutstanding of $17.1 million under the amended arrangement.

 

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Under the Company’s manufacturing relationships withits other foundries, cancellation of outstanding purchase orders is allowed butrequires repayment of all expenses incurred through the date of cancellation.As of August 2, 2008, these foundries had incurred approximately$188.4 million of manufacturing expenses on the Company’s outstandingpurchase orders.

 

On February 28, 2005 and as amended on March 31,2005, the Company entered into an agreement with a foundry to reserve andsecure foundry fabrication capacity for a fixed number of wafers at agreed uponprices for a period of five and a half years beginning on October 1, 2005.In return, the Company agreed to pay the foundry $174.2 million over a periodof 18 months.  The amendment extends theterm of the agreement and the agreed upon pricing terms until December 31,2015.  As of August 2, 2008,payments totaling $174.2 million, which is included in prepaid expenses andother current assets and other non-current assets have been made andapproximately $140.2 million of the prepayment has been utilized as of August 2,2008.  At August 2, 2008, there areno outstanding commitments under the agreement.

 

As of August 2,2008, the Company had approximately $49.8 million of other outstanding non-cancellable purchaseorders for capital purchase obligations.

 

***Contingencies***

 

*IPO Securities Litigation.*  On July 31, 2001, a putative classaction suit was filed against two investment banks that participated in theunderwriting of the Company’s initial public offering (“IPO”) on June 29,2000. That lawsuit, which did not name the Company or any of its officers ordirectors as defendants, was filed in the United States District Court for theSouthern District of New York. Plaintiffs allege that the underwriters received“excessive” and undisclosed commissions and entered into unlawful “tie-in”agreements with certain of their clients in violation of Section 10(b) ofthe Securities Exchange Act of 1934, as amended (the “Exchange Act”). Thereafter,on September 5, 2001, a second putative class action was filed in theSouthern District of New York relating to the Company’s IPO. In this secondaction, plaintiffs named three underwriters as defendants and also named asdefendants the Company and two of its officers, one of whom is also a director.Relying on many of the same allegations contained in the initial complaint,plaintiffs allege that the defendants violated various provisions of theSecurities Act of 1933, as amended, and the Exchange Act. In both actions,plaintiffs seek, among other items, unspecified damages, pre-judgment interestand reimbursement of attorneys’ and experts’ fees. These two actions have beenconsolidated and coordinated with hundreds of other lawsuits filed by plaintiffsagainst approximately 40 underwriters and approximately 300 issuers across theUnited States. Defendants in the coordinated proceedings moved to dismiss theactions. In February 2003, the trial court granted the motions in part anddenied them in part, thus allowing the case to proceed against the Company andthe underwriters. Claims against the individual officers have been voluntarilydismissed with prejudice by agreement with plaintiffs. In June 2004, astipulation of settlement and release of claims against the issuer defendants,including the Company, was submitted to the court for approval. On August 31,2005, the Court preliminarily approved the settlement. In December 2006,the appellate court overturned the certification of classes in the six focuscases that were selected by the underwriter defendants and plaintiffs in thecoordinated proceedings (the action involving the Company is not one of the sixcases). Because class certification was a condition of the settlement, it wasunlikely that the settlement would receive final Court approval. On June 25,2007, the Court entered an order terminating the proposed settlement based upona stipulation among the parties to the settlement. Plaintiffs filed amendedmaster allegations and amended complaints in the six focus cases. Defendants’motions to dismiss those new complaints were denied in part and granted in part. Plaintiffs have also moved for classcertification in the six focus cases, which the defendants in those cases haveopposed.

 

*Section 16(b) Litigation.*  On October 9, 2007, a purportedshareholder of the Company filed a complaint for violation of Section 16(b) ofthe Exchange Act, which prohibits short-swing trading, against the Company’sIPO underwriters. The complaint, *VanessaSimmonds v. The Goldman Sachs Group, et al.*, Case No. C07-1632filed in District Court for the Western District of Washington, seeks therecovery of short-swing profits. The Company is named as a nominal defendant.No recovery is sought from the Company. The underwriter defendants and some ofthe issuer defendants (excluding the Company) filed motions to dismiss on July 25,2008; the plaintiff’s opposition briefing was due on September 8, 2008;the moving defendants’ reply briefs are due on October 23, 2008 when the DistrictCourt will consider setting a hearing date for the motions. All discovery isstayed pending resolution of the moving defendants’ motions to dismiss.

 

*Jasmine Networks Litigation.*  On September 12, 2001, Jasmine Networks, Inc.(“Jasmine”) filed a lawsuit in the Santa Clara County Superior Court allegingclaims against the Company and three of its officers for allegedly improperlyobtaining and using information and technologies during the course of thenegotiations with its personnel regarding the potential acquisition of certainJasmine assets by the Company. The lawsuit claims that the Company’s officersimproperly obtained and used such information and technologies after theCompany signed a non-disclosure agreement with Jasmine. The Company believesthe claims asserted against its officers and the Company are without merit andthe Company intends to defend all claims vigorously.

 

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On June 21, 2005, the Company filed a crosscomplaint in the above disclosed action in the Santa Clara County SuperiorCourt asserting claims against Jasmine and unnamed Jasmine officers andemployees. The cross complaint was later amended to name two individualofficers of Jasmine. On May 15, 2007, the Company filed a second amendedcross complaint to add additional causes of action for declaratory reliefagainst Jasmine. Among other causes of action, the cross complaint alleges thatJasmine and its personnel engaged in fraud in connection with their effort tosell the Company technology that Jasmine and its personnel wrongfully obtainedfrom a third party in violation of such third party’s rights, and that suchtechnology does not constitute trade secrets or property of Jasmine. The crosscomplaint seeks a declaratory judgment that the Company’s technology does notincorporate any of Jasmine’s alleged technology. The cross complaint seeksfurther a declaratory judgment that Jasmine and its personnel misappropriatedcertain aspects of Jasmine’s allegedly proprietary technology. The Companyintends to prosecute the cross complaint against Jasmine and its personnelvigorously, including, but not limited to, filing certain dispositive motionsregarding the ownership of the technology which is the subject of the crosscomplaint. On June 13, 2007, Jasmine filed a demurrer to the fifth, sixthand seventh causes of action of the Company’s second amended cross complaint.The demurrer was heard on July 19, 2007 and denied. On August 3,2007, Jasmine filed its answer to the second amended cross complaint. The Company thereafter filed its motion for summaryadjudication on its fifth and sixth causes of action for declaratory relief seeking, among other things, adetermination that Jasmine held no proprietary interest in the “JSLIP”algorithm, which was one of the core technologies Jasmine asserts wasmisappropriated by the Company. The motion was denied on November 14,2007. However, in its opposition, Jasmine admitted that JSLIP had been takenfrom the work of a third party and is embodied in patents held by theUniversity of California and Cisco Systems. These admissions are significantwith respect to both Jasmine’s assertion of trade secret rights and any damagesclaimed by Jasmine.

 

In addition, on December 28, 2001 and January 7,2002, the trial court issued a preliminary injunction precluding Jasmine fromusing, disclosing or disseminating the contents of a privileged communicationbetween certain officers of the Company and its counsel. The order grantinginjunctive relief was reversed by the California Court of Appeal, but reviewwas granted by the California Supreme Court on a “grant and hold” basis pendingthe Court’s decision on a case involving closely related issues, *Rico v. Mitsubishi Motors Corp*. (2004) 116Cal.App.4th 51. The effect of the California Supreme Court’s grant ofreview was to depublish the Court of Appeal’s decision. On December 13,2007, the California Supreme Court ruled in the *Rico v.Mitsubishi* case in a manner consistent with the position asserted bythe Company that attorney work product and attorney-client privileges are notwaived by inadvertent disclosure of a privileged communication, and that anyparty receiving such information (i) is required to notify opposingcounsel immediately; and (ii) may not read such document more closely thanis necessary to determine it is privileged. *Rico v. Mitsubishi MotorsCorp.* (2007) 42 Cal.4th 807.Following its decision in *Rico v. Mitsubishi*,on April 23, 2008, the California Supreme Court issued an order dismissingthe Company’s petition for review.  As aresult the decision of the Court of Appeal, which remains unpublished, becamefinal.

 

The case is now proceeding in the trial court, wherethe parties are engaged in extensive discovery. The Company has successfully filed multiple discovery motions andanticipates filing additional discovery motions based upon Jasmine’s failure toprovide discovery.  The Company furtherintends to bring dispositive motions on a number of Jasmine’s claims andanticipates a trial date sometime in 2009. The Company intends to vigorously assert its cross-claims and defensesin the trial court.

 

*CSIRO Litigation.*  As of January 2007, Australia’s CommonwealthScientific and Industrial Research Organisation (“CSIRO”) is involved in threepatent litigations in the Eastern District of Texas in which it has accused anumber of wireless LAN system manufacturers, including some of the Company’scustomers, of infringing CSIRO’s patent, U.S. Patent No. 5,487,069 (the “‘069Patent”).  CSIRO’s claims of infringementrelate to IEEE 802.11a, 802.11g and 802.11n wireless standards. As a result ofCSIRO’s claims for patent infringement, a number of the Company’s customershave sought indemnification from the Company. In response to these demands for indemnification, the Company hasacknowledged the demands and incurred costs in response to them.

 

On May 4, 2007, the Company filed an action inthe United States District Court for the Eastern District of Texas seeking adeclaratory judgment against CSIRO that the ‘069 Patent is invalid andunenforceable and that the Company and its customers do not infringe the ‘069Patent. The complaint also seeks damages and a license for the Company and itscustomers on reasonable and non-discriminatory terms in the event the Company’s802.11a/g/n wireless LAN products are found to infringe and the ‘069 Patent isfound to be valid and enforceable.

 

On July 3, 2007, the Company moved to intervenein the two actions described in the first paragraph above pending in theEastern District of Texas, for the purposes of staying the actions as toproducts incorporating the Company’s parts in favor of the separate action thatthe Company filed as described in the second paragraph above. Alternatively theCompany moved to disqualify the firm of Townsend, Townsend and Crew fromcontinuing to represent CSIRO because of a conflict of interest. CSIRO opposedthese motions on August 3, 2007.

 

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On August 3, 2007, CSIRO moved to dismiss theCompany’s complaint for lack of case or controversy and failure to state aclaim upon which relief can be granted, or, in the alternative, to stay thecase pending the resolution of the pending lawsuits described in the firstparagraph above. On October 24, 2007, the Court issued an order denyingCSIRO’s motion to dismiss. The Court also denied the Company’s motions tostay/intervene/disqualify.  The Companyappealed the Court’s denial of the motions to stay/intervene/disqualify to theUnited States Court of Appeals for the Federal Circuit.  The hearing on the Company’s appeal was heldon September 3, 2008.  The Court hasnot yet rendered a decision.

 

On December 5, 2007, CSIRO filed its answer tothe Company’s complaint, as well as counterclaims against the Company forwillful and deliberate infringement of the ‘069 Patent. CSIRO’s counterclaimsincluded a claim for monetary damages, including triple damages based on itsallegation of willful and deliberate infringement, attorneys’ fees andinjunctive relief.   On April 10,2008, the Company filed a First Amended Complaint and First Amended Reply toCSIRO’s Answer and Counterclaims.  On April 23,2008, CSIRO filed its Answer and Counterclaims to the First AmendedComplaint.  On May 12, 2008, theCompany filed a Reply and Affirmative Defenses to CSIRO’s amendedcounterclaims.

 

On May 22, 2008, the Company filed a motion for summaryjudgment seeking to invalidate the ‘069 Patent on indefiniteness grounds.  The motion was denied on August 14,2008.

 

The claim construction hearing was held on June 26,2008 and the claim construction order was issued on August 14, 2008.  On August 1, 2008, the Company moved todisqualify the firm of Townsend, Townsend and Crew from representing CSIRO inthe Marvell v. CSIRO case because of a conflict of interest.  CSIRO opposed the motion on August 18,2008.  The Court has not yet rendered adecision. Trial for the Company’s declaratory judgment action is set to beginon May 10, 2010. CSIRO and the Company are currently engaging in discoveryand motion practice.

 

*Shareholder Derivative Litigation.*  Between June 22, 2006 and August 2,2006, three purported shareholder derivative actions were filed in the UnitedStates District Court for the Northern District of California. Each of theselawsuits names the Company as a nominal defendant and a number of the Company’scurrent and former directors and officers as defendants. Each lawsuit seeks torecover damages purportedly sustained by the Company in connection with itsoption granting processes, and seeks certain corporate governance and internalcontrol changes. Pursuant to orders of the court dated August 17 and October 17,2006, the three actions were consolidated as a single action, entitled *In re Marvell Technology Group Ltd. DerivativeLitigation*. The plaintiffs filed an amended and consolidated complainton November 1, 2006. On January 16, 2007, the Company filed a motionto dismiss the consolidated complaint for lack of standing or, in thealternative, stay proceedings.

 

On February 12, 2007, a new purported derivativeaction was filed in the United States District Court for the Northern Districtof California. As in *In re MarvellTechnology Group Ltd. Derivative Litigation*, this lawsuit namesthe Company as a nominal defendant and a number of the Company’s current andformer directors and officers as defendants. It seeks to recover damagespurportedly sustained by the Company in connection with its option grantingprocesses, and seeks certain corporate governance and internal control changes.On May 1, 2007, the court entered an order consolidating this lawsuit with*In re Marvell Technology Group Ltd.Derivative Litigation*.

 

On May 29, 2007, the Court entered an orderstaying discovery in this matter pending resolution of the Company’s motion todismiss.

 

On January 25, 2008, the Court entered a stipulatedorder staying proceedings so that the parties could finalize a settlement thatwould resolve the actions. On or about March 5, 2008, the parties enteredinto a memorandum of understanding that tentatively settles and resolves theactions. The terms of the memorandum of understanding include certain corporategovernance enhancements and an agreement by the Company to pay up to$16 million in plaintiffs’ attorneys’ fees, an amount less than the $24.5million that the Company received from a settlement with its directors’ andofficers’ liability insurers. This tentative settlement of the consolidatedderivative actions requires court approval before it becomes final. The Companyaccrued the $16 million settlement amount in the fourth quarter of fiscal 2008. The Company anticipates that the partieswill finalize and submit formal settlement documentation to the court in thenext few months for both preliminary and final approval, at which time paymentof the settlement amount will be made. The Company recorded the insurance settlement amount as restricted cashat the time it was received in the first quarter of fiscal 2009.

 

*Class Action SecuritiesLitigation.*  Between October 5,2006 and November 13, 2006, four putative class actions were filed in theUnited States District Court for the Northern District of California againstthe Company and certain of its officers and directors. The complaints allegethat the Company and certain of its officers and directors violated the federalsecurities laws by making false and 

 

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misleadingstatements and omissions relating to the grants of stock options. Thecomplaints seek, on behalf of persons who purchased the Company’s common sharesduring the period from October 3, 2001 to October 3, 2006,unspecified damages, interest, and costs and expenses, including attorneys’fees and disbursements. Pursuant to an order of the court dated February 2,2007, these four putative class actions were consolidated as a single actionentitled *In re Marvell TechnologyGroup Ltd. Securities Litigation*. On August 16, 2007,plaintiffs filed a consolidated class action complaint. On October 18,2007, the Company filed a motion to dismiss the consolidated class actioncomplaint. The motion is fully briefed and was argued on February 15,2008. The Company awaits the court’s order on this motion.

 

*SEC and United States AttorneyInquiries.*  In July 2006,the Company received a letter of informal inquiry from the SEC requestingcertain documents relating to the Company’s stock option grants and practices.The Company also received a grand jury subpoena from the office of the UnitedStates Attorney for the Northern District of California requestingsubstantially similar documents. On April 20, 2007, the Company wasinformed that the SEC was conducting a formal investigation into this matter.On June 8, 2007 and July 3, 2007, the Company received document subpoenasfrom the SEC. On October 11, 2007, the Company received a “Wells Notice”from the staff of the SEC. Weili Dai, Vice President of Sales forCommunications and Consumer Business of Marvell Semiconductor, Inc. (“MSI”),who is not an officer or director of the Company, also received a “Wells”notice. The SEC staff also advised the Company that it is not at this timerecommending enforcement action against any of the Company’s current officersor directors. The “Wells” notices indicated that the staff intended torecommend to the staff of the SEC that it bring civil actions against therecipients for injunctive relief and civil monetary penalties. The Companyresponded in writing to the “Wells Notice” and sought to reach a resolution ofthis matter before any action was filed.

 

On May 8, 2008, the Companyannounced that it had reached an agreement with the SEC to settle thismatter.  Without admitting or denying theallegations in the SEC’s complaint, the Company agreed to settle the charges byconsenting to a permanent injunction against any future violations of variousprovisions of the federal securities laws. The Company also agreed to pay acivil penalty of $10 million in connection with the settlement.  On May 8, 2008, the SEC filed acomplaint captioned *SEC v. MarvellTechnology Group, Ltd., et al*., Case No. CV-08-2367-HRL,in the United States District Court for the Northern District ofCalifornia.  The Company’s consent toentry of final judgment was also filed on May 8, 2008. In a related agreement, Ms. Dai also entered into a settlement withthe SEC.  Without admitting or denyingthe allegations in the SEC’s complaint, Ms. Dai consented to a permanentinjunction against any future violations of various provisions of the federalsecurities laws, agreed not to serve as a director or officer of a publiccompany for a period of five years, and agreed to pay a civil penalty of$500,000.   The Court entered thefinal judgment against Ms. Dai on June 16, 2008 and against theCompany on July 1, 2008.  The Companyaccrued the $10 million civil penalty in the first quarter of fiscal 2009 andpaid it to the SEC on July 8, 2008.

 

This settlement concludes the SEC’s formalinvestigation of the Company with respect to the Company’s historic stockoption granting practices.

 

*Wi-Lan Litigation.*  On December 21, 2006, MSI received aletter from Wi-Lan, Inc. (“Wi-Lan”) accusing MSI of infringing four UnitedStates patents allegedly owned by Wi-Lan, and one Canadian patent alsoallegedly owned by Wi-Lan. On October 31, 2007, Wi-Lan sued two groups ofsystem and chip manufacturers in the United States District Court for theEastern District of Texas, in both cases naming MSI as a defendant and allegingpatent infringement. In the first case, Wi-Lan alleges that defendants infringetwo patents that allegedly relate to the 802.11 wireless standard. In thesecond case, Wi-Lan alleges that defendants infringe the same two patentsasserted in the first case, and in addition Wi-Lan alleges that some of thedefendants in the second case infringe a third patent that allegedly relates toAsymmetric Digital Subscriber Line (“ADSL”) technology. In the second case, MSIis not accused of infringing the ADSL patent.

 

On May 27, 2008, defendants in both cases jointlymoved to consolidate the co-pending related cases and permit claims involvingsuppliers of the products to be litigated first.  Wi-Lan filed its opposition on June 18,2008.  The Court has not yet rendered adecision.  The Claim Construction Hearingis scheduled for September 1, 2010, and the trial is set to begin on January 4,2011.  MSI believes it does not infringethe asserted Wi-Lan patents and will vigorously defend itself in these matters.

 

On November 5, 2007, MSI filed a complaintagainst Wi-Lan in the United States District Court for the Northern District ofCalifornia asking the Court to find that it does not infringe three patentsthat Wi-Lan asserted against MSI in its December 21, 2006 letter. Two ofthese patents were not asserted against MSI in either of the two Texaslitigations. These patents allegedly relate to Wideband Code Division MultipleAccess technology. Also, MSI asks in the alternative that the Court find thepatents invalid. Wi-Lan has filed a motion to dismiss, and the Company filed its opposition to that motion on June 9, 2008.  On June 19,2008, Marvell settled this declaratory judgment action.  This settlement does not effect or in any wayinvolve the ongoing litigations brought by Wi-LAN in the Eastern District ofTexas.

 

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*Fujitsu et al. Litigation.*  On December 17, 2007, Fujitsu, Ltd., LGElectronics., Ltd., and U.S. Philips Corp., sued NETGEAR, Inc. in theUnited States District Court for the Western District of Wisconsin, allegingthat NETGEAR’s 802.11 equipment infringed three United States patents allegedlyowned individually by the plaintiffs.  OnMarch 17, 2008, NETGEAR filed a third-party complaint against threecompanies, including MSI, who allegedly supply 802.11 chips to NETGEAR.  In the third-party action, NETGEAR allegesthat whatever damages and compensation it is required to pay as a result of theunderlying patent infringement litigation, the alleged suppliers owe toNETGEAR.  The Company filed an answer anda motion to amend the schedule in the case on April 8, 2008.  The Court, on its own, adjusted the scheduleto account for the new parties added to the litigation and moved the trial dateto April 27, 2009.  The claimconstruction hearing was held on August 15, 2008.  The Company believes that it does not oweNETGEAR any payment resulting from NETGEAR’s use of the Company’s 802.11 partsin NETGEAR products, and the Company also believes that none of the patents insuit is infringed by NETGEAR.  TheCompany intends to defend this litigation vigorously.

 

*General.*  The Company is also party to other legalproceedings and claims arising in the normal course of business.  The legal proceedings and claims describedabove could result in substantial costs and could divert the attention andresources of the Company’s management. Although the legal responsibility andfinancial impact with respect to these proceedings and claims cannot currentlybe ascertained, an unfavorable outcome in such actions could have a materialadverse effect on the Company’s cash flows, including potential impacts tocertain covenants under its existing credit agreement. Litigation is subject toinherent uncertainties and unfavorable rulings could occur. An unfavorableruling in litigation could require the Company to pay damages or one-timelicense fees or royalty payments, which could adversely impact gross margins infuture periods, or could prevent the Company from manufacturing or selling someof its products or limit or restrict the type of work that employees involvedin such litigation may perform for the Company. There can be no assurance thatthese matters will be resolved in a manner that is not adverse to the Company’sbusiness, financial condition, results of operations or cash flows.

 

**Note 8. Stock-Based Compensation**

 

The Company adopted SFAS 123R in its fiscal year beginning January 29,2006.  SFAS 123R requires the measurementand recognition of compensation expense for all share-based awards to employeesand directors, including employee stock options, restricted stock units andemployee stock purchase rights based on estimated fair values.

 

The following table presents details ofstock-based compensation expenses by functional line item (in thousands):

 
| ** **                 | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                 | ** ** | **August 2,  2008**         | ** ** | **July 28,  2007**        | ** ** | **August 2,  2008** | ** ** | **July 28,  2007** | ** ** |
| Cost of goods sold         |       | $                                | 3,755      |                           | $          | 3,275 |   | $ | 6,828 |   | $ | 6,293 |   |
| Research and development   |       | 32,998                           |       | 34,591                         |       | 62,930 |   | 66,633 |   |
| Selling and marketing      |       | 6,159                            |       | 10,997                         |       | 13,507 |   | 18,148 |   |
| General and administrative |       | 4,715                            |       | 10,033                         |       | 9,588 |   | 14,590 |   |
|                       |       | $                                | 47,627     |                           | $          | 58,896 |   | $ | 92,853 |   | $ | 105,664 |   |

 

The following assumptions were used for eachrespective period to calculate the weighted average fair value of each optionaward on the date of grant using the Black-Scholes option pricing model:

 
| ** **                  | ** ** | **Stock Option Plans** | ** ** | **ESPP**                         | ** ** |
|-----------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                  | ** ** | **Three Months Ended** | ** ** | **Three Months Ended** | ** ** |
| ** **                  | ** ** | **August 2, 2008**     | ** ** | **July 28, 2007**      | ** ** | **August 2, 2008** | ** ** | **July 28, 2007** | ** ** |
| Volatility                  |       | 44                               | %          | 45                               | %          | 45 | % | — |   |
| Expected life (in years)    |       | 5.0                              |       | 5.0                              |       | 1.3 |   | — |   |
| Risk-free interest rate     |       | 2.7                              | %          | 4.6                              | %          | 4.3 | % | — |   |
| Dividend yield              |       | —                           |       | —                           |       | — |   | — |   |
| Weighted average fair value |       | $                                | 7.01       |                             | $          | 7.58 |   | $ | 6.05 |   | — |   |
|                             |            |                                  |            |                                  |            |  |  |  |  |  |  |  |

 
| ** **                  | ** ** | **Stock Option Plans** | ** ** | **ESPP**                       | ** ** |
|-----------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                  | ** ** | **Six Months Ended**   | ** ** | **Six Months Ended** | ** ** |
| ** **                  | ** ** | **August 2, 2008**     | ** ** | **July 28, 2007**    | ** ** | **August 2, 2008** | ** ** | **July 28, 2007** | ** ** |
| Volatility                  |       | 44                               | %          | 45                             | %          | 45 | % | — |   |
| Expected life (in years)    |       | 5.2                              |       | 5.0                            |       | 1.3 |   | — |   |
| Risk-free interest rate     |       | 3.3                              | %          | 4.6                            | %          | 4.3 | % | — |   |
| Dividend yield              |       | —                           |       | —                         |       | — |   | — |   |
| Weighted average fair value |       | $                                | 5.25       |                           | $          | 7.66 |   | $ | 6.05 |   | — |   |
|                             |            |                                  |            |                                |            |  |  |  |  |  |  |  |

 

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In developing estimates used in the adoption ofSFAS 123R, the Company established the expected term for employee options andawards, as well as expected forfeiture rates, based on the historicalsettlement experience and after giving consideration to vesting schedules.  Assumptions for option exercises andpre-vesting terminations of options were stratified by employee groups withsufficiently distinct behavior patterns.

 

Expected volatility under SFAS 123R wasdeveloped based on the average of the Company’s historical daily stock pricevolatility.  The risk-free interest rateassumption is based on observed interest rates appropriate for the expectedterms of our stock options.

 

SFAS 123R also requires forfeitures to beestimated at the time of grant and revised, if necessary, in subsequent periodsif actual forfeitures differ from initial estimates.

 

**Note 9. Shareholders’ Equity**

 

***Stock plans***

 

In April 1995, the Company adopted the 1995 StockOption Plan (the “Option Plan”). The Option Plan, as amended, had 383,675,842 common shares reserved forissuance thereunder as of August 2, 2008. Options granted under the Option Plan generally have a term of ten yearsand generally must be issued at prices not less than 100% and 85% for incentiveand nonqualified stock options, respectively, of the fair market value of thestock on the date of grant. Incentive stock options granted to shareholders whoown greater than 10% of the outstanding stock are for periods not to exceedfive years and must be issued at prices not less than 110% of the fair market valueof the stock on the date of grant. The options generally vest 20% one yearafter the vesting commencement date, and the remaining shares vest one-sixtiethper month over the remaining 48 months. Options granted under the Option Planprior to March 1, 2000 may be exercised prior to vesting and the exercisedshares remain unvested until vested in accordance with the terms of the grant.The Company has the right to repurchase such shares at their original purchaseprice if the optionee is terminated from service prior to vesting. Such rightexpires as the options vest over a five-year period. Options granted under theOption Plan subsequent to March 1, 2000 may only be exercised upon orafter vesting.

 

In August 1997, the Company adopted the 1997Directors’ Stock Option Plan (the “Directors’ Plan”). Under the Directors’Plan, an outside director was granted an option to purchase 30,000 commonshares upon appointment to the Company’s Board of Directors. These optionsvested 20% one year after the vesting commencement date and remaining sharesvest one-sixtieth per month over the remaining 48 months. An outside directorwas also granted an option to purchase 6,000 common shares on the date of eachannual meeting of the shareholders. These options vested one-twelfth per monthover 12 months after the fourth anniversary of the vesting commencement date.Options granted under the Directors’ Plan could be exercised prior to vesting.The Directors’ Plan was terminated in October 2007.

 

In October 2007, the Company adopted the 2007Directors’ Stock Incentive Plan (the “2007 Directors’ Plan”). Under the 2007Directors’ Plan, an outside director is granted an option to purchase 50,000common shares upon appointment to the Company’s Board of Directors. Theseoptions vest 1/3rd on the one year anniversary of the date ofgrant and 1/3rd ofthe shares on each anniversary thereafter. An outside director who has servedon the Board of Directors for the prior six months is also granted an option topurchase 12,000 common shares on the date of each annual meeting of the Company’sshareholders. These options vest 100% on the earlier of the date of the nextannual general meeting of shareholders or the one year anniversary of the dateof grant.

 

Under the Option Plan and the 2007 Directors’ Plan,the Company may also grant restricted stock awards, which may be subject tovesting and stock unit awards, which are denominated in shares of stock, butmay be settled in cash or tradable shares of the Company’s common shares uponvesting, as determined by the Company at the time of grant.

 

***Employee stock purchase plan***

 

In June 2000, the Company adopted the 2000Employee Stock Purchase Plan (the “Purchase Plan”). The Purchase Plan, asamended, had 49,871,612common shares reserve for issuance thereunder as of August 2, 2008.  Under the Purchase Plan, employees aregranted the right to purchase common shares at a price per share that is 85% ofthe lesser of the fair market value of the shares at 

 

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(i) theparticipant’s entry date into the two-year offering period, or (ii) theend of each six-month purchase period within the offering period. Participantspurchase stock using payroll deductions, which may not exceed 20% of theirtotal cash compensation.  Effective on August 20,2007, offering and purchase periods begin on December 8 and June 8 ofeach year.  For the three and six monthsended August 2, 2008, the Company recognized $8.1 million and $18.0 million of stock-based compensationexpense related to the activity under the Purchase Plan, respectively.  The Companyissued 1,741,158 shares under the Purchase Plan in the three and six monthsended August 2, 2008 at a price of $12.95. As of August 2, 2008, there was $21.3 million of unrecognizedcompensation cost related to the Purchase Plan.

 

Stock option activity under the Company’sstock option plans for the six months ended August 2, 2008 is summarizedbelow (in thousands, except per share amounts):

 
| ** **                                        | ** ** | **Options  Outstanding** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|---------------------------------------------------|------------|--------------------------|------------|----------------------------------------|------------|
| ** **                                        | ** ** | **(In thousands)**  | ** ** | ** **                             | ** ** |
| Balance at February 2, 2008                  |       | 109,158                  |       | $                                      | 14.64      |   |
| Options granted                                   |       | 10,881                   |       | $                                      | 12.17      |   |
| Options forfeited/canceled/expired                |       | (4,877                   | )          | $                                      | 19.42      |   |
| Options exercised                                 |       | (6,247                   | )          | $                                      | 6.80       |   |
|                                              |       |                     |       |                                   |       |
| Balance at August 2, 2008                    |       | 108,915                  |       | $                                      | 14.63      |   |
| Vested or expected to vest at August 2, 2008 |       | 100,651                  |       | $                                      | 14.18      |   |
| Exercisable at August 2, 2008                |       | 60,952                   |       | $                                      | 11.05      |   |

 

Included in the preceding table are options for 1,683,000 common sharesgranted to certain officers at exercise prices ranging between $14.01 and$24.80 that will become exercisable only upon the achievement of specifiedannual earnings per share targets through fiscal 2014.

 

The aggregate intrinsic value and weighted average remainingcontractual term of options vested and expected to vest at August 2, 2008was $416.4 millionand 6.3 years, respectively.  The aggregate intrinsic value and weightedaverage remaining contractual term of options exercisable at August 2,2008 was $378.3 million and 5.0 years, respectively.  The aggregate intrinsic value is calculatedbased on the Company’s closing stock price for all in-the-money options as of August 2,2008.

 

Theaggregate intrinsic value and weighted average remaining contractual term ofrestricted stock vested and expected to vest as of August 2, 2008 was $51.0 million and 0.8 years,respectively.

 

Includedin the table below is activity related to the nonvested restricted stock awards:

 
| ** **                       | ** ** | **Nonvested  Restricted  Stock  Outstanding** | ** ** | **Weighted  Average  Grant Date  Fair Value** | ** ** |
|----------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------------------|------------|
| Balance at February 2, 2008 |       | 2,111                                         |       | $                                                       | 16.89      |   |
| Granted                          |       | 2,371                                         |       | $                                                       | 11.51      |   |
| Vested                           |       | (638                                          | )          | $                                                       | 14.71      |   |
| Canceled/Forfeited               |       | (191                                          | )          | $                                                       | 13.94      |   |
| Balance at August 2, 2008   |       | 3,653                                         |       | $                                                       | 13.55      |   |

 

TheCompany’s current practice is to issue new shares to satisfy share optionexercises. As of August 2, 2008, compensation costs related to nonvestedawards not yet recognized amounted to $332.2 million. The unamortizedcompensation expense for stock options and restricted stock will be amortizedon a straight-line basis and is expected to be recognized over aweighted-average period of 2.4 years and 1.3 years, respectively.

 

Thetotal tax benefit attributable to options exercised in the six months ended August 2,2008 was $0.5 million and the excess tax benefits from stock-based compensationof $0.5 million as reported on the condensed consolidated statements of cashflows in financing activities.  Suchexcess tax benefits represent the reduction in income taxes otherwise payableduring the period, attributable to the actual gross tax benefits in excess ofthe expected tax benefits for options exercised in current and prior periods.

 

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***Stock award activity***

 

The Company has issued restricted stock and restricted stock unitawards to its employees under the Option Plan. Such awards generally vest over a period of one to five years from thedate of grant. The restricted stock awards have the voting rights of commonshares and the shares underlying the restricted stock are considered issued andoutstanding.  The Company expenses thecost of the restricted stock awards, which is determined to be the fair marketvalue of the shares at the date of grant, ratably over the period during whichthe restrictions lapse.  The grant ofrestricted stock awards is deducted from the shares available for grant underthe Option Plan.

 

Based on the closing price of the Company’sstock of $14.69 as reported on the NASDAQ Stock Market on August 1,2008, the total pretax intrinsic value of all outstanding restricted stock was$1.1 million.

 

**Note 10.Income Taxes**

 

For the three months ended August 2,2008 and July 28, 2007, the Company’s effective tax rate was an income taxexpense of 6.6% and an income tax expense of (20.5)%, respectively.  Theincome tax provision for these periods was affected by non-tax-deductible expensessuch as SFAS 123R stock-based compensation expense, amortization of acquiredintangibles, foreign exchange adjustments, and accrual of unrecognized taxbenefits, interest and penalties associated with FIN 48.  In addition, the August 2, 2008 incometax expense was also affected by the Housing and Economic Recovery Act of 2008(P.L. 110-289) signed into law July 30, 2008.

 

The Company’s totalunrecognized tax benefits as of August 2, 2008 and February 2, 2008were $118.3 million and $109.7 million, respectively. During the three monthsended August 2, 2008, there was a reversal of a FIN 48 reserve due to thelapse of a statute of limitations in the amount of $1.4 million which includespenalty and interest.  However, overallthere was a net $8.6 million increase in unrecognized tax benefits, penaltiesand interest during the six months ended August 2, 2008.  The net increase was primarily due touncertain tax positions on our international structure.  If recognized, all of the FIN 48 liabilitiesrecorded to date will impact the effective tax rate.

 

In accordance with theCompany’s accounting policy, the Company recognizes accrued interest andpenalties related to unrecognized tax benefits as a component of income taxprovision. This policy did not change as a result of the adoption of FIN 48.

 

The Company conductsbusiness globally and, as a result, one or more of its subsidiaries file incometax returns in the U.S. federal jurisdiction and various state and foreignjurisdictions.  The Company is subject to examination by tax authoritiesthroughout the world, including such major jurisdictions as Singapore, Japan,Taiwan, China, India, Germany, Israel, Netherlands, Switzerland, the UnitedKingdom, Canada, Malaysia and the United States.  The Company is subjectto non U.S. income tax examinations for years beginning with fiscal year 2002and for U.S. income tax examinations beginning with fiscal year 2004. During the quarter ended May 3, 2008, non U.S. subsidiaries were notifiedby tax authorities that they would begin an income tax audit for fiscal years2004, 2005 and 2006. The audit field work was completed after the quarter endedMay 3, 2008, concluding that no adjustments were necessary to the 2004,2005 and 2006 years. The audit also covered the employment taxes with regard tothe re-measured stock options, and the taxing authorities found that theemployment taxes were adequately provided. The audit field work by U.S. tax authorities of the Company’s U.S.subsidiaries is complete for the fiscal years 2004, 2005 and 2006, however,there is no closing agreement.  The U.S. tax authorities are reviewingemployment taxes with regard to the re-measured stock options and have proposedaudit assessments for calendar years 2003, 2004, 2005 and 2006.  TheCompany believes that it has adequately provided for all issues related tothese examinations, and the ultimate disposition of these matters is unlikelyto have a material adverse affect the Company’s consolidated financialposition.

 

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**Note 11. Related Party Transactions**

 

During fiscal 2008, the Company incurred $0.1 millionin expenses from an unrelated third-party entity, ACM Aviation, Inc. (“ACM”),for charter aircraft services provided to MSI for Estopia Air LLC (“Estopia Air”).The aircraft provided by ACM to the Company for such services is owned byEstopia Air. The Company’s Chairman, President and Chief Executive Officer, Dr. SehatSutardja, and the Company’s Vice President of Sales for Communications andConsumer Business of MSI, Weili Dai, through their control and ownership ofEstopia Air, own the aircraft provided by ACM. During the three months ended August 2, 2008 and July 28,2007, the Company incurred no expenses from ACM for charter aircraft servicesprovided to MSI.During the first six months ended August 2, 2008 and July 28,2007, the Companyincurred none and approximately$73,000, respectively,of expenses from ACM, for charter aircraft services provided to MSI.

 

On August 19, 2005, the Company, through its subsidiaries MSI andMarvell International Ltd. (“Marvell International”), entered into a Licenseand Manufacturing Services Agreement (the “License Agreement”) with C2Microsystems, Inc. (“C2Micro”).  TheLicense Agreement has substantially similar terms as other license andmanufacturing services agreements of the Company with other third parties.  The Company recognized $1.4 million ofrevenue under the License Agreement with C2 Micro during the three months endedAugust 2, 2008, $9,000 of revenue during the three months ended July 28,2007, $2.6 million of revenue during the first six months ended August 2,2008 and $39,000 of revenue during the first six months ended July 28,2007.  As of August 2, 2008, theCompany had a receivable of $1.4 million from C2Micro.  Dr. Sehat Sutardja, and Weili Dai,through their ownership and control of Estopia LLC (“Estopia”), are indirectshareholders of C2Micro.  Kuo Wei(Herbert) Chang, a member of the Company’s Board of Directors, through hisownership and control of C-Squared venture entities, is also an indirectshareholder of C2Micro.  Dr. PantasSutardja, the Company’s Vice President, Chief Technology Officer, and ChiefResearch and Development Officer, is also a shareholder of C2Micro.

 

On January 8, 2007, the Company, through MarvellInternational, entered into a Library/IP/Software Evaluation License Agreement(the “Evaluation License Agreement”) with VeriSilicon Holdings Co., Ltd. (“VeriSilicon”).  The Evaluation License Agreement has noconsideration.  The Company also incurred$43,000 and $119,000 of royalty expense from VeriSilicon under a core licenseagreement assumed from its acquisition of the semiconductor design business ofUTStarcom, Inc. during the three months ended August 2, 2008 and July 28,2007, respectively.  The Company incurred$109,000 and $191,000 of royalty expense under the same license agreementduring the first six months ended August 2, 2008 and July 28, 2007,respectively. Weili Dai’s brother (and Dr. Sehat Sutardja’sbrother-in-law) is the Chairman, President and Chief Executive Officer ofVeriSilicon.  Ms. Dai is also ashareholder of VeriSilicon.

 

On October 31, 2007, the Company entered into aLicense Agreement with Vivante Corporation (“Vivante”).  The License Agreement has substantiallysimilar terms as other license agreements of the Company with other thirdparties.  The Company recorded none and$0.2 million of expense during the three and six months ended August 2,2008, respectively, in connection with the License Agreement with Vivante.  Dr. Sehat Sutardja and Weili Dai,through their ownership and control of Estopia, are indirect shareholders ofVivante.  In addition, Dr. SehatSutardja is also a direct shareholder and Chairman of the board of directors ofVivante.  Weili Dai’s brother (and Dr. SehatSutardja’s brother-in-law) is the Chief Executive Officer of Vivante.  Kuo Wei (Herbert) Chang, a member of theCompany’s Board of Directors, through his ownership and control of C-Squaredventure entities, is also an indirect shareholder of Vivante.

 

On September 28, 2007, the Company, throughMarvell International, entered into a Master Technology Agreement (the “TechnologyAgreement”) with Sonics, Inc. (“Sonics”), pursuant to which the Companylicensed technology from Sonics.  TheTechnology Agreement has substantially similar terms as other licenseagreements of the Company with other third parties.  The Company paid $2.1 million under theTechnology Agreement for the license and related maintenance during fiscal2008.  Kuo Wei (Herbert) Chang, member ofthe Company’s Board of Directors and Mike Sophie, former member of the Company’sBoard of Directors, both serve as members of the board of directors of Sonicsand each has a direct and/or indirect ownership interest in the equity ofSonics.  There was no expense incurredduring the three months ended August 2, 2008 and July 28, 2007.

 

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**Item 2. *Management’sDiscussion and Analysis of Financial Condition and Results******of Operations***

 

*This Quarterly Report on Form 10-Qcontains forward-looking statements that involve risks and uncertainties. Thesestatements include, without limitation, statements regarding our expectations,beliefs, intentions or strategies regarding the future. These statementsinvolve known and unknown risks, uncertainties and other factors, which maycause our actual results to differ materially from those implied by theforward-looking statements.**Wordssuch as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,”**“can,” and similarexpressions identify such forward-looking statements. These are statements thatrelate to future periods and include statements relating to ouranticipation  that the rate of new ordersand shipments will vary significantly from quarter to quarter; industry trends;our anticipation that the total amount of sales through distributors willincrease in future periods; our expectation that a significant percentage ofour sales will continue to come from direct sales to key customers; ourexpectations regarding the number of days in inventory, inventory levels andlevels of accounts receivable; our expectations regarding competition; ourintention to reduce product costs to offset decreases in average sellingprices; our continued efforts relating to the protection of our intellectualproperty; our expectations regarding the amount of customer concentration inthe future; our expectations regarding the amount of our future sales in Asia;our intention to continue to invest significant resources for research anddevelopment; our expectation regarding the effect of auction rate securities onour working capital needs or other requirements; our expected results, cashflows, and expenses, including those related to research and development, salesand marketing and general and administrative; our intention to completeacquired in-process research and development projects; our intention to makeacquisitions, investments, strategic alliances and joint ventures; ourexpectations regarding revenue, sources of revenue and make-up of revenue; ourexpectations regarding the impact of legal proceedings and claims; ourexpectations regarding the adequacy of our capital resources to meet ourcapital needs for the next 12 months; our plan to attract and retain highlyskilled personnel; our expectations regarding the growth in business andoperations; our expectations regarding our compliance with periodic reportingrequirements; our expectations regarding the impact of the restatement of ourfinancial statements in connection with the internal review of our historicstock option granting**practices**; our plansregarding remediation of 2008 material weakness and expectations regarding theeffectiveness of those remediation efforts; our plan regarding forward exchangecontracts; and the effect of recent accounting pronouncements and changes intaxation rules; and our plan of sourcing certain legacy application processorcellular and handset inventory from Intel. These forward-looking statements aresubject to risks and uncertainties that could cause actual results to differmaterially from those indicated in the forward-looking statements. Factors thatcould cause actual results to differ materially from those predicted, includebut are not limited to, the impact of international conflict and continuedeconomic volatility in either domestic or foreign markets; the outcome andimpact of the litigation related to our historic stock option grantingpractices**;**ourdependence upon the hard disk drive industry which is highly cyclical; ourability to scale our operations in response to changes in demand for existingor new products and services; our maintenance of an effective system ofinternal controls; our dependence on a small number of customers; our abilityto develop new and enhanced products; our success in integrating businesses weacquire and the impact such acquisitions may have on our operating results; ourability to estimate customer demand accurately; the success of our strategicrelationships with customers; our reliance on independent foundries andsubcontractors for the manufacture, assembly and testing of our products; ourability to manage future growth; the development and evolution of markets forour integrated circuits; our ability to protect our intellectual property; theimpact of any change in our application of the United States federal income taxlaws and the loss of any beneficial tax treatment that we currently enjoy; theimpact of changes in international financial and regulatory conditions; theimpact of changes in management; the risk that other remediation efforts willbe insufficient to address our material weakness in internal controls and theoutcome of pending or future litigation and legal proceedings. Additionalfactors which could cause actual results to differ materially include those setforth in the following discussion, as well as the risks discussed in Item 1A, “RiskFactors.” and other sections of this Quarterly Report on Form 10-Q. Theseforward-looking statements speak only as of the date hereof. Unless required bylaw, we undertake no obligation to update any forward-looking statements.*

 

**Overview**

 

We are a leading global semiconductor provider ofhigh-performance analog, mixed-signal, digital signal processing and embeddedmicroprocessor integrated circuits. Our diverse product portfolio includesswitching, transceiver, wireless, PC connectivity, gateways, communicationscontroller and storage and power management solutions that serve diverseapplications used in business enterprises, consumer electronics and emergingmarkets. We are a fabless integrated circuit company, which means that we relyon independent, third-party contractors to perform manufacturing, assembly andtest functions. This approach allows us to focus on designing, developing andmarketing our products and significantly reduces the amount of capital we needto invest in manufacturing products. In February 2006, we acquired thesemiconductor design business of UTStarcom, Inc. for $40.8 million,including $16.0 million subsequently recognized when milestones wereachieved.  This business designs andsupplies chipsets for personal phone applications.  In May 2006, we acquired the printersemiconductor business of Avago Technologies Limited for $288.0 million, 

 

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including earnoutpayments of $35.0 million subsequently recognized during fiscal 2007 and fiscal2008 based on the achievement of certain levels of revenue.  The printer semiconductor business of Avagodesigns and develops System-on-Chip (“SoC”) and system level solutions for bothinkjet and laser jet printer systems.  InNovember 2006, we completed the acquisition of the communications andapplications processor business of Intel Corporation for approximately $605.6million.  The communications andapplications processor business of Intel designs and develops cellular basebandprocessors for multi-mode, multi-band wireless handheld devices such as cellularhandsets, PDAs and smartphones.  Inaddition, we have also completed several smaller acquisitions over the lastthree fiscal years.

 

We offer our customers a wide range ofhigh-performance analog, mixed-signal, digital signal processing and embeddedmicroprocessor integrated circuits. Our products can be utilized in a widearray of enterprise applications including hard disk drives, high-speednetworking equipment, PCs, wireless local area network solutions for smalloffice/home office and residential gateway solutions, and consumer applicationssuch as cell phones, printers, digital cameras, MP3 devices, speakers, gameconsoles and PDAs.

 

 Our sales have historically beenmade on the basis of purchase orders rather than long-term agreements. Inaddition, the sales cycle for our products is long, which may cause us toexperience a delay between the time we incur expenses and the time revenue isgenerated from these expenditures. We expect to increase our research anddevelopment, selling and marketing, and general and administrative expendituresas we seek to expand our operations. We anticipate that the rate of new ordersmay vary significantly from quarter to quarter. Consequently, if anticipatedsales and shipments in any quarter do not occur when expected, expenses andinventory levels could be disproportionately high, and our operating resultsfor that quarter and future quarters may be adversely affected.

 

Our fiscal year is the 52- or 53-week periodending on the Saturday closest to January 31. In a 52-week year, eachfiscal quarter consists of 13 weeks. The additional week in a 53-week year isadded to the fourth quarter, making such quarter consist of 14 weeks. Fiscal2009 is comprised of 52 weeks and fiscal 2008 was comprised of 53 weeks. Inthis Quarterly Report on Form 10-Q, we refer to the fiscal year ended January 27,2007 as fiscal 2007, the fiscal year ended February 2, 2008 as fiscal2008, and the fiscal year ending January 31, 2009 as fiscal 2009.

 

**Critical Accounting Policies and Estimates**

** **

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States (“GAAP”) requires managementto make estimates, judgments and assumptions that affect the reported amountsof assets, liabilities, revenues and expenses and related disclosure ofcontingent assets and liabilities. Actual results could differ from theseestimates, and such differences could affect the results of operations reportedin future periods. For a description of our critical accounting policies andestimates, please refer to the “Critical Accounting Policies and Estimates”section of our Management’s Discussion and Analysis of Financial Condition andResults of Operations contained in our Annual Report on Form 10-K for theyear ended February 2, 2008. There have been no material changes in any ofour accounting policies during fiscal 2009.

 

**Results of Operations**

 

The following table sets forthinformation derived from our unaudited condensed consolidated statements ofoperations expressed as a percentage of net revenue:

 
| ** **                                  | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                  | ** ** | **August 2,****2008**       | ** ** | **July 28,****2007**      | ** ** | **August 2,****2008** | ** ** | **July 28,****2007** | ** ** |
| ** **                                  | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net revenue                                 |       | 100.0                            | %          | 100.0                          | %          | 100.0 | % | 100.0 | % |
| Operating costs and expenses:               |       |                             |       |                           |       |   |   |   |   |
| Cost of goods sold                          |       | 48.2                             |       | 51.1                           |       | 48.3 |   | 51.3 |   |
| Research and development and  other         |       | 29.6                             |       | 36.0                           |       | 29.6 |   | 36.4 |   |
| Selling and marketing                       |       | 5.0                              |       | 8.2                            |       | 5.3 |   | 8.1 |   |
| General and administrative                  |       | 3.7                              |       | 5.1                            |       | 2.7 |   | 4.5 |   |
| Amortization of acquired  intangible assets |       | 4.1                              |       | 5.7                            |       | 4.3 |   | 5.8 |   |
| Total operating costs and  expenses         |       | 90.6                             |       | 106.1                          |       | 90.2 |   | 106.1 |   |
| Operating income (loss)                     |       | 9.4                              |       | (6.1                           | )          | 9.8 |   | (6.1 | ) |
| Interest and other income, net              |       | 0.3                              |       | 0.5                            |       | 0.3 |   | 0.3 |   |
| Interest expense                            |       | 0.6                              |       | 1.5                            |       | 0.7 |   | 1.5 |   |
| Income (loss) before income  taxes          |       | 9.1                              |       | (7.1                           | )          | 9.4 |   | (7.3 | ) |
| Provision for income taxes                  |       | 0.6                              |       | 1.5                            |       | 0.8 |   | 1.2 |   |
| Net income (loss)                           |       | 8.5                              | %          | (8.6                           | )%         | 8.6 | % | (8.5 | )% |

 

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**Three and Six Months Ended August 2, 2008 and July 28,2007**

** **

***  ****Net Revenue*

 
| ** **  | ** ** | **Three Months Ended** | ** ** | ** **                | ** ** | **Six Months Ended** | ** ** | ** **               | ** ** |
|-------------|------------|----------------------------------|------------|---------------------------|------------|--------------------------------|------------|--------------------------|------------|
| ** **  | ** ** | **August 2,  2008**         | ** ** | **July 28,****2007** | ** ** | **%  Change**                  | ** ** | **August 2,  2008** | ** ** | **July 28,****2007** | ** ** | **%  Change** | ** ** |
| Net revenue |       | $                                | 842,575    |                      | $          | 656,711                        |       | 28.3                     | %          | $ | 1,646,650 |   | $ | 1,291,761 |   | 27.5 | % |
|             |            |                                  |            |                           |            |                                |            |                          |            |  |  |  |  |  |  |  |  |

 

Net revenue consists primarily of product revenuefrom sales of our semiconductor devices, and to a much lesser extent,development revenue derived from development contracts with our customers. Netrevenue is gross revenue, net of accruals for estimated sales returns,allowances and rebates. The increase in net revenue for the three and sixmonths ended August 2, 2008 compared to the net revenue for the three andsix months ended July 28, 2007 reflects an increase in volume shipments ofour storage SoCs and wireless products. The increase in net revenue was due to increased demand from our primary hard disk drivecustomers and the overall hard disk drive industry demand for notebook PC twoand a half inch drives and consumerproducts markets and increased demand for our wireless products in consumerapplications.  Net revenue derived fromdevelopment contracts increased in absolute dollars during the three and sixmonths ended August 2, 2008 compared to the three and six months ended July 28,2007, but represented less than 10% of net revenue for each period.

 

Historically,a relatively small number of customers have accounted for a significant portionof our revenue.  For the three and sixmonths ended August 2, 2008, one customer represented more than 10% of ournet revenue, with a total of 21% of our net revenue.  For the three months ended July 28,2007, two customers each represented more than 10% of our net revenue, for acombined total of 27% of our net revenue.  For the six months ended July 28,2007, one customer accounted for more than 10% of our net revenue with a totalof 15% of our net revenue.  No distributors accounted for more than 10% of our netrevenue in the three and six months ended August 2, 2008 and in the threeand six months ended July 28, 2007.

 

Because we sell our products to many OEM manufacturers who havemanufacturing operations located in Asia, a significant percentage of our salesare made to customers located outside of the United States.  Sales to customers located in Asiarepresented 87% and 81% of our net revenue for the three months ended August 2,2008 and July 28, 2007, respectively, and represented 86% and 83% of our net revenue for the six months ended August 2,2008 and July 28, 2007, respectively. The rest of our sales are to customers located in the United States andother geographic regions.  We expect that a significant portion of ourrevenue will continue to be represented by sales to our customers in Asia.  Substantially all of our sales to date havebeen denominated in U.S. dollars.

 

***   ****Cost of Goods Sold*

 
| ** **         | ** ** | **Three Months Ended** | ** ** | ** **                | ** ** | **Six Months Ended** | ** ** | ** **          | ** ** |
|--------------------|------------|----------------------------------|------------|---------------------------|------------|--------------------------------|------------|---------------------|------------|
| ** **         | ** ** | **August 2,****2008**       | ** ** | **July 28,****2007** | ** ** | **%  Change**                  | ** ** | **August 2,  2008** | ** ** | **July 28,****2007** | ** ** | **%  Change** | ** ** |
|               |       |                             |       |                      |       |                           |       |                |       |   |   |   |   |
| Cost of goods sold |       | $                                | 405,913    |                      | $          | 335,530                        |       | 21.0                | %          | $ | 794,755 |   | $ | 662,947 |   | 19.9 | % |
| % of net revenue   |       | 48.2                             | %          | 51.1                      | %          |                           |       | 48.3                | %          | 51.3 | % |   |   |
| Gross margin       |       | 51.8                             | %          | 48.9                      | %          |                           |       | 51.7                | %          | 48.7 | % |   |   |
|                    |            |                                  |            |                           |            |                                |            |                     |            |  |  |  |  |  |  |  |  |

 

Cost of goods sold consists primarily of thecosts of manufacturing, assembly and test of integrated circuit devices andrelated overhead costs, product warranty costs, royalties and compensation andassociated costs relating to manufacturing support, logistics and qualityassurance personnel, including stock-based compensation, excess andobsolescence provisions and purchase accounting adjustments.  Gross margin is calculated as net revenueless cost of goods sold as a percentage of net revenue.  The increase in gross margin for the threeand six months ended August 2, 2008 compared to the three and six monthsended July 28, 2007 was primarily due to reduced costs for cellular andhandset products resulting from the transition of manufacturing to ourfabrication partners.  In addition, grossmargins improved as we recorded less inventory excess and obsolescenceprovision and experienced lower material and manufacturing costs due to volumeefficiencies and yield improvements.  Thedecrease in excess and obsolescence provision was due to lower levels ofinventory as well as to the mix and quantities on hand compared to forecasteddemand for such products.  Our 

 

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grossmargins may fluctuate in future periods due to, among other things, changes inthe mix of products sold, the timing of production ramps of new products,increased pricing pressures from our customers and competitors, particularly inthe consumer product markets that we are targeting, charges for obsolete orpotentially excess inventory, changes in the costs charged by our manufacturingand test subcontractors, the introduction of new products with lower margins,product warranty costs and changes in the amount of development revenuerecognized.

 

*    Research andDevelopment and Other*

 
| ** **                         | ** ** | **Three Months Ended** | ** ** | ** **                | ** ** | **Six Months Ended** | ** ** | ** **               | ** ** |
|------------------------------------|------------|----------------------------------|------------|---------------------------|------------|--------------------------------|------------|--------------------------|------------|
| ** **                         | ** ** | **August 2,  2008**         | ** ** | **July 28,****2007** | ** ** | **%  Change**                  | ** ** | **August 2,  2008** | ** ** | **July 28,****2007** | ** ** | **%  Change** | ** ** |
|                               |       |                             |       |                      |       |                           |       |                     |       |   |   |   |   |
| Research and development and other |       | $                                | 249,714    |                      | $          | 236,194                        |       | 5.7                      | %          | $ | 488,189 |   | $ | 470,327 |   | 3.8 | % |
| % of net revenue                   |       | 29.6                             | %          | 36.0                      | %          | 29.6                           | %          | 36.4                     | %          |   |   |   |   |
|                                    |            |                                  |            |                           |            |                                |            |                          |            |  |  |  |  |  |  |  |  |

 

Research and development and other expenseconsists primarily of compensation and associated costs relating to developmentpersonnel, including stock-based compensation, prototype costs, contracteddevelopment work costs, depreciation and amortization expense, patentinvestigation and filings fees and allocated occupancy costs for theseoperations.

 

The increase in research and development andother expense in absolute dollars for the three months ended August 2,2008 compared to the three months ended July 28, 2007 was primarily due tohigher salary and related costs of $7.6 million.  Additionally, we incurred higher mask,prototype and product related costs of $6.6 million, increased costs fordepreciation and amortization expense and an increase of $1.9 million relatedto our expanding operations.  Partiallyoffsetting the increases in research and development and other expense wasdecreased costs of $2.2 million in outside professional services and computeraided design maintenance costs. Additionally, stock based compensation expense decreased by $1.6million.  Research and developmentrelated costs for the three months ended August 2, 2008 was $245.6 millioncompared to $232.2 million for the three months ended July 28, 2007.

 

The increase in research and development andother expense in absolute dollars in the six months ended August 2, 2008compared to the six months ended July 28, 2007 was primarily due to highersalary and related costs of $17.7 million. Additionally, we incurred increased costs for depreciation andamortization expense of $5.5 million arising from purchases of property,equipment and technology licenses and an increase of $4.0 million related toour expanding operations.  Partiallyoffsetting the increases in research and development and other expenses was adecrease in outside professional services, computer aided design maintenance costsand engineering supplies of $5.5 million and a decrease in stock-basedcompensation expense of $3.7 million. Research and development related costs for the six months ended August 2,2008 was $479.0 million compared to $463.2 million for the six months ended July 28,2007.

 

*    Selling and Marketing*

 
| ** **            | ** ** | **Three Months Ended** | ** ** | ** **                | ** ** | **Six Months Ended** | ** ** | ** **               | ** ** |
|-----------------------|------------|----------------------------------|------------|---------------------------|------------|--------------------------------|------------|--------------------------|------------|
| ** **            | ** ** | **August 2,  2008**         | ** ** | **July 28,****2007** | ** ** | **%  Change**                  | ** ** | **August 2,  2008** | ** ** | **July 28,****2007** | ** ** | **%**

**Change** | ** ** |
|                  |       |                             |       |                      |       |                           |       |                     |       |   |   |   |   |
| Selling and marketing |       | $                                | 41,834     |                      | $          | 53,942                         |       | (22.4                    | )%         | $ | 87,922 |   | $ | 104,334 |   | (15.7 | )% |
| % of net revenue      |       | 5.0                              | %          | 8.2                       | %          |                           |       | 5.3                      | %          | 8.1 | % |   |   |
|                       |            |                                  |            |                           |            |                                |            |                          |            |  |  |  |  |  |  |  |  |

 

Selling and marketing expense consists primarilyof compensation and associated costs relating to sales and marketing personnel,including stock-based compensation, sales commissions, promotional and othermarketing expenses, and allocated occupancy costs for these operations.  The decrease in selling and marketing expensein absolute dollars for the three months ended August 2, 2008 compared tothe three months ended July 28, 2007 was primarily due to lower salary andrelated expenses of $3.4 million due to lower overall headcount of sales andmarketing personnel.  Additionally, weincurred a decrease in stock-based compensation expense of $4.8 million and adecrease in other marketing costs of $2.3 million.

 

The decrease in selling and marketing expense inabsolute dollars for the six months ended August 2, 2008 compared to thesix months ended July 28, 2007 was primarily due to lower overallheadcount of selling and marketing personnel that resulted in a decrease in salary and relatedcosts of $4.8 million.  Additionally, weincurred a decrease in stock-based compensation expense of $4.6 million, adecrease in other marketing costs of $3.6 million and a decrease in overheadcosts of $1.4 million.

 

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*General and Administrative*

 
| ** **                 | ** ** | **Three Months Ended** | ** ** | ** **                | ** ** | **Six Months Ended** | ** ** | ** **               | ** ** |
|----------------------------|------------|----------------------------------|------------|---------------------------|------------|--------------------------------|------------|--------------------------|------------|
| ** **                 | ** ** | **August 2,  2008**         | ** ** | **July 28,****2007** | ** ** | **%  Change**                  | ** ** | **August 2,  2008** | ** ** | **July 28,****2007** | ** ** | **%  Change** | ** ** |
|                       |       |                             |       |                      |       |                           |       |                     |       |   |   |   |   |
| General and administrative |       | $                                | 30,989     |                      | $          | 33,775                         |       | (8.2                     | )%         | $ | 43,940 |   | $ | 57,763 |   | (23.9 | )% |
| % of net revenue           |       | 3.7                              | %          | 5.1                       | %          |                           |       | 2.7                      | %          | 4.5 | % |   |   |
|                            |            |                                  |            |                           |            |                                |            |                          |            |  |  |  |  |  |  |  |  |

 

General and administrative expense consistsprimarily of compensation and associated costs relating to general andadministrative personnel, including stock-based compensation, fees forprofessional services and allocated occupancy costs for these operations.  The decrease in absolute dollars in generaland administrative expense for the three months ended August 2, 2008compared to the three months ended July 28, 2007 was the result of a $6.1million decrease in legal and professional fees due to completion of theinternal review by a special committee of our Board of Directors related to ourhistoric stock option granting practices and related accounting matters thatwas completed during the three months ended July 28, 2007.  Additionally, stock-based compensationexpense decreased $5.3 million. Partially offsetting the decrease in general and administrative expensewas a $2.0 million increase in salary and related costs due to the net hiringof additional administrative personnel and a $5.1 million gain from the sale of an asset underconstruction recorded during the three monthsended July 28, 2007.

 

The decrease in absolute dollars in generaladministrative expense for the six months ended August 2, 2008 compared tothe six months ended July 28, 2007 was primarily due to a decrease inlegal fees of $19.9 million as a result of $24.5 million of insurance recoveries for shareholderderivative, class action and related lawsuits received during the three monthsended May 3, 2008 partially offset by a $10.0 million settlement with theSecurities and Exchange Commission (“SEC”) investigation regarding our historicstock option granting practices and related accounting matters. Additionally, stock-based compensation expense decreased $5.0million.  Partially offsetting thedecrease in general and administrative expense was an increase in salary andrelated costs of $5.0 million due to the net hiring of additionaladministrative personnel and a $5.1 million gain from the sale of an assetunder construction recorded during the six months ended July 28, 2007.

 

*    Amortization ofAcquired Intangible Assets*

 
|                                       |   | **Three Months Ended** |       |                    |       | **Six Months Ended** |       |                     |       |
|--------------------------------------------|--------|----------------------------------|------------|-------------------------|------------|--------------------------------|------------|--------------------------|------------|
|                                       |   | **August 2,  2008**         | ** ** | **July 28,  2007** | ** ** | **%  Change**                  | ** ** | **August 2,  2008** | ** ** | **July 28,  2007** | ** ** | **%  Change** | ** ** |
| Amortization of acquired intangible assets |   | $                                | 34,988     |                    | $          | 37,293                         |       | (6.2                     | )%         | $ | 70,235 |   | $ | 74,613 |   | (5.9 | )% |
| % of net revenue                           |   | 4.1                              | %          | 5.7                     | %          |                           |       | 4.3                      | %          | 5.8 | % |   |   |
|                                            |        |                                  |            |                         |            |                                |            |                          |            |  |  |  |  |  |  |  |  |

 

In fiscal 2007 and 2008, we made seven acquisitions in which weacquired intangible assets that are being amortized over their estimatedeconomic lives of one to eight years. The decrease in amortization of acquired intangible assets for the threeand six months ended August 2, 2008 compared to the three and six monthsended July 28, 2007 was due to amortization of intangible assets fromcertain acquisitions being fully amortized.

 

*    Interest and OtherIncome, Net*

 
|                           |   | **Three Months Ended** | ** **  | ** **                | ** ** | **Six Months Ended** | ** ** | ** **               |       |
|--------------------------------|--------|----------------------------------|-------------|---------------------------|------------|--------------------------------|------------|--------------------------|------------|
|                           |   | **August 2,****2008**       | ** **  | **July 28,****2007** | ** ** | **%  Change**                  | ** ** | **August 2,  2008** | ** ** | **July 28,****2007** | ** ** | **%  Change** |   |
| Interest and other income, net |   | $                                |  2,469 |                      | $          |  3,128                    |       | (21.1                    | )%         | $ |  5,661 |   | $ |  4,447 |   | 27.3 | % |
| % of net revenue               |   | 0.3                              | %           | 0.5                       | %          |                           |       | 0.3                      | %          | 0.3 | % |   |   |
|                                |        |                                  |             |                           |            |                                |            |                          |            |  |  |  |  |  |  |  |  |

 

Interest and other income, net consists primarilyof interest earned on cash, cash equivalents and short-term investment balancesand other realized and unrealized gains and losses. The decrease in interestand other income for the three months ended August 2, 2008 compared to thethree months ended July 28, 2007 was primarily due to a decrease in marketinterest rates for the three months ended August 2, 2008.

 

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The increase in interest and other income, netfor the six months ended August 2, 2008 compared to the six months ended July 28,2007 was due primarily to a $4.9 million reserve for the full impairment of anequity investment in a private company recorded for the six months ended July 28,2007.  Partially offsetting the increasein interest and other income was a decrease in interest and other income due toa decrease in market interest rates.

 

*    Interest Expense*

 
| ** **       | ** ** | **Three Months Ended** | ** ** | ** **                | ** ** | **Six Months Ended** | ** ** | ** **               | ** ** |
|------------------|------------|----------------------------------|------------|---------------------------|------------|--------------------------------|------------|--------------------------|------------|
| ** **       | ** ** | **August 2,  2008**         | ** ** | **July 28,****2007** | ** ** | **%  Change**                  | ** ** | **August 2,  2008** | ** ** | **July 28,****2007** | ** ** | **%  Change** | ** ** |
| Interest expense |       | $                                | 5,159      |                      | $          | 9,942                          |       | (48.1                    | )%         | $ | 12,310 |   | $ | 19,917 |   | (38.2 | )% |
| % of net revenue |       | 0.6                              | %          | 1.5                       | %          |                           |       | 0.7                      | %          | 1.5 | % |   |   |
|                  |            |                                  |            |                           |            |                                |            |                          |            |  |  |  |  |  |  |  |  |

 

Interest expense consists primarily of interestpaid on a term loan and capital lease obligations. The decrease in interestexpense for the three and six months ended August 2, 2008 compared to thethree and six months ended July 28, 2007 was primarily due to lowerinterest rates on a term loan obligation, lower interest expense from a supplyagreement with Intel and lower capital lease interest expense.

 

*    Provision forIncome Taxes*

 
| ** **                 | ** ** | **Three Months Ended** | ** ** | ** **                | ** ** | **Six Months Ended** | ** ** | ** **               | ** ** |
|----------------------------|------------|----------------------------------|------------|---------------------------|------------|--------------------------------|------------|--------------------------|------------|
| ** **                 | ** ** | **August 2,  2008**         | ** ** | **July 28,****2007** | ** ** | **%  Change**                  | ** ** | **August 2,  2008** | ** ** | **July 28,****2007** | ** ** | **%  Change** | ** ** |
|                       |       |                             |       |                      |       |                           |       |                     |       |   |   |   |   |
| Provision for income taxes |       | $                                | 5,080      |                      | $          | 9,619                          |       | (47.2                    | )%         | $ | 13,654 |   | $ | 15,591 |   | (12.4 | )% |
| % of net revenue           |       | 0.6                              | %          | 1.5                       | %          |                           |       | 0.8                      | %          | 1.2 | % |   |   |
|                            |            |                                  |            |                           |            |                                |            |                          |            |  |  |  |  |  |  |  |  |

 

For the three months ended August 2,2008 and July 28, 2007, our effective tax rate was 6.6% and (20.5)%,respectively.  For the six months ended August 2, 2008 and July 28,2007, our effective tax rate of 8.8% and (16.6%), respectively.  The effective tax rates are influenced bynon-tax-deductible expenses, such asStatementof Financial Accounting Standards (“SFAS”)123R stock-based compensation expense, amortization ofacquired intangibles, and accounting for uncertain tax benefits under FinancialAccounting Standards Board (“FASB”) Interpretation No. 48, “Accounting forUncertainty in Tax Positions” (“FIN 48”), which include foreign exchangeadjustments.  The July 28, 2007 effective tax rate was also impactedby the pretax loss and the fact that a smaller proportion of profit was earnedin low or zero tax jurisdictions.  Also,for the three months ended August 2, 2008, the effective tax rate wasreduced by the recognition of uncertain tax positions resulting from lapse of astatute of limitations, and the benefit of a research tax credit refund arisingout of the signing of the Housing and Economic Recovery Act of 2008 (P.L.110-289).

 

**Liquidity and Capital Resources**

 

Our principal source of liquidity as of August 2,2008 consisted of $888.9 million of cash, cash equivalents, restricted cash andshort-term investments of which $24.5 million is restricted for use in a legalsettlement.  Since our inception, we havefinanced our operations through a combination of sales of equity securities,cash generated by operations and cash assumed in acquisitions.

 

***Net Cash Provided by (Used in) OperatingActivities***

 

Net cash provided by operating activities was$313.1 million for the six months ended August 2, 2008 compared to netcash used in operating activities of $10.8 million for the six months ended July 28,2007.  The cash inflow from operations inthe six months ended August 2, 2008 was primarily due to net income of$141.3 million and changes in working capital. Non-cash charges for the six months ended August 2, 2008 included $70.2 million relatedto amortization of acquired intangible assets, $56.7 million of depreciationand amortization expense and $92.9 million of stock-based compensationexpense.  A significant working capitalchange contributing to positive cash flow in the six months ended August 2,2008 was the decrease in inventories of $103.3 million.  The decrease in inventories was primarily dueto the completion of contractual obligations under the original supplyagreement with Intel as well as concentrated efforts to reduce inventorylevels.  The number of days in inventorydecreased to 72 days as of August 2, 2008 compared to 80 days as of July 28,2007.  Also contributing to the increasein cash flows was a decrease in prepaid expenses and other assets of $42.8million primarily due to the utilization of prepaid foundry capacity andprepaid wafers.  In addition, accruedemployee compensation increased $10.0 million due primarily to an increase inaccrued vacation, accrued salaries due to timing of the payroll cycle and toaccrued bonuses.

 

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Significant working capital changes offsettingpositive cash flows for the six months ended August 2, 2008 included anincrease in accounts receivable of $138.6 million due primarily to the timingof revenue recorded toward the end of the quarter as well as timing of paymentsreceived from customers.  Days sales outstanding(“DSO”) increased to 50 days for the six months ended August 2, 2008compared to 49 days for the six months ended July 28, 2007.  Many of our larger customers have regularly scheduledpayment dates that fall immediately before or after our fiscal quarter-end. As aresult, our accounts receivable balance and DSO may fluctuate depending on thetiming of large payments made by our customers. Also contributing to the use of cashin operating activities was a decrease in accrued liabilities and otherof $34.0 million.  The decrease inaccrued liabilities and other was attributable to decreases in accruedcontingent consideration and accrued sales rebates.  Restricted cash increased $24.5 million dueto proceeds from settlement with our directors’ and officers’ insurancecarriers with the settlement requiring the proceeds to be used towards theconsolidated derivative actions settlement and any future class actionsecurities litigation settlement.

 

Significant working capital changes contributingto the use of cash in operating activities for the six months ended July 28,2007 included an increase in inventories of $88.7 million from inventorypurchase commitments and build up of inventory to support increased revenuelevels.  Also contributing to the use ofcash in operating activities was an increase in accounts receivable of $28.7million due primarily to the timing of payments received from ourcustomers.  Also contributing to the useof cash in operating activities was a decrease in accrued liabilities and otherof $26.2 million due primarily to a reduction in accrued legal expenses andpayment of an acquisition contingency.

 

Significant working capital changes contributingto positive cash flows for the six months ended July 28, 2007 included adecrease in prepaid expense and other assets of $54.0 million due primarily tothe utilization of prepaid foundry capacity and prepaid wafers.  Also contributing to positive cash flows wasan increase in accounts payable of $22.3 million due to the increase in overallactivity and the increase in inventory.

 

***Net Cash Used in Investing Activities***

 

Net cash used in investing activities was $34.2million for the six months ended August 2, 2008 compared to $148.2 millionfor the six months ended July 28, 2007. The net cash used in investing activities in the six month ended August 2,2008 was due to purchases of property and equipment of $46.5 million andpurchases of investments of $10.2 million, partially offset by sales andmaturities of investments of $23.8 million.  The net cash used in investing activities for the six months ended July 28,2007 was due to purchases of short-term investments of $113.7 million,purchases of property and equipment of $64.5 million and purchases oftechnology licenses of $16.9 million, partially offset by sales and maturitiesof short-term investments of $50.0 million.

 

***Net Cash Used in Financing Activities***

 

Net cash used in financing activities was $35.3million for the six months ended August 2, 2008 compared to $4.9 millionfor the six months ended July 28, 2007. For the six months ended August 2, 2008 and July 28, 2007, netcash used in financing activities was attributable to principal payments ondebt obligations and capital leases partially offset by proceeds from theissuance of common shares under our stock option plans.

 

**Contractual Obligations and Commitments**

 

In connection with the acquisition of thecommunications and applications processor business of Intel, we entered into aproduct supply agreement with Intel. Although we have met the contractual obligations under the originalsupply agreement and have transitioned certain products to our fabricationpartners, we anticipate that we will continue to source certain legacyapplication processor cellular and handset inventory from Intel.  Under terms of an amendment to the supplyagreement, we have committed to purchase an additional minimum number of wafersthrough December 2008.  Theamendment had no impact on the accounting for the original acquisition.  As of August 2, 2008, we had non-cancellablepurchase orders outstanding of $17.1 million under the amended arrangement.

 

Under our manufacturing relationships with our otherfoundries, cancellation of outstanding purchase orders is allowed but requiresrepayment of all expenses incurred through the date of cancellation. As of August 2,2008, these foundries had incurred approximately $188.4 million ofmanufacturing expenses on our outstanding purchase orders.

 

On February 28, 2005 and as amended on March 31,2005, we entered into an agreement with a foundry to reserve and secure foundryfabrication capacity for a fixed number of wafers at agreed upon prices for aperiod of five and a half years beginning on October 1, 2005.  In return, we agreed to pay the foundry$174.2 million over a period of 18 months. The amendment extends the term ofthe agreement and the agreed upon pricing terms until December 31,2015.  As of August 2, 2008,payments totaling $174.2 million 

 

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(included inprepaid expenses and other current assets and other non-current assets) hadbeen made and approximately $140.2 million of the prepayment had been utilizedas of August 2, 2008.  At August 2,2008, there were no outstanding commitments under the agreement.

 

As of August 2, 2008, we had approximately $49.8 million of other outstandingnon-cancelable purchase orders for capital purchase obligations.

 

As a resultof a facility consolidation in February 2002, we obtained a sublease onone of our facilities that had a non-cancelable lease.  Actual sublease income has approximatedestimated sublease income, but was less than our actual lease commitment,resulting in future negative cash flow over the remaining term of thesublease.  As of August 2, 2008,cash payments of $11.8 million, net of sublease income, have been made inconnection with this sublease. Approximately $1.5 million remains accrued forthis facilities consolidation charge as of August 2, 2008 of which $0.6million is current and $0.9 million is long-term, payable through 2010.

 

Wecurrently intend to fund our short and long-term capital requirements, as wellas our liquidity needs, with existing cash, cash equivalents and short-terminvestment balances as well as cash generated by operations. We believe thatour existing cash, cash equivalents and short-term investment balances will besufficient to meet our working capital needs, capital requirements, investment requirementsand commitments for at least the next 12 months. However, ourcapital requirements will depend on many factors, including our rate of salesgrowth, market acceptance of our products, costs of securing access to adequatemanufacturing capacity, the timing and extent of research and developmentprojects, costs of making improvements to facilities and increases in operatingexpenses, which are all subject to uncertainty. To the extent that our existingcash, cash equivalents and short-term investment balances and cash generated byoperations are insufficient to fund our future activities, we may need to raiseadditional funds through public or private debt or equity financing. We mayenter into additional acquisitions or other strategic arrangements in thefuture, which could also require us to seek additional debt or equityfinancing. Additional equity financing or convertible debt financing may bedilutive to our current shareholders. Additional funds may not be available onterms favorable to us or at all.

 

The following table summarizes our contractualobligations as of August 2, 2008 and the effect such obligations areexpected to have on our liquidity and cash flow in future periods (inthousands):

 
| ** **                          | ** ** | **Payments Due by Period** | ** ** |
|-------------------------------------|------------|-------------------------------------------|------------|
| ** **                          | ** ** | **2009**                                  | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **2013** | ** ** | **There-  after** | ** ** | **Total** | ** ** |
|                                | ** ** | **(remaining**                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                | ** ** | **six months)**                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Contractual obligations:            |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating leases                    |       | $                                         | 28,399     |   | $ | 38,842 |   | $ | 27,842 |   | $ | 16,979 |   | $ | 10,136 |   | $ | 10,441 |   | $ | 132,639 |   |
| Capital lease obligations           |       | 1,257                                     |       | 2,085 |   | 2,084 |   | 521 |   | — |   | — |   | 5,947 |   |
| Purchase commitments to  foundries  |       | 205,504                                   |       | — |   | — |   | — |   | — |   | — |   | 205,504 |   |
| Capital purchase obligations        |       | 49,792                                    |       | — |   | — |   | — |   | — |   | — |   | 49,792 |   |
| Long-term debt obligations          |       | 2,162                                     |       | 290,750 |   | — |   | — |   | — |   | — |   | 292,912 |   |
| Total contractual cash  obligations |       | $                                         | 287,114    |   | $ | 331,677 |   | $ | 29,926 |   | $ | 17,500 |   | $ | 10,136 |   | $ | 10,441 |   | $ | 686,794 |   |

 

Includedin operating lease commitments are lease payments for computer aided designsoftware license agreements and airplane lease commitments.

 

Our total unrecognized taxbenefits under FIN 48 as of August 2, 2008 and February 2, 2008 were$118.3 million and $109.7 million, respectively. There was an overall $8.6million net increase in our unrecognized tax benefits, penalties and interestduring the six months ended August 2, 2008 as discussed above in Note 10 –Income Taxes of the notes to our unaudited condensed consolidated financialstatements.  At this time, we are unableto make a reasonably reliable estimate of the amount of payments in individualyears beyond 12 months due to uncertainties in the timing of tax auditoutcomes.

 

In November 2006, weborrowed $400.0 million from a group of lenders in the form of term loans topartially finance the acquisition of the communications and applicationsprocessor business of Intel.  The creditagreement contains customer covenants including financial covenants with whichwe were in compliance as of August 2, 2008.  We pay interest and principal amounts equalto 0.25% of the aggregate principal amount of loans on a quarterly basis on thelast business day of each March, June, September and December.  The loan is repayable in November 2009.  We may repay the term loans in part or infull at any time without premium or penalty. During the three months ended August 2, 2008, we paid an additionalprincipal amount of $100.0 million.

 

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*Prospective capital needs:  *We believe that our existing cash, cash equivalentsand marketable securities, together with cash generated from operations andfrom exercise of employee stock options will be sufficient to cover our workingcapital needs, capital expenditures, investment requirements and commitmentsfor at least the next 12 months. However, we are named as defendants to several litigation actions and anunfavorable outcome in such actions could have a material adverse effect on ourcash flows, including potential impacts to certain covenants under our existingcredit agreement.  In the event that wemay need or desire to raise additional funds to prepay our term loan obligationor consummate acquisitions of other businesses, assets, products ortechnologies, we could raise such funds by electing to sell equity or debtsecurities to the public or to selected investors, or by borrowing money fromfinancial institutions. Our existing credit agreement however limits ourability to borrow additional funds as certain covenants would have to be met.

 

If we elect to raise additional funds, we may not be able to obtainsuch funds on a timely basis or on acceptable terms, if at all. If we raiseadditional funds by issuing additional equity or convertible debt securities,the ownership percentages of existing shareholders would be reduced. Inaddition, the equity or debt securities that we issue may have rights, preferencesor privileges senior to our common shares.

 

**Off-BalanceSheet Arrangements**

 

As of August 2, 2008, we did not have any materialoff-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of SECRegulation S-K.

 

**Recent Accounting Pronouncements**

 

In December 2007, the FASB issued SFAS No. 141 (revised2007), “Business Combinations” (“SFAS 141R”). The objective of SFAS 141 is toimprove the relevance, representational faithfulness, and comparability of theinformation that a company provides in its financial reports about a businesscombination and its effects. Under SFAS 141R, a company is required torecognize the assets acquired, liabilities assumed, contractual contingenciesand any estimate or contingent consideration measured at their fair value atthe acquisition date.  It furtherrequires that research and development assets acquired in a businesscombination that have no alternative future use be measured at theiracquisition-date fair value and then immediately charged to expense, and thatacquisition-related costs are to be recognized separately from the acquisitionand expensed as incurred.  Among otherchanges, this statement also requires that any “negative goodwill” berecognized in earnings as a gain attributable to the acquisition, and anydeferred tax benefits resulting from a business combination be recognized inincome from continuing operations in the period of the combination.SFAS 141R is effective for business combinations for which the acquisitiondate is on or after the beginning of the first annual reporting periodbeginning on or after December 15, 2008. We expect that SFAS 141R willhave an impact on our financial position and results of operations, but thenature and magnitude of the impact will depend on the nature, terms and size ofany future business combinations or adjustments to prior business combinations.

 

In December 2007, the FASB issued SFAS No. 160, “NoncontrollingInterests in Consolidated Financial Statements—an amendment of ARB No. 51”(“SFAS 160”).  The objective of SFAS 160is to improve the relevance, comparability, and transparency of the financialinformation that a company provides in its consolidated financial statements.SFAS 160 requires a company to clearly identify and present ownership interestsin subsidiaries held by parties other than the company in the consolidatedfinancial statements within the equity section but separate from the company’sequity.  It also requires the amount ofconsolidated net income attributable to the parent and to the noncontrollinginterest be clearly identified and presented on the face of the consolidatedstatement of income; changes in ownership interest be accounted for similarly,as equity transactions; and when a subsidiary is deconsolidated, any retainednoncontrolling equity investment in the former subsidiary and the gain or losson the deconsolidation of the subsidiary be measured at fair value. SFAS 160 iseffective for fiscal years, and interim periods within those fiscal years,beginning on or after December 15, 2008. We do not expect SFAS 160 willhave a significant impact on our financial position and results of operations.

 

In February 2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 157-2,“Effective Date of FASB Statement No. 157,”(“FSP 157-2”), to partially defer SFAS No. 157, “Fair Value Measurements”(“SFAS 157”).  FSP 157-2 defers the effective date of SFAS 157for non-financial assets and non-financial liabilities, except those that arerecognized or disclosed at fair value in the financial statements on arecurring basis (at least annually), to fiscal years, and interim periodswithin those fiscal years, beginning after November 15, 2008. We do notbelieve the adoption of FSP 157-2 will have a material impact on our financialposition and results of operations.

 

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments andHedging Activities”(“SFAS 161”). SFAS 161 amends and expands the disclosurerequirements of SFAS No. 133, “Accountingfor Derivative Instruments and 

 

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HedgingActivities”**and requires qualitative disclosuresabout objectives and strategies for using derivatives, quantitative disclosuresabout fair value amounts of and gains and losses on derivative instruments, anddisclosures about credit-risk-related contingent features in derivativeagreements. SFAS 161 is effective for financial statements issued for fiscalyears and interim periods beginning after November 15, 2008, with earlyapplication encouraged.  We will adoptSFAS 161 in the first quarter of fiscal 2010 and do not anticipate that SFAS161 will have a significant impact on our financial position and results ofoperations.

 

In April 2008, the FASB issued FSP FAS 142-3, “Determinationof Useful Life of Intangible Assets” (“FSP FAS 142-3”). FSP FAS 142-3amends the factors that should be considered in developing the renewal orextension assumptions used to determine the useful life of a recognizedintangible asset under SFAS 142, “Goodwill and Other Intangible Assets.”FSP FAS 142-3 also requires expanded disclosure related to thedetermination of intangible asset useful lives. FSP FAS 142-3 is effectivefor fiscal years beginning after December 15, 2008. Earlier adoption isnot permitted. We do not anticipate that FSP FAS 142-3 will have asignificant impact on our financial position and results of operations.

 

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally AcceptedAccounting Principles” (“SFAS 162”). SFAS 162 identifies thesources of accounting principles and the framework for selecting the principlesused in the preparation of financial statements of nongovernmental entitiesthat are presented in conformity with generally accepted accounting principles.SFAS 162 will become effective 60 days following the SEC’s approval of thePublic Company Accounting Oversight Board amendments to AU Section 411,“The Meaning of Present Fairly inConformity With Generally AcceptedAccounting Principles.”* *We do not anticipate theadoption of SFAS 162 will have a significant impact on its financial positionand results of operations.

 

**Related Party Transactions**

 

During fiscal 2008, we incurred $0.1 million ofexpenses from an unrelated third-party entity, ACM Aviation, Inc. (“ACM”)for charter aircraft services provided to Marvell Semiconductor, Inc. (“MSI”)for Estopia Air LLC (“Estopia Air”). The aircraft provided by ACM to us forsuch services is owned by Estopia Air. Our President and Chief ExecutiveOfficer, Dr. Sehat Sutardja and Vice President of Sales for Communicationsand Consumer Business of MSI, Weili Dai, through their control and ownership inEstopia Air, own the aircraft provided by ACM. Dr. Sutardja and Weili Daiare husband and wife.  During the threemonths ended August 2, 2008 and July 28, 2007, we incurred noexpense, respectively of expenses from ACM, for charter aircraft servicesprovided to MSI.  During the six monthsended August 2, 2008 and July 28, 2007, the Company incurred none and $73,000, respectively, of expenses from ACM, for charteraircraft services provided to MSI.

 

On August 19, 2005, through our subsidiaries MSIand Marvell International Ltd. (“Marvell International”), we entered into aLicense and Manufacturing Services Agreement (the “License Agreement”) with C2Microsystems, Inc. (“C2Micro”).  TheLicense Agreement has substantially similar terms as other license andmanufacturing services agreements with other third parties.  We recognized $1.4 million of revenue underthe License Agreement with C2Micro during the three months ended August 2,2008, $9,000 of revenue during the three months ended July 28, 2007, $2.6million of revenue during the six months ended August 2, 2008 and $39,000revenue during the six months ended July 28, 2007.  As of August 2, 2008, we had areceivable of $1.4 million from C2Micro. Sehat Sutardja, Ph.D., and Weili Dai, through their ownership andcontrol of Estopia LLC (“Estopia”), are indirect shareholders of C2Micro.  Kuo Wei (Herbert) Chang, a member of ourboard of directors, is a member of the Board of Directors of C2Micro andthrough his ownership and control of C-Squared venture entities, is also anindirect shareholder of C2Micro.  Dr. PantasSutardja, our Vice President, Chief Technology Officer, Acting Chief OperatingOfficer and Chief Research and Development Officer, is also a shareholder ofC2Micro.

 

On January 8, 2007, through MarvellInternational, we entered into a Library/IP/Software Evaluation LicenseAgreement (the “Evaluation License Agreement”) with VeriSilicon Holdings Co.,Ltd. (“VeriSilicon”). The Evaluation License Agreement has no consideration. Weincurred $43,000 and $119,000 of royalty expense from VeriSilicon under a corelicense agreement assumed from our acquisition of the semiconductor designbusiness of UTStarcom, Inc. during the three months ended August 2,2008 and July 28, 2007, respectively. We also incurred $109,000 and$191,000 of royalty expense from VeriSilicon under a core license agreementassumed from our acquisition of the semiconductor design business of UTStarcom, Inc.during the six month ended August 2, 2008 and July 28, 2007,respectively.  Weili Dai’s brother (and Dr. SehatSutardja’s brother-in-law) is the Chairman, President and Chief ExecutiveOfficer of VeriSilicon.  Ms. Dai isalso a shareholder of VeriSilicon.

 

On October 31, 2007, we entered into a LicenseAgreement with Vivante Corporation (“Vivante”). The License Agreement has substantially similar terms as other licenseagreements with other third parties.  Werecorded none and $0.2 million of expense during the three and six months endedAugust 2, 2008, respectively, in connection with the License Agreementwith Vivante.  Dr. Sehat 

 

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Sutardja and WeiliDai, through their ownership and control of Estopia, are indirect shareholdersof Vivante.  In addition, Dr. SehatSutardja is also a direct shareholder and Chairman of the board of directors ofVivante.  Weili Dai’s brother (and Dr. SehatSutardja’s brother-in-law) is the Chief Executive Officer of Vivante.  Kuo Wei (Herbert) Chang, a member of ourBoard of Directors, through his ownership and control of C-Squared ventureentities, is also an indirect shareholder of Vivante.

 

On September 28, 2007, through MarvellInternational, we entered into a Master Technology Agreement (the “TechnologyAgreement”) with Sonics, Inc. (“Sonics”), pursuant to which we havelicensed technology from Sonics.  TheTechnology Agreement has substantially similar terms as other licenseagreements with other third parties.  We paid$2.1 million under the Technology Agreement for the license and relatedmaintenance during fiscal 2008.  Kuo Wei(Herbert) Chang, member of our Board of Directors, and Mike Sophie, formermember of our Board of Directors, both serve as members of the board ofdirectors of Sonics and each has a direct and/or indirect ownership interest inthe equity of Sonics.  There was noexpense incurred related to the Technology Agreement during the three monthsended August 2, 2008 and July 28, 2007.

 

**Item 3. *****Quantitativeand Qualitative Disclosures About Market Risk***

 

*I**nterest Rate Risk.* The primary objective of our investment activities is to preserveprincipal while at the same time maximize the income we receive from ourinvestments without significantly increasing risk. Some of the securities inwhich we have invested may be subject to market risk. This means that a changein prevailing interest rates may cause the principal amount of the investmentto fluctuate. For example, if we hold a security that was issued with a fixedinterest rate at the then-prevailing rate and the prevailing interest ratelater rises, the principal amount of our investment will probably decline.Also, variable rate securities may produce less income than expected ifinterest rates fall. To minimize this risk, we maintain our portfolio of cashequivalents and short-term investments in a variety of fixed and variable ratesecurities including money market funds, corporate debt securities, Federal,State, county and municipal debt securities and auction rate securities. Ingeneral, money market funds are not subject to market risk because the interestpaid on such funds fluctuates with the prevailing interest rate. The followingtable presents the amounts of our cash equivalents and short-term investmentsthat are subject to market risk by range of expected maturity andweighted-average interest rates as of August 2, 2008 (in thousands). Thistable does not include money market funds because those funds are not subjectto market risk. Auction rate securities are presented below with an expectedfiscal year maturity date beyond five years because of recent auctionfailures.  As a result, we believe thatwe have the ability to hold the securities for a period of longer than 12 months and thus have classified theauction rate securities based on the stated maturity date.

 
| ** **            | ** ** | **Expected Fiscal Year Maturity Date** | ** ** |
|-----------------------|------------|------------------------------------------------------------|------------|
| ** **            | ** ** | **2009**                                                   | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **2013** | ** ** | **Thereafter** | ** ** | **Total** | ** ** | **Fair Value** | ** ** |
| Variable Rate         |       | $                                                          | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 42,163 |   | $ | 42,163 |   | $ | 40,307 |   |
| Average Interest Rate |       | —                                                     |       | — |   | — |   | — |   | — |   | 2.79 | % | 2.79 | % |   |   |
| Fixed Rate            |       | $                                                          | 5,088      |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 5,088 |   | $ | 5,089 |   |
| Average Interest Rate |       | 3.65                                                       | %          | — |   | — |   | — |   | — |   | — |   | 3.65 | % |   |   |

 

As of August 2, 2008, our investment portfolioincluded $42.2 million in par value of auction rate securities.  Auction rate securities are usually found inthe form of municipal bonds, preferred stock, pools of student loans orcollateralized debt obligations with contractual maturities generally between20 to 30 years and whose interest rates are reset every seven to 35 daysthrough an auction process. At the end of each reset period, investors can sellor continue to hold the securities at par. Our auction rate securities are all backed by student loans originatedunder the Federal Family Education Loan Program (“FFELP”) and areover-collateralized, insured and guaranteed by the United States FederalDepartment of Education (the “DOE”).  Allauction rate securities held by us are rated by the major independent ratingagencies as either AAA or Aaa at the time of purchase and their current ratingsare still within the guidelines of our corporate investment policy.

 

Beginning in February 2008, liquidity issues inthe global credit markets resulted in failure of the auctions representing allof the auction rate securities held by us, as the amount of securitiessubmitted for sale in those auctions exceed the amount of bids.  These failures are not believed to be acredit issue, but rather caused by a lack of liquidity.  Observable market prices were not availablefor the valuation of these investments. Accordingly, we used a discounted cash flow model to estimate the fairvalue of the auction rate securities as of August 2, 2008.  The assumptions used in preparing thediscounted cash flow model included estimates for the amount and timing offuture interest and principal payments, the collateralization of underlyingsecurity investments, the credit worthiness of the issuer of the securities,the probability of full repayment considering the guarantees by the DOE ofthe underlying student loans, guarantees by other third parties,additional credit enhancements included in the securities, andthe rate of return required by 

 

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investors to ownthese securities in the current environment. Utilizing these assumptions, we found that our auction rate securitieshad a fair value of $40.3 million, which indicated an impairment ofapproximately $1.9 million.  During thesix months ended August 2, 2008, we recorded a temporary impairment chargefor this amount in accumulated other comprehensive (loss), a component ofshareholders’ equity.  When evaluatingwhether the impairment of the investments is temporary or other than temporary,we reviewed factors such as the length of time and extent to which fair valuehas been below cost basis, the financial condition and near-term prospects ofthe issuer, and our ability and intent to hold the investment for a period oftime which may be sufficient for anticipated recovery in the marketvalue.  We specifically noted that we had approximately 5% of our totalcash invested in these auction rate securities, a cash balance of approximately$859.3 million in investments in other than auction rate securities, and thatwe continue to generate positive cash flow.

 

While the recent auction failures limit our ability toliquidate these investments, we do not believe that the auction failures willmaterially impact our ability to fund our working capital needs, capitalexpenditures or other business requirements, and that we have the ability tohold these securities for a period longer than 12 months. However, at the reporting date, it is not certain when liquidity willreturn to the markets or if any other secondary markets will become available,and we have continued to classify these auction rate securities in long-terminvestments as of August 2, 2008.

 

We will continue to evaluate the impact of thesefailed auctions on the fair value of our auction rate securities.  If the issuer of the auction rate securitiesis unable to successfully close future auctions or does not redeem the auctionrate securities, or the United States government fails to support its guarantyof the obligations, we may be required to adjust the carrying value of theauction rate securities and record other-than-temporary impairment charges infuture periods, which could materially affect our results of operations andfinancial condition.

 

At any time, fluctuations in interest rates couldaffect interest earnings on our cash, cash equivalents and short-terminvestments, or the fair value of our investment portfolio. A 10% move ininterest rates as of August 2, 2008 would have an immaterial effect on ourfinancial position, results of operations and cash flows.

 

Our term debt bears interest at the higher of thelender’s prime rate or 0.5% per annum above the federal funds effective rate,as defined in the agreement, plus a 1% margin. In the case of eurodollar loans, amounts borrowed bear interest at arate equal to the Adjusted London Interbank Offered Rate, or LIBOR, plus 2%margin.  Such margins are subject toreductions or increases depending on our future credit rating if obtained.  We pay interest and principal amounts equalto 0.25% of the aggregate principal amount of loans on a quarterly basis on thelast business day of each March, June, September and December.  The interest rate as of August 2, 2008was 5.0%.

 

*I**nvestment Risk.* We invest in equity instruments of privately-held companies for businessand strategic purposes. These investments are included in other non-currentassets in the accompanying balance sheets and are accounted for under the costmethod because our ownership is less than 20% and we do not have the ability toexercise significant influence over the operations on these companies. Wemonitor these investments for impairment and make appropriate reductions incarrying value when an impairment is deemed to be other than temporary.

 

*F**oreign Currency Exchange Risk.* Substantially all of our sales and the majority of our expenses to datehave been denominated in United States dollars, and, as a result, we havelimited exposure to foreign currency exchange risk. Occasionally, we will enterinto short-term forward exchange contracts to hedge exposures for purchasesdenominated in foreign currencies such as the New Israeli Shekel. We do notenter into any other derivative financial instruments for trading orspeculative purposes.

 

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**Item 4. *Controls and Procedures***

 

**Management’sEvaluation of Disclosure Controls and Procedures**

 

Our management,with the participation of our Chief Executive Officer and our Chief FinancialOfficer, has evaluated the effectiveness of our disclosure controls andprocedures (as defined in Rule 13a-15(e) of the Securities ExchangeAct of 1934, as amended (the “Exchange Act”)) as of August 2, 2008.Disclosure controls and procedures are designed to ensure that informationrequired to be disclosed is recorded, processed, summarized and reported withinthe time periods specified in the rules and forms of the SEC and that suchinformation is accumulated and communicated to management, including the ChiefExecutive Officer and Chief Financial Officer, as appropriate, to allow timelydecisions regarding required disclosure. Based on this evaluation, ourmanagement, including our Chief Executive Officer and Chief Financial Officer,has concluded that our disclosure controls and procedures were not effectivebecause of the material weakness described under “Management’s Report onInternal Control Over Financial Reporting” in Item 9A of our Annual Reporton Form 10-K for the year ended February 2, 2008, which we are stillin the process of remediating. This material weakness is described below:

 

*        Controlenvironment.*    We did not maintain an effective control environmentbased on criteria established in the Committee of Sponsoring Organizations ofthe Treadway Commission (“COSO”) framework. Specifically: (1) internalcontrol deficiencies were not remediated in a timely manner as our managementdid not exercise the necessary rigor and commitment to internal control overfinancial reporting and senior management was unable to timely implement theplanned remediation actions of the control deficiencies identified in fiscal2007; (2) we did not maintain a sufficient complement of personnel with alevel of accounting knowledge, experience and training in the application ofgenerally accepted accounting principles commensurate with our financialreporting requirements; and (3) we did not maintain effective, timely andsufficient communication within our finance department and between our financedepartment and other departments.

 

        Thesecontrol deficiencies resulted in audit adjustments for the year ended February 2,2008 relating to the valuation of intangible assets, valuation of goodwill inpurchase accounting, completeness of litigation accrual, valuation ofinventory, valuation of deferred tax assets, valuation of accounts receivable,certain other accounts and the related financial disclosures. Additionally,these control deficiencies could result in misstatements to substantially allfinancial statement accounts and disclosures that would result in a materialmisstatement to the annual or interim consolidated financial statements that wouldnot be prevented or detected. Accordingly, our management has determined thatthese control deficiencies constitute a material weakness.

 

Because of thismaterial weakness, which we are still in the process of remediating, managementhas concluded that we did not maintain effective internal control overfinancial reporting as of August 2, 2008, based on the criteriaestablished in “Internal Control - Integrated Framework” issued by the COSO. Wehave undertaken the remediation steps described below, and in connection withthe preparation of this Quarterly Report on Form 10-Q, our managementundertook and completed reconciliations, analyses, reviews and controlprocedures in addition to those historically completed to confirm that thisQuarterly Report on Form 10-Qfairly presents in all material aspects our financialposition, results of operations and cash flows as of, and for the periodpresented in accordance with U.S. generally accepted accounting principles.

 

**Changesin Internal Control Over Financial Reporting**

 

There were nochanges in our internal control over financial reporting during the threemonths ended August 2, 2008 that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting, except as described below.

 

**Implementedor Planned Remedial Actions of Material Weakness**

 

Management hasmade significant improvements to the overall design of its control environmentto address the material weaknesses in internal control over financial reportingdescribed in Item 9A of our Annual Report on Form 10-K for the year ended February 2,2008. Specifically,

 

(1) Wehave developed and implemented remediation plans during the first and secondquarters of fiscal 2009, and will continue to implement during the remainder offiscal 2009, specific remediation plans to address internal controldeficiencies that were identified as at February 2, 2008. In addition tothe above, we proactively identify opportunities for control improvements andhave reassessed internal controls financial reporting over other processes thatmay be susceptible to potential material misstatements.

 

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(2) Anew Chief Financial Officer and Acting Chief Operating Officer were announcedon May 29, 2008 and became effective June 23, 2008.  We continue to search for a new GeneralCounsel and Compliance Executive. The Compliance Executive will report directlyto the Audit Committee of our Board of Directors.  In the meantime, we have engaged externalresources to support and assist in our compliance efforts.  We are actively strengthening our controlsover the monthly closing and financial reporting processes by continuing tohire additional personnel with knowledge, experience and training in theapplication of U.S. generally accepted accounting principles commensuratewith our financial reporting requirements. The hiring of additional, qualifiedpersonnel is critical to the building of a finance organization with the depthand breadth of knowledge to support our planned operations.

 

In May 2007,the Implementation Committee of our Board of Directors decided to implement therecommendation of the Board of Directors’ Special Committee RegardingDerivative Litigation that Dr. Sehat Sutardja remain Chief ExecutiveOfficer and a member of our Board of Directors, but step down as Chairman ofthe Board in favor of a non-executive Chairman. This non-executive Chairman was to be selected from a group of newindependent directors appointed to fill the then-three vacancies on our Boardof Directors.  Since that time, we haveadded two new independent directors, Dr. Juergen Gromer and Dr. JohnKassakian, to our Board of Directors, and our Board of Directors continues tosearch for additional independent directors. Our Board of Directors is evaluating the roles of independent directorsin the governance of the Board, and our Board of Directors will designate an independentdirector either as non-executive Chairman or non-executive Lead Director (if itretains an executive Chairman) once it has completed its search for additionalnew independent directors.

 

(3) Weare actively enhancing communications through the implementation of formalizedinter-departmental information exchanges on a recurring basis, and enhancementsto the design of certain internal controls to enable a more detailed reviewprocess to occur on a timely basis.

 

**Limitation on Effectiveness of Controls**

 

It should be notedthat any system of controls, however well designed and operated, can provideonly reasonable, and not absolute, assurance that the objectives of the systemare met. The design of any control system is based, in part, upon the benefitsof the control system relative to its costs. Control systems can becircumvented by the individual acts of some persons, by collusion of two ormore people, or by management override of the control. In addition, over time,controls may become inadequate because of changes in conditions, or the degreeof compliance with the policies and procedures may deteriorate. In addition,the design of any control system is based in part upon certain assumptionsabout the likelihood of future events.

 

**PART II. OTHER INFORMATION**

 

**Item 1. *LegalProceedings***

 

*IPO Securities Litigation.* On July 31, 2001, a putative class action suit was filed againsttwo investment banks that participated in the underwriting of our initialpublic offering (“IPO”) on June 29, 2000. That lawsuit, which did not nameus or any of our officers or directors as defendants, was filed in the UnitedStates District Court for the Southern District of New York. Plaintiffs allegethat the underwriters received “excessive” and undisclosed commissions andentered into unlawful “tie-in” agreements with certain of their clients inviolation of Section 10(b) of the Exchange Act. Thereafter, on September 5,2001, a second putative class action was filed in the Southern District of NewYork relating to our IPO. In this second action, plaintiffs named threeunderwriters as defendants and also named as defendants us and two of ourofficers, one of whom is also a director. Relying on many of the sameallegations contained in the initial complaint, plaintiffs allege that thedefendants violated various provisions of the Securities Act of 1933, asamended (the “Securities Act”), and the Exchange Act. In both actions,plaintiffs seek, among other items, unspecified damages, pre-judgment interestand reimbursement of attorneys’ and experts’ fees. These two actions have beenconsolidated and coordinated with hundreds of other lawsuits filed byplaintiffs against approximately 40 underwriters and approximately 300 issuersacross the United States. Defendants in the coordinated proceedings moved todismiss the actions. In February 2003, the trial court granted the motionsin part and denied them in part, thus allowing the case to proceed against usand the underwriters. Claims against the individual officers have been voluntarilydismissed with prejudice by agreement with plaintiffs. In June 2004, astipulation of settlement and release of claims against the issuer defendants,including the Company, was submitted to the court for approval. On August 31,2005, the Court preliminarily approved the settlement. In December 2006,the appellate court overturned the certification of classes in the six focuscases that were selected by the underwriter defendants and plaintiffs in thecoordinated proceedings (the action involving Marvell is not one of the sixcases). Because class certification was a condition of the settlement, it wasunlikely that the settlement would receive final Court approval. On June 25,2007, the Court entered an order terminating the proposed settlement based upona stipulation among the parties to the settlement. Plaintiffs filed amendedmaster allegations and amended complaints in the six focus cases. Defendants’motions to dismiss those new complaints were denied in part and granted in part. Plaintiffs have also moved for classcertification in the six focus cases, which the defendants in those cases haveopposed.

 

*Section 16(b) Litigation.* On October 9, 2007, a purported Marvell shareholder filed acomplaint for violation of Section 16(b) of the Exchange Act, whichprohibits short-swing trading, against our IPO underwriters. The complaint, *Vanessa Simmonds v. The Goldman Sachs Group, etal.*, Case No. C07-1632 filed in District Court for the WesternDistrict of Washington, seeks the recovery of short-swing profits. We are namedas a nominal defendant. No recovery is sought from us. The underwriterdefendants and some of the issuer defendants (excluding us) filed motions to dismiss on July 25,2008; the plaintiff’s opposition briefing was due on September 8, 2008; 

 

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the movingdefendants’ reply briefs are due on October 23, 2008 when the DistrictCourt will consider setting a hearing date for the motions. All discovery isstayed pending resolution of the moving defendants’ motions to dismiss.

 

*Jasmine Networks Litigation.* On September 12, 2001, Jasmine Networks, Inc. (“Jasmine”)filed a lawsuit in the Santa Clara County Superior Court alleging claimsagainst us and three of our officers for allegedly improperlyobtaining and using information and technologies during the course of thenegotiations with its personnel regarding the potential acquisition of certainJasmine assets by us. The lawsuit claims that our officers improperly obtained and used suchinformation and technologies after we signed a non-disclosure agreement withJasmine. We believe the claims asserted against our officers and us are without merit and we intend todefend all claims vigorously.

 

On June 21, 2005, we filed a cross complaint inthe above disclosed action in the Santa Clara County Superior Court assertingclaims against Jasmine and unnamed Jasmine officers and employees. The crosscomplaint was later amended to name two individual officers of Jasmine. On May 15,2007, we filed a second amended cross complaint to add additional causes ofaction for declaratory relief against Jasmine. Among other causes of action, the cross complaint alleges thatJasmine and its personnel engaged in fraud in connection with their effort tosell our technologythat Jasmine and its personnel wrongfully obtained from a third party inviolation of such third party’s rights, and that such technologydoes not constitute trade secrets or property of Jasmine. The cross complaint seeks a declaratoryjudgment that our technology does not incorporate any of Jasmine’s alleged technology.The cross complaint seeks further declaratory judgment that Jasmine and itspersonnel misappropriated certain aspects of Jasmine’s allegedly proprietary technology. We intend to prosecute thecross complaint against Jasmine and its personnel vigorously, including, butnot limited to, filing certain dispositive motions regarding the ownership of thetechnology which is the subject of the cross complaint. On June 13, 2007,Jasmine filed a demurrer to the fifth, sixth and seventh causes of action of our second amended crosscomplaint. The demurrer was heard on July 19,2007 and denied. On August 3, 2007, Jasmine filed its answer to the secondamended cross complaint. We thereafterfiled our motion forsummary adjudication on our fifth and sixth causes of action for declaratoryrelief seeking, amongother things, a determination that Jasmine held no proprietary interest in the “JSLIP” algorithm,which was one of the core technologies Jasmine asserts was misappropriated by us. The motion was denied on November 14,2007. However, in its opposition, Jasmine admitted that JSLIP had been takenfrom the work of a third party and is embodied in patents held by theUniversity of California and Cisco Systems. These admissions are significantwith respect to both Jasmine’s assertion of trade secret rights and any damagesclaimed by Jasmine.

 

In addition, on December 28, 2001 and January 7,2002, the trial court issued a preliminary injunction precluding Jasmine fromusing, disclosing or disseminating the contents of a privileged communicationbetween certain officers of us and our counsel. The order granting injunctiverelief was reversed by the California Court of Appeal, but review was grantedby the California Supreme Court on a “grant and hold” basis pending the Court’sdecision on a case involving closely related issues, *Rico v. Mitsubishi Motors Corp*. (2004) 116Cal.App.4th 51. The effect of the California Supreme Court’s grant ofreview was to depublish the Court of Appeal’s decision. On December 13,2007, the California Supreme Court ruled in the *Rico v.Mitsubishi* case in a manner consistent with the position asserted byus that attorneywork product and attorney-client privileges are not waived by inadvertentdisclosure of a privileged communication, and that any party receiving suchinformation (i) is required to notify opposing counsel immediately; and (ii) maynot read such document more closely than is necessary to determine it isprivileged. *Rico v. Mitsubishi Motors Corp.*(2007) 42 Cal.4th 807. Following its decision in *Rico v. Mitsubishi*, on April 23, 2008, the CaliforniaSupreme Court issued an order dismissing our petition for review. As a result the decision of the Court of Appeal, which remainsunpublished, became final.

 

The case is now proceeding in the trial court, where the parties are engaged inextensive discovery. We have successfully filed multiple discovery motions andanticipate filing additional discovery motions based upon Jasmine’s failure toprovide discovery.  We further intend tobring dispositive motions on a number of Jasmine’s claims and anticipate atrial date sometime in 2009.  We intendto vigorously assert our cross-claims and defenses in the trial court.

 

*CSIRO Litigation.* As of January 2007, Australia’s Commonwealth Scientific andIndustrial Research Organisation (“CSIRO”) is involved in three patentlitigations in the Eastern District of Texas in which it has accused a numberof wireless LAN system manufacturers, including some of our customers, of infringing CSIRO’s patent,U.S. Patent No. 5,487,069 (the “‘069 Patent”).  CSIRO’s claims of infringement relate to IEEE802.11a, 802.11g and 802.11n wireless standards. As a result of CSIRO’s claimsfor patent infringement, a number of our customers have sought indemnification from us. In response to these demands for indemnification, we have acknowledgedthe demands and incurred costs in response to them.

 

On May 4, 2007, we filed an action in the United States District Courtfor the Eastern District of Texas seeking a declaratory judgment against CSIROthat the ‘069 Patent is invalid and unenforceable and that we and our customersdo not infringe the ‘069 

 

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Patent. Thecomplaint also seeks damages and a license for us and our customers onreasonable and non-discriminatory terms in the event our 802.11a/g/n wireless LAN products arefound to infringe and the ‘069 Patent is found to be valid and enforceable.

 

On July 3, 2007, we moved to intervene in the twoactions described in the first paragraph above pending in the Eastern Districtof Texas, for the purposes of staying the actions as to products incorporatingour parts in favor of the separate action that we filed as described in thesecond paragraph above. Alternatively we moved to disqualify the firm ofTownsend, Townsend and Crew from continuing to represent CSIRO because of aconflict of interest. CSIRO opposed these motions on August 3, 2007.

 

On August 3, 2007, CSIRO moved to dismiss our complaint for lack of case orcontroversy and failure to state a claim upon which relief can be granted, or,in the alternative, to stay the case pending the resolution of the pendinglawsuits described in the first paragraph above. On October 24, 2007, theCourt issued an order denying CSIRO’s motion to dismiss. The Court also denied our motions tostay/intervene/disqualify.  We appealed the Court’s denial of themotions to stay/intervene/disqualify to the United States Court of Appeals forthe Federal Circuit.  The hearing on our appeal was held on September 3,2008.  The Court has not yet rendered adecision.

 

On December 5, 2007, CSIRO filed its answer to our complaint, as well as counterclaimsagainst us for willful and deliberate infringement of the ‘069 Patent. CSIRO’scounterclaims included a claim for monetary damages, including triple damagesbased on its allegation of willful and deliberate infringement, attorneys’ feesand injunctive relief.  On April 10,2008, we filed a First Amended Complaint and First Amended Reply to CSIRO’sAnswer and Counterclaims.  On April 23,2008, CSIRO filed its Answer and Counterclaims to the First AmendedComplaint.  On May 12, 2008, wefiled a Reply and Affirmative Defenses to CSIRO’s amended counterclaims.

 

On May 22, 2008, we filed a motion for summary judgment seeking toinvalidate the ‘069 Patent on indefiniteness grounds.  The motion was denied on August 14,2008.

 

The claim construction hearing occurred on June 26,2008 and the claim construction order was issued on August 14, 2008.  On August 1, 2008, the Company moved todisqualify the firm of Townsend, Townsend and Crew from representing CSIRO inthe Marvell v. CSIRO case because of a conflict of interest.  CSIRO opposed the motion on August 18,2008.  The Court has not yet rendered adecision.  Trial for our declaratory judgment action is set tobegin on May 10, 2010. CSIRO and we are currently engaging in discovery and motionpractice.

 

*Shareholder Derivative Litigation.* Between June 22, 2006 and August 2, 2006, three purportedshareholder derivative actions were filed in the United States District Courtfor the Northern District of California. Each of these lawsuits names us as anominal defendant and a number of our current and former directors and officersas defendants. Each lawsuit seeks to recover damages purportedly sustained byus in connection with our option granting processes, and seeks certaincorporate governance and internal control changes. Pursuant to orders of thecourt dated August 17 and October 17, 2006, the three actions wereconsolidated as a single action, entitled *Inre Marvell Technology Group Ltd. Derivative Litigation*. Theplaintiffs filed an amended and consolidated complaint on November 1,2006. On January 16, 2007, we filed a motion to dismiss the consolidated complaintfor lack of standing or, in the alternative, stay proceedings.

 

On February 12, 2007, a new purported derivativeaction was filed in the United States District Court for the Northern Districtof California. As in *In re MarvellTechnology Group Ltd. Derivative Litigation*, this lawsuit namesus as a nominal defendant and a number of our current and former directors and officers asdefendants. It seeks to recover damages purportedly sustained by us inconnection with our option granting processes, and seeks certain corporategovernance and internal control changes. On May 1, 2007, the court enteredan order consolidating this lawsuit with *Inre Marvell Technology Group Ltd. Derivative Litigation*.

 

On May 29, 2007, the Court entered an orderstaying discovery in this matter pending resolution of our motion to dismiss.

 

On January 25, 2008, the Court entered astipulated order staying proceedings so that the parties could finalize asettlement that would resolve the actions. On or about March 5, 2008, theparties entered into a memorandum of understanding that tentatively settles andresolves the actions. The terms of the memorandum of understanding includecertain corporate governance enhancements and an agreement by us to pay up to$16 million in plaintiffs’ attorneys’ fees, an amount less than the $24.5million that we received from a settlement with our directors’ and officers’liability insurers. This tentative settlement of the consolidated derivativeactions requires court approval before it becomes final. We accrued the $16million settlement amount in the fourth quarter of fiscal 2008.  We anticipate that the parties will finalizeand submit formal settlement documentation to the court in the next few monthsfor both 

 

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preliminary andfinal approval, at which time payment of the settlement amount will bemade.  We recorded the insurancesettlement amount as restricted cash at the time it was received in the firstquarter of fiscal 2009.

 

*Class Action SecuritiesLitigation.*  Between October 5, 2006 and November 13,2006, four putative class actions were filed in the United States DistrictCourt for the Northern District of California against us and certain of ourofficers and directors. The complaints allege that we and certain of ourofficers and directors violated the federal securities laws by making false andmisleading statements and omissions relating to the grants of stock options.The complaints seek, on behalf of persons who purchased our common shares during the period from October 3,2001 to October 3, 2006, unspecified damages, interest, and costs andexpenses, including attorneys’ fees and disbursements. Pursuant to an order ofthe court dated February 2, 2007, these four putative class actions wereconsolidated as a single action entitled *Inre Marvell Technology Group Ltd. Securities Litigation*. On August 16,2007, plaintiffs filed a consolidated class action complaint. On October 18,2007, we filed a motionto dismiss the consolidated class action complaint. The motion is fully briefedand was argued on February 15, 2008. We await the court’s order on thismotion.

 

*SEC and United States AttorneyInquiries.*  In July 2006, we received a letter ofinformal inquiry from the SEC requesting certain documents relating to our stock option grants and practices. Wealso received a grand jury subpoena from the office of the United StatesAttorney for the Northern District of California requesting substantiallysimilar documents. On April 20, 2007, we were informed that the SEC was conducting aformal investigation into this matter. On June 8, 2007 and July 3,2007, we receiveddocument subpoenas from the SEC. On October 11, 2007, we received a “WellsNotice” from the staff of the SEC. Weili Dai, Vice President of Sales forCommunications and Consumer Business of MSI, who is not an officer or directorof us, also received a “Wells” notice. The SEC staff also advised us that it isnot at this time recommending enforcement action against any of our current officers or directors. The “Wells”notices indicated that the staff intended to recommend to the staff of the SECthat it bring civil actions against the recipients for injunctive relief andcivil monetary penalties. We responded in writing to the “Wells Notice” andsought to reach a resolution of this matter before any action was filed.

 

On May 8, 2008, we announced thatwe had reached an agreement with the SEC to settle this matter.  Without admitting or denying the allegationsin the SEC’s complaint, we agreed to settle the charges by consenting to apermanent injunction against any future violations of various provisions of thefederal securities laws. We also agreed to pay a civil penalty of $10 millionin connection with the settlement.  On May 8,2008, the SEC filed a complaint captioned *SECv. Marvell Technology Group, Ltd., et al*., Case No. CV-08-2367-HRL, in theUnited States District Court for the Northern District of California.  Our consent to entry of final judgment was also filed on May 8,2008.  In a related agreement, Ms. Daialso entered into a settlement with the SEC. Without admitting or denying the allegations in the SEC’s complaint, Ms. Daiconsented to a permanent injunction against any future violations of variousprovisions of the federal securities laws, agreed not to serve as a director orofficer of a public company for a period of five years, and agreed to pay acivil penalty of $500,000.   The Court entered the final judgmentagainst Ms. Dai on June 16, 2008 and against us on July 1, 2008.  The Company accrued the $10 million civilpenalty in the first quarter of fiscal 2009 and paid it to the SEC on July 8,2008.

 

This settlement concludes the SEC’s formalinvestigation of us with respect to our historic stock option granting practices.

 

*Wi-Lan Litigation.* On December 21, 2006, we received a letter from Wi-Lan, Inc. (“Wi-Lan”)accusing us of infringing four United States patents allegedly owned by Wi-Lan,and one Canadian patent also allegedly owned by Wi-Lan. On October 31,2007, Wi-Lan sued two groups of system and chip manufacturers in the UnitedStates District Court for the Eastern District of Texas, in both cases namingus as a defendant and alleging patent infringement. In the first case, Wi-Lanalleges that defendants infringe two patents that allegedly relate to the802.11 wireless standard. In the second case, Wi-Lan alleges that defendantsinfringe the same two patents asserted in the first case, and in additionWi-Lan alleges that some of the defendants in the second case infringe a thirdpatent that allegedly relates to Asymmetric Digital Subscriber Line (“ADSL”)technology. In the second case, we are not accused of infringing the ADSLpatent.

 

On May 27, 2008, defendants in both cases jointlymoved to consolidate the co-pending related cases and permit claims involvingsuppliers of the products to be litigated first.  Wi-Lan filed its opposition on June 18,2008.  The Court has not yet rendered adecision.  The Claim Construction Hearingis scheduled for September 1, 2010, and the trial is set to begin on January 4,2011.  We believe that we do not infringethe asserted Wi-Lan patents and will vigorously defend ourselves in thesematters.

 

On November 5, 2007, we filed a complaint againstWi-Lan in the United States District Court for the Northern District ofCalifornia asking the Court to find that we do not infringe three patents thatWi-Lan asserted against us in its December 21, 2006 letter. Two of thesepatents were not asserted against us in either of the two Texas litigations.These patents allegedly relate to Wideband Code Division Multiple Accesstechnology. Also, we ask in the alternative that the Court find the patentsinvalid. Wi-Lan 

 

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has filed a motionto dismiss, and we filed our opposition to that motion on June 9,2008.  On June 19, 2008, we settled thisdeclaratory judgment action.  Thissettlement does not effect or in any way involve the ongoing litigationsbrought by Wi-LAN in the Eastern District of Texas.

 

*Fujitsu et al. Litigation.* On December 17, 2007, Fujitsu, Ltd., LG Electronics., Ltd., andU.S. Philips Corp., sued NETGEAR, Inc. in the United States District Courtfor the Western District of Wisconsin, alleging that NETGEAR’s 802.11 equipmentinfringed three United States patents allegedly owned individually by theplaintiffs.  On March 17, 2008,NETGEAR filed a third-party complaint against three companies, including MSI,who allegedly supply 802.11 chips to NETGEAR. In the third-party action, NETGEAR alleges that whatever damages andcompensation it is required to pay as a result of the underlying patentinfringement litigation, the alleged suppliers owe to NETGEAR.  We filed an answer and a motion to amend theschedule in the case on April 8, 2008. The Court, on its own, adjusted the schedule to account for the newparties added to the litigation and moved the trial date to April 27,2009.  The claim construction hearing washeld on August 15, 2008.  We believethat we do not oweNETGEAR any payment resulting from NETGEAR’s use of our 802.11 parts in NETGEARproducts, and we also believe that none of the patents in suit is infringed byNETGEAR.  We intend to defend thislitigation vigorously.

 

*General.*  We are also party to other legal proceedingsand claims arising in the normal course of business.  The legal proceedings and claims describedabove could result in substantial costs and could divert the attention andresources of our management. Although the legal responsibility and financial impactwith respect to these proceedings and claims cannot currently be ascertained,an unfavorable outcome in such actions could have a material adverse effect on our cash flows, including potential impactsto certain covenants under its existing credit agreement. Litigation is subjectto inherent uncertainties and unfavorable rulings could occur. An unfavorableruling in litigation could require us to pay damages or one-time license feesor royalty payments, which could adversely impact gross margins in futureperiods, or could prevent us from manufacturing or selling some of its productsor limit or restrict the type of work that employees involved in suchlitigation may perform for us. There can be no assurance that these matterswill be resolved in a manner that is not adverse to our business, financial condition, results of operationsor cash flows.

 

**Item 1A. *Risk Factors***

 

*Before deciding to purchase,hold or sell our common shares, you should carefully consider the risksdescribed below in addition to the other cautionary statements and risksdescribed elsewhere and the other information contained in this quarterlyreport on Form 10-Q and in our other filings with the SEC, including ourAnnual Report on Form 10-K for the year ended February 2, 2008 andsubsequent reports on Forms 10-Q and 8-K.**Many of these risks and uncertainties are beyondour control, including business cycles and seasonal trends of the computing,semiconductor and related industries.*

 

***Changes in our management may cause uncertainty in,or be disruptive to, our business.***

 

We have experiencedsignificant changes in our management and our Board of Directors. In May 2007,our former Chief Financial Officer resigned and our Executive Vice Presidentand Chief Operating Officer, who is one of our co-founders, resigned from thosepositions and as a member of our Board of Directors but continues to serve in anon-management role. Our former interim Chief Financial Officer, whojoined us in January 2008, became ActingChief Operating Officer after our newly appointed Chief Financial Officer joined us in May 2008.Also, the general counsel of our U.S. operating subsidiary was terminated in March 2007.We have not yet recruited permanent replacements for our Chief OperatingOfficer and General Counsel positions, and if we cannot recruit qualifiedpermanent replacements for such positions, our business may suffer. Moreover,we continue to search for new independent directors to fill the existingvacancies on our Board of Directors, and two of the independent directorscurrently on our Board of Directors joined our Board of Directors in October 2007 and July 2008, respectively.An independent director will either suceed Dr. Sehat Sutardja as Chairmanof the Board or be appointed to a new position of Lead Director. Although wewill endeavor to implement any director and management transition asnondisruptive as possible, any such transition might impact our business, andgive rise to uncertainty among customers, investors, vendors, employees andothers concerning our future direction and performance. Our future success willdepend to a significant extent on the ability of our management team to worktogether effectively. The loss of any of our management or other key personnelcould harm our ability to implement our business strategy and respond to therapidly changing market conditions in which we operate. Moreover, our successwill depend on our ability to attract, hire and retain qualified management andother key personnel and on the abilities of the new management personnel tofunction effectively, both individually and as a group, going forward. If weare unable to attract and retain effective qualified replacements for our keyexecutives and board of directors positions in a timely manner, our business,financial condition, results of operations and cash flows may be adverselyaffected and our ability to execute our business model could be impaired.

 

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***We and certain of our current and former officersand directors have been named as parties to several purported shareholderderivative and class action lawsuits relating to our historic stock optiongranting practices, and may be named in additional litigation, all of whichcould require significant management time and attention, result in significantlegal expenses, or cause our business, financial condition, results ofoperations and cash flows to suffer.***

 

We have been named as anominal defendant in purported shareholder derivative actions that name anumber of our current and former directors and officers as defendants and thatseek to recover damages purportedly sustained by us in connection with ourhistoric stock option granting practices. The parties in the consolidatedderivative lawsuit have reached a tentative settlement. In addition, putativeclass actions have been filed against us and certain of our officers anddirectors that allege violations of the federal securities laws in connectionwith our historic stockoption granting practices, which seek to recover damages. Weand our current and former executive officers and board members may in thefuture be subject to additional litigation relating to our historic stockoption granting practices. Subject to certain limitations, we are obligated toindemnify our current and former directors, officers and employees inconnection with such lawsuits. We cannot predict the outcome of these lawsuits.Regardless of the outcome, these lawsuits, and any other litigation that may bebrought against us or our directors and officers, could be time consuming,result in significant expense, and divert the attention and resources of ourmanagement and other key employees, which could have a material adverse effecton our business, financialcondition, results of operations and cash flows. An unfavorable outcome inthese litigations could exceed the proceeds obtained from a settlement andpolicy release with our directors and officers liability insurers and couldhave a material adverse effect on our business, financial condition, results ofoperations and cash flows, including potential impacts to certain covenants inour existing credit agreement.

 

***Our tentative settlement of the consolidatedshareholder derivative actions requires the court’s preliminary and finalapproval, and may not be approved by the court.***

 

On or about March 5,2008, the parties inthe shareholder derivative actions enteredinto a memorandum of understanding that tentatively settles and resolves thepending consolidated derivative action filed in connection with our historicstock option granting practices. This tentative settlement of the derivative actionsrequires court approval before it becomes final. The court may notpreliminarily or finally approve the tentative settlement. If the court doesnot approve the tentative settlement, the parties might elect or be required tocontinue litigating the consolidated derivative actions.

 

***Matters related to the internal review of ourhistoric stock option granting practices and the restatement of our financialstatements may result in additional litigation, regulatory proceedings andgovernment enforcement actions, and could have a negative impact on ourreputation, business, financial condition and******resultsof operations******.***

 

Our historic stock optiongranting practices and the restatement of our financial statements have exposedus to greater risks associated with litigation, regulatory proceedings andgovernment enforcement actions. We may become the subject of additional privateor government actions regarding these matters in the future. We provided theresults of our internal review to the SEC and the United States Attorney’sOffice for the Northern District of California, and in that regard responded toformal and informal requests for documents and additional information. The SECconducted first an informal and then a formal investigation of our historic stockoption grantingpractices. On May 8, 2008, we announced that we had reached an agreementwith the SEC to settle this matter. In a related agreement, Ms. Weili Daialso entered into a settlement with the SEC. The Court entered into the finaljudgment against Ms. Dai on June 16, 2008 and against us on July 1, 2008.  On July 8, 2008, we paid a $10 millioncivil penalty to the SEC in accordance with the settlement.As a result of ourSEC settlement, we have forfeited for three years the ability to invoke the “safeharbor” for the forward-looking statements provision of the Private SecuritiesLitigation Reform Act (“Reform Act”). This safe harbor provided us enhancedprotection from liability related to forward-looking statements if theforward-looking statements were either accompanied by meaningful cautionarystatements or were made without actual knowledge that they were false ormisleading. Without the statutory safe harbor, it may be more difficult for usto defend against any such claims. Althoughthis settlement concluded the SEC’s formal investigation of us with respect toour historic stock option granting practices, we cannot be certain regardingthe outcome of any other unresolved litigation, regulatory proceedings andgovernment enforcement actions relating to our historic stock option grantingpractices. The resolution of these matters has been and will be time consumingand expensive, and may require the time and attention of our management.Subject to certain limitations, we are obligated to indemnify our current andformer directors, officers and employees in connection with the shareholderlitigation, as well as the government investigations of our historic stockoption granting practices and any subsequent litigation. Further, we could berequired to pay damages or additional penalties or have other remedies imposedagainst us, our directors, executive officers or other officers, or employees,which could harm our reputation, business, financial condition, results ofoperations and cash flows. Moreover, our settlement with the SEC,the tentatively settled shareholder derivative actions and the pending classaction litigation could have a negative impact on our relationships withcustomers, suppliers and business partners, our ability to generate revenue,our ability to obtain director and officer insurance 

 

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coverage, our ability to attract and retain employees,officers and directors, our ability to access debt and equity markets, customerand investor confidence in our board and management, and our revenue, netincome, expenses, results of operations, profitability, earnings-per-share andcash flows.

 

***Class action litigation due to stock pricevolatility or other factors could cause us to incur substantial costs anddivert our management’s attention and resources.***

 

On July 31, 2001, aputative class action suit was filed against two investment banks thatparticipated in the underwriting of our initial public offering (“IPO”) on June 29,2000. That lawsuit, which did not name us or any of our officers or directorsas defendants, was filed in the United States District Court for the SouthernDistrict of New York. Plaintiffs allege that the underwriters received “excessive”and undisclosed commissions and entered into unlawful “tie-in” agreements withcertain of their investment clients in violation of Section 10(b) ofthe Exchange Act. Thereafter, on September 5, 2001, a second putativeclass action was filed in the Southern District of New York relating to ourIPO. In this second action, plaintiffs named three underwriters as defendantsand also named as defendants, us and two of our officers, one of whom is also adirector. Relying on many of the same allegations contained in the initialcomplaint in which we were not named as a defendant, plaintiffs allege that thedefendants violated various provisions of the Securities Act and the ExchangeAct in the course of our IPO. In both actions, plaintiffs seek, among otheritems, unspecified damages, pre-judgment interest and reimbursement ofattorneys’ and experts’ fees. These two actions relating to our IPO have beencoordinated with hundreds of other similar lawsuits filed by plaintiffs againstapproximately 40 underwriters and approximately 300 issuers across the UnitedStates. Defendants in the coordinated proceedings moved to dismiss the actions.In February 2003, the trial court granted the motions in part and deniedthem in part, thus allowing the case to proceed against us and the underwritersand us as to alleged violations of Section 11 of theSecurities Act and Section 10(b) ofthe Exchange Act. Claims against the individual officers have been voluntarilydismissed with prejudice by agreement with plaintiffs. In June 2004, astipulation of settlement and release of claims against the issuer defendants,including us, was submitted to the court for approval. On August 31, 2005,the court preliminarily approved the settlement. In December 2006, theappellate court overturned the certification of classes in the six focus casesthat were selected by the underwriter defendants and plaintiffs in thecoordinated proceedings (the action involving us is not one of the six cases).Because class certification was a condition of the settlement, it was unlikelythat the settlement would receive final court approval. On June 25, 2007,the court entered an order terminating the proposed settlement based upon astipulation among the parties to the settlement. Plaintiffs filed amendedmaster allegations and amended complaints in the six focus cases and have movedfor class certification. Defendants’ motions to dismiss those new complaints were denied in partand granted in part. On December 21, 2007,defendants in the six focus cases filed briefs opposing plaintiffs’ motion forclass certification. In the past, securities class action litigation often hasbeen brought against a company following periods of volatility in the marketprice of its securities. Companies in the integrated circuit industry and othertechnology industries are particularly vulnerable to this kind of litigationdue to the high volatility of their stock prices. Accordingly, we may in thefuture be the target of additional securities litigation. Any securitieslitigation could result in substantial costs, could divert the attention andresources of our management, and could have a material adverse effect on ourreputation, business, financial condition, financial results, results ofoperations and cash flows.

 

***We have had and continue to have material weaknesses in internalcontrol over financial reporting and cannot assure you that additional materialweaknesses will not be identified in the future. If our internal control overfinancial reporting or disclosure controls and procedures are not effective,there may be errors in our financial statements that could require arestatement or our filings may not be filed on a timely basis and investors maylose confidence in our reported financial information, which could lead to adecline in our stock price.***

 

We have assessed that wecontinue to have material weaknesses in our internal control overfinancial reporting. Weare still in the process of remediating our material weaknesses. We stronglybelieve that effective internal controls arenecessary for us to provide reliable financial reports and effectively preventfraud. Any inability to provide reliable financial reports or prevent fraudcould harm our business. The Sarbanes-Oxley Act of 2002 requires management andour auditors to evaluate and assess the effectiveness of our internal controlover financial reporting,as of the end of each year, and to include a management report assessing theeffectiveness of our internal control over financial reporting in each AnnualReport on Form 10-K.

 

Our management, including ourChief Executive Officer and Chief Financial Officer, does not expect that ourinternal control over financial reporting will prevent all error and all fraud.A control system, no matter how well designed and operated, can provide onlyreasonable, not absolute, assurance that the control system’s objectives willbe met. Further, the design of a control system must reflect the fact thatthere are resource constraints, and the benefits of controls must be consideredrelative to their costs. In addition, we may reassess the implementation or testing of certainof our current controls as a result of the recent release of Public CompanyAccounting Oversight Board Auditing Standard No. 5, which may lead tomodifications in such controls. These modifications could 

 

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affect the overalleffectiveness or evaluation of the control system in the future by us or ourindependent registered public accounting firm. Theseinherent limitations include the realities that judgments in decision makingcan be faulty, breakdowns can occur because of simple error or mistake anderrors discovered by personnel within control systems may not be properlydisclosed and addressed. Controls can also be circumvented by the individualacts of some persons, by collusion of two or more people, or by managementoverride of the controls. The design of any system of controls is based in parton certain assumptions about the likelihood of future events, and we cannotassure you that any design will succeed in achieving its stated goals under allpotential future conditions. Over time, controls may become inadequate becauseof changes in conditions or deterioration in the degree of compliance withpolicies or procedures. Because of the inherent limitations in a cost-effectivecontrol system, misstatements due to error or fraud may occur and not bedetected.

 

We cannot assure you thatmaterial weaknesses in our internal control over financial reporting will notbe identified in the future. Although we intend to continue to devotesubstantial resources to improve our internal control processes, we may not beable to effectively and timely implement necessary control changes and employeetraining to ensure continued compliance with the Sarbanes-Oxley Act of 2002 andother regulatory and reporting requirements. Our rapid growth and numerousacquisitions in recent years,and our possible future expansion through additional acquisitions, presentchallenges to maintain the internal control and disclosure control standardsapplicable to public companies. Any failure to maintain or implement requirednew or improved controls, or any difficulties we encounter in theirimplementation, could result in significant deficiencies or materialweaknesses, cause us to fail to timely meet our periodic reporting obligations,or result in material misstatements in our financial statements. Any suchfailure could also adversely affect the results of periodic managementevaluations and the effectiveness of our internal control over financialreporting required under the Sarbanes-Oxley Act of 2002. The existence of amaterial weakness could result in errors in our financial statements that couldresult in a restatement of financial statements, cause us to fail to timelymeet our reporting obligations and cause investors to lose confidence in ourreported financial information, leading to a decline in our stock price. If wefail to maintain effective internal controls, we could be subject to regulatoryscrutiny and sanctions and investors could lose confidence in the accuracy and completenessof our financial reports. We cannot assure you that we will be able to fullycomply with the requirements of the Sarbanes-Oxley Act of 2002 or thatmanagement or our auditors will conclude that our internal control overfinancial reporting is effective in future periods.

 

***If the recent worsening of credit market conditionscontinues or increases, it could have a material adverse impact on ourinvestment portfolio.***

 

Recent U.S. sub-primemortgage defaults have had a significant impact across various sectors of thefinancial markets, causing global credit and liquidity issues. The short-termfunding markets experienced credit issues during the second half of calendar2007 and continuing into the first half of calendar2008, leading to liquidity disruption in asset-backed commercial paper andfailed auctions in the auction rate securities market. Ifthe global credit market continues to deteriorate, our investment portfolio maybe impacted and we could determine that some of our investments are impaired.This could materially adversely impact our results of operations and financialcondition.

 

As of August 2, 2008, ourinvestment portfolio included $42.2 million in par value of auction ratesecurities.  Auction rate securities are usually found in the form ofmunicipal bonds, preferred stock, pools of student loans or collateralized debtobligations with contractual maturities generally between 20 to 30 yearsand whose interest rates are reset every seven to 35 days through an auctionprocess. At the end of each reset period, investors can sell or continue tohold the securities at par.  Our auction rate securities are all backed bystudent loans originated under the FFELP and are over-collateralized, insuredand guaranteed by the DOE.  All auction rate securities heldby us are rated by the major independent rating agencies as either AAA or Aaaat the time of purchase andtheir current ratings are still within the guidelines of our corporateinvestment policy.

 

Beginning in February 2008,liquidity issues in the global credit markets resulted in failure of theauctions representing all of the auction rate securities held by us, as theamount of securities submitted for sale in those auctions exceed the amount ofbids.  These failures are not believed to be a credit issue, but rathercaused by a lack of liquidity.  Observable market places were notavailable for the valuation of these investments. Accordingly, we used adiscounted cash flow model to estimate the fair value of the auction ratesecurities as of August 2,2008.  The assumptions used in preparing the discounted cash flow modelincluded estimates for the amount and timing of future interest and principalpayments, the collateralization of underlying security investments, the creditworthiness of the issuer of the securities, the probability of full repayment consideringthe guarantees by the DOE of the underlying student loans, guaranteesby other third parties, additional credit enhancements included in thesecurities, and the rate of return required by investors to own thesesecurities in the current environment. Utilizing these assumptions, we found that our auction rate securitieshad a fair value of $40.3 million, which indicated an impairment of approximately$1.9 million.  Duringthe six months ended August 2, 2008, werecorded a temporary impairment charge for this amount in accumulated othercomprehensive (loss), a component of 

 

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shareholders’ equity.  When evaluating whether theimpairment is temporary or other than temporary, we reviewed factors such asthe length of time and extent to which fair value has been below cost basis,the financial condition and near-term prospects of the issuer, and our abilityand intent to hold the investment for a period of time which may be sufficientfor anticipated recovery in the market value.  We specifically noted that we had approximately 5% ofour total cash invested in these auction rate securities, a cash balance ofapproximately $859.3 million in investments other than auction rate securities,and that we continue to generate positive cash flow on a quarterly basis.

 

While the recent auctionfailures limit our ability to liquidate these investments, we do not believethat the auction failures will materially impact our ability to fund ourworking capital needs, capital expenditures or other business requirements, andthat we have the ability to hold these securities for a period longer than 12months.  However, at the reporting date, it is not certain when liquiditywill return to the markets or if any other secondary markets will becomeavailable, and we have continued to classify these auction rate securities inlong-term investments as of August 2, 2008.

 

We will continue to evaluatethe impact of these failed auctions on the fair value of our auction ratesecurities.  If the issuer of the auction rate securities is unable tosuccessfully close future auctions or does not redeem the auction ratesecurities, or the United States government fails to support its guaranty ofthe obligations, we may be required to adjust the carrying value of the auctionrate securities and record other-than-temporary impairment charges in futureperiods, which could materially affect our results of operations and financialcondition.

 

***Our recent acquisitions and any future acquisitionscould harm our operating results and share price.***

 

In November 2006,we completed our acquisition of the communications and applications processorbusiness of Intel. The integration of thesebusiness assets and personnel was both a time consuming and expensive process.If customers do not accept or are dissatisfied with the way we have integratedthe manufacturing processes of the business, they may adopt competing productsand solutions. If our integration efforts were not successful, our results ofoperations could be harmed, employee morale could decline, key employees couldleave, and customer relations could be damaged.

 

We also completed severalsmaller acquisitions over the last three fiscal years.  Suchacquisitions, as well as acquisitions in the future, could materially harm ouroperating results ofoperations or liquidity as a result of possible concurrent issuances ofdilutive equity securities or payment of cash. In addition, the purchase priceof any acquired businesses may exceed the current fair values of the nettangible assets of the acquired businesses. As a result, we would be requiredto record material amounts of goodwill, acquired in-process research anddevelopment charges and other intangible assets, which could result insignificant impairment and acquired in-process research and development chargesand amortization expense in future periods. It may also be necessary for us totake other financial charges and reserves as a result of acquisitions, such asinventory write-downs. These charges, in addition to the results of operationsof such acquired businesses, could have a material adverse effect on ourbusiness, financial condition and results of operations. We cannot forecast thenumber, timing or size of future acquisitions, or the effect that any suchacquisitions might have on our operating or financial results.

 

Under GAAP, we are requiredto review our intangible assets for impairment whenever events or changes incircumstances indicate that the carrying value of these assets may not berecoverable. In addition, we are required to review our goodwill andindefinite-lived intangible assets on an annual basis. If presently unforeseenevents or changes in circumstances arise which indicate that the carrying valueof our goodwill or other intangible assets may not be recoverable, we will berequired to perform impairment reviews of these assets, which had carryingvalues of approximately $2.4 billion as of August 2, 2008. Animpairment review could result in a write-down of all or a portion of theseassets to their fair values. We intend to perform an annual impairment reviewduring the fourth quarter of each fiscal year or more frequently if we believeindicators of impairment exist. In light of the large carrying value associatedwith our goodwill and intangible assets, any write-down of these assets mayresult in a significant charge to our statement of operations in the period anyimpairment is determined and could cause our stock price to decline.

 

***We have made and may continue to make acquisitionsand investments******,******which could divert management’s attention, cause ownership dilution toour shareholders, be difficult to integrate and adversely affect our results******ofoperations******.***

 

We expect to continue to makeacquisitions of, and investments in, businesses that offer complementaryproducts, services and technologies, augment our market segment coverage, orenhance our technological capabilities. We may also enter into strategicalliances or joint ventures to achieve these goals. We cannot assure you thatwe will be able to identify suitable acquisition, investment, alliance or jointventure opportunities, or that we will be able to consummate any suchtransactions or relationships on terms and conditions acceptable to us, or thatsuch transactions or relationships will be successful.

 

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Integrating newly acquiredbusinesses or technologies could put a strain on our resources, could be costlyand time consuming, and might not be successful. Such acquisitions could divertour management’s attention from other business concerns. In addition, we mightlose key employees while integrating new organizations. Acquisitions could alsoresult in customer dissatisfaction, performance problems with an acquiredcompany or technology, potentially dilutive issuances of equity securities orthe incurrence of debt, the assumption or incurrence of contingent liabilities,possible impairment charges related to goodwill or other intangible assets, orother unanticipated events or circumstances, any of which could harm ourbusiness. We might not be successful in integrating any acquired businesses,products or technologies, and might not achieve anticipated revenues and costbenefits.

 

Our ability to realize theexpected benefits of our acquisition of the communications and applicationsprocessor business of Intel and to eliminate the operating losses of thatbusiness will depend in large part on our ability to arrange for or maintainmore cost-effective production of that business’ products, either through therecently completed transition of the manufacturing of certain products fromIntel to third partyfoundries or through continuing arrangements with Intel for certain legacyproducts, increase the gross margin of those products, and retain the business’relationship with its principal customers.

 

***A significant portion of our business is dependenton the hard disk drive industry, which is highly cyclical, experiences rapidtechnological change, and is facing increased competition from******alternative******technologies.***

 

The hard disk drive industryis intensely competitive, and the technology changes rapidly. As a result, thisindustry is highly cyclical, with periods of increased demand and rapid growthfollowed by periods of oversupply and subsequent contraction. These cycles mayaffect us because our customers are suppliers to this industry. Hard disk drivemanufacturers tend to order more components than they may need during growthperiods, and sharply reduce orders for components during periods ofcontraction. In addition, advances in existing technologies and theintroduction of new technologies may result in lower demand for disk drivestorage devices, thereby reducing demand for our products. Rapid technologicalchanges in the hard disk drive industry often result in significant and rapidshifts in market share among the industry’s participants. If the hard diskdrive manufacturers using our products do not retain or increase their marketshare, our sales may decrease.

 

Future changes in the natureof information storage products may reduce demand for traditional hard diskdrives. For instance, products using alternative technologies, such assemiconductor memory, optical storage, and other storage technologies could becomea significant source of competition to manufacturers of hard disk drives. Flashmemory has typically been more costly than disk drive technologies. However,flash memory manufacturers have been reducing the prices for their products,which could enable them to complete more effectively with very small formfactor hard disk drive products. Demand for hard disk drives could be reducedif alternative storage technologies such as flash memory can meet customers’cost and capacity requirements.

 

***Our sales are concentrated in a few customers, andif we lose or experience a significant reduction in sales to any of these keycustomers, our revenues may decrease substantially.***

 

We receive a significantamount of our revenues from a limited number of customers. For the six monthsended August 2,2008, one customer accounted for more than 10% of our net revenue, for a totalof approximately 21%of our net revenue. Sales to our largest customers have fluctuatedsignificantly from period to period primarily due to the timing and number ofdesign wins with each customer, as well as the continued diversification of ourcustomer base as we expand into new markets, and will likely continue tofluctuate dramatically in the future. The loss of any of our largest customers,a significant reduction in sales we make to them, or any problems we encountercollecting amounts due from them would likely harm our financial condition andresults of operations. Our operating results in the foreseeable future willcontinue to depend on sales to a relatively small number of customers, as wellas the ability of these customers to sell products that incorporate ourproducts. In the future, these customers may decide not to purchase ourproducts at all, purchase fewer products than they did in the past, or altertheir purchasing patterns in some other way, particularly because:

 

·                  substantially all of oursales are made on a purchase order basis, which permits our customers tocancel, change or delay product purchase commitments with little or no noticeto us and without penalty;

 

·                  our customers may developtheir own solutions;

 

·                  our customers may purchaseintegrated circuits from our competitors; or

 

·                  our customers may discontinuesales or lose market share in the markets for which they purchase our products.

 

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***We rely on independent foundries and subcontractorsfor the manufacture, assembly and testing of our integrated circuit products,and the failure of any of these******third******party vendors to deliver products or otherwise perform as requestedcould damage our relationships with our customers, decrease our sales and limitour growth.***

 

We do not have our ownmanufacturing or assembly facilities and have very limited in-house testingfacilities. Therefore, we rely on third partyvendors to manufacture, assemble and test the products we design. We currentlyrely on several thirdparty foundries to produce substantially all of ourintegrated circuit products. We also currently rely on several third partyassembly and test subcontractors to assemble, package and test our products.This exposes us to a variety of risks, including the following:

 

*Regional Concentration:*

 

Substantially all of ourproducts are manufactured by third party foundries located in Taiwan.Currently our only alternative manufacturing sources are located in Taiwan,China and Singapore. In addition, substantially all of our assembly and testingfacilities are located in Singapore, Taiwan, Malaysia and the Philippines.Because of the geographic concentration of these third partyfoundries, we are exposed to the risk that their operations may be disrupted byregional disasters. For example, the risk of an earthquake in Taiwan andelsewhere in the Pacific Rim region is significant due to the proximity ofmajor earthquake fault lines to the facilities of our foundries and assemblyand test subcontractors. In September 1999, a major earthquake in Taiwanaffected the facilities of several of these third partycontractors. As a consequence of this earthquake, these contractors sufferedpower outages and disruptions that impaired their production capacity. Majorearthquakes also occurred in Taiwan in 2002, 2003, 2004 and more recently in2006. In addition, the resurgence of severe acute respiratory syndrome, theoutbreak of avian flu and any similar future outbreaks in Asia, where thesefoundries are located, could affect the production capabilities of ourmanufacturers by resulting in quarantines or closures. In the event of such aquarantine or closure, if we were unable to quickly identify alternatemanufacturing facilities, our revenues, cost of revenues and results ofoperations would be negatively impacted. If these vendors do not provide uswith high-quality products and services in a timely manner, or if one or moreof these vendors terminates its relationship with us, we may be unable toobtain satisfactory replacements to fulfill customer orders on a timely basis,our relationships with our customers could suffer, our sales could decrease andharm our business, financial condition or results of operations.

 

*No Guarantee ofCapacity or Supply:*

 

Availability of foundrycapacity has from time to time in the past been constrained due to strongdemand, and with limited exceptions, our vendors are not obligated to performservices or supply products to us for any specific period, in any specificquantities, or at any specific price, except as may be provided in a particularpurchase order. The ability of each foundry to provide us with semiconductordevices is limited by its available capacity and existing obligations. Althoughwe have entered into contractual commitments to supply specified levels of productsto some of our customers, we may not have sufficient levels of productioncapacity with all of our foundries, despite signing a long-term guaranteedproduction capacity agreement with one of our foundries. Despite thisagreement, foundry capacity may not be available when we need it or atreasonable prices. We place our orders on the basis of our customers’ purchaseorders or our forecast of customer demand, and the foundries can allocatecapacity to the production of other companies’ products and reduce deliveriesto us on short notice. It is possible that foundry customers that are largerand better financed than we are or that have long-term agreements with our mainfoundries, may induce our foundries to reallocate capacity to those customers.This reallocation could impair our ability to secure the supply of componentsthat we need.

 

Although we use severalindependent foundries to manufacture substantially all of our semiconductorproducts, most of our components are not manufactured at more than one foundryat any given time, and our products typically are designed to be manufacturedin a specific process at only one of these foundries. Accordingly, if one ofour foundries is unable to provide us with components as needed, it may bedifficult for us to transition the manufacture of our products to otherfoundries, and we could experience significant delays in securing sufficientsupplies of those components. This could result in a material decline inrevenues, net income and cash flow.

 

In order to secure sufficientfoundry capacity when demand is high and mitigate the risks described in theforegoing paragraph, we may enter into various arrangements with suppliers thatcould be costly and harm our results of operations, such as nonrefundable depositswith or loans to foundries in exchange for capacity commitments, and contractsthat commit us to purchase specified quantities of integrated circuits overextended periods. We may not be able to make any such arrangement in a timelyfashion or at all, and any arrangements may be costly, reduce our financialflexibility, and not be on terms favorable to us. For example, amounts payableunder our foundry capacity are non-refundable regardless of whether we are ableto utilize all of any of the guaranteed wafer 

 

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capacity under the terms of the agreement. Moreover, if weare able to secure foundry capacity, we may be obligated to use all of thatcapacity or incur penalties. These penalties may be expensive and could harmour financial results.

 

*UncertainYields and Quality:*

 

The fabrication of integratedcircuits is a complex and technically demanding process. Our foundries havefrom time to time experienced manufacturing defects and reduced manufacturingyields. Changes in manufacturing processes or the inadvertent use of defectiveor contaminated materials by our foundries could result in lower thananticipated manufacturing yields or unacceptable performance. Many of theseproblems are difficult to detect at an early stage of the manufacturing processand may be time consuming and expensive to correct. Poor yields from ourfoundries, or defects, integration issues or other performance problems in ourproducts could cause us significant customer relations and business reputationproblems, harm our financial results and result in financial or other damagesto our customers. Our customers could also seek damages from us for theirlosses. A product liability claim brought against us, even if unsuccessful,would likely be time consuming and costly to defend. In addition, defects inour existing or new products could result in significant warranty, support andrepair costs, and divert the attention of our engineering personnel from ourproduct development efforts.

 

***If we are unable to accurately predict our futuresales and to appropriately budget for our expenses, our results******ofoperations******could suffer.***

 

The rapidly changing natureof the markets in which we sell our products limits our ability to accuratelyforecast quarterly and annual sales. Additionally, because many of our expensesare fixed in the short term or are incurred in advance of anticipated sales, wemay not be able to decrease our expenses in a timely manner to offset anyshortfall of sales. If our sales do not increase as anticipated, significantlosses could result due to our higher expense levels. For example, although infiscal 2006 and 2007 we expanded our staffing and increased our expense levelsin anticipation of future sales growth, in the fourth quarter of fiscal 2008,we implemented a plan to reduce operating expenses and help meet financialtargets with a worldwide reduction in force of approximately 438 employees, orapproximately 8% of our total workforce. We expect cost savings from thisrestructuring to be used to offset market forces or to be reinvested in ourbusinesses to strengthen our competitiveness, but we cannot be certain that wewill be successful in these efforts.

 

***Our financial******condition******and results******ofoperations******may vary******,******which may cause the price of our common shares to decline.***

 

We currently provide guidanceon revenue and gross margin on a quarterly basis. Our quarterly operating resultshave fluctuated in the past and are likely to do so in the future. Because ouroperating results are difficult to predict, you should not rely on quarterlycomparisons of our results of operations as an indication of our futureperformance.

 

Fluctuations in our operatingresults may be due to a number of factors, including, but not limited to, thoselisted below and those identified throughout this “Risk Factors” section:

 

·                  order or shipmentcancellations, rescheduling or deferrals of significant customer orders;

 

·                  our ability to scale ouroperations in response to changes in demand for our existing products andservices or demand for new products requested by our customers;

 

·                  gain or loss of a keycustomer;

 

·                  our ability to maintain acompetitive cost structure for our manufacturing and assembly and testprocesses;

 

·                  failure to qualify ourproducts or our suppliers’ manufacturing lines;

 

·                  our ability to exercisestringent quality control measures to obtain high yields;

 

·                  effectiveand timely update of equipment and facilities as required for leading edgeproduction capabilities; and

 

·                  our ability to realize thebenefits expected from our recent acquisitions, including our acquisition ofthe communications and applications processor business of Intel.

 

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Due to fluctuations in ourquarterly operating results and other factors, the price at which our commonshares will trade is likely to continue to be highly volatile. In futureperiods, if our revenues or operating results are below our estimates or theestimates or expectations of public market analysts and investors, our stockprice could decline. On average, technology companies have been subject to agreater number of securities class action claims than companies in many otherindustries as a result of stock price volatility. If our stock price isvolatile, we may become involved in this type of litigation. Any litigationcould result in substantial costs and a diversion of management’s attention andresources that are needed to successfully run our business.

 

***Changes in financial accounting standards orpractices or existing taxation rules or practices may cause adverseunexpected revenue and expense fluctuations and affect our reported results ofoperations.***

 

A change in accountingstandards or practices or a change in existing taxation rules or practicescan have a significant effect on our reported results and may even affect ourreporting of transactions completed before the change is effective. Newaccounting pronouncements and taxation rules and varying interpretationsof accounting pronouncements and taxation practice have occurred and may occurin the future. Changes to existing rules or the questioning of currentpractices by regulators may adversely affect our reported financial results orthe way we conduct our business.

 

***If we are unable to develop and introduce new andenhanced products that achieve market acceptance in a timely and cost-effectivemanner, our results******of operations******and competitive position will be harmed.***

 

Our future success willdepend on our ability, in a timely and cost-effective manner, to develop andintroduce new products and enhancements to our existing products. We must alsoachieve market acceptance for these products and enhancements. If we do notsuccessfully develop and achieve market acceptance for new and enhancedproducts, our ability to maintain or increase revenues will suffer. Thedevelopment of our products is highly complex. We occasionally have experienceddelays in completing the development and introduction of new products andproduct enhancements, and we could experience delays in the future. Even if newand enhanced products are introduced to the market, we may not be able toachieve market acceptance of them in a timely manner.

 

In addition, our longstandingrelationships with some of our larger customers may also deter other potentialcustomers who compete with these customers from buying our products. To attractnew customers or retain existing customers, we may offer certain customersfavorable prices on our products. If these prices are lower than the pricespaid by our existing customers, we would have to offer the same lower prices tocertain of our customers who have contractual “most favored nation” pricingarrangements. In that event, our average selling prices and gross margins woulddecline. The loss of a key customer, a reduction in sales to any key customeror our inability to attract new significant customers could materially andadversely affect our business, financial condition and results of operations.

 

***If we fail to appropriately scale our operations inresponse to changes in demand for our existing products and services or to thedemand for new products requested by our customers, our business could bematerially and adversely affected.***

 

To achieve our businessobjectives, it may be necessary from time to time for us to expand or contractour operations. For example, we have experienced periods of rapid growth andexpansion. Through internal growth and acquisitions, we significantly increasedthe scope of our operations and expanded our workforce from 1,205 employees, asof January 31, 2003, to 5,453 employees, as of August 2, 2008.Nonetheless, we may not be able to scale our workforce and operations in asufficiently timely manner to respond effectively to changes in demand for ourexisting products and services or to the demand for new products requested byour customers. In that event, we may be unable to meet competitive challengesor exploit potential market opportunities, and our current or future businesscould be materially and adversely affected. Conversely, if we expand our operationsand workforce too rapidly in anticipation of increased demand for our products,and such demand does not materialize at the pace at which we expected, the rateof increase in our operating expenses may exceed the rate of increase in ourrevenue, which would adversely affect our results of operations.

 

Our past growth has placed,and any future growth is expected to continue to place, a significant strain onour management personnel, systems and resources. To implement our currentbusiness and product plans, we will need to continue to expand, train, manageand motivate our workforce. All of these endeavors will require substantialmanagement effort. Although we have implemented an enterprise resource planningsystem to help us improve our planning and management processes, we anticipatethat we will also need to continue to implement and improve a variety of newand upgraded operational and financial systems, as well as additionalprocedures and other internal management systems. These processes can be timeconsuming and expensive, increase management responsibilities, and divertmanagement attention. If we are unable to effectively manage our expandingoperations, we may be unable to scale our business quickly enough to meetcompetitive challenges or exploit potential market opportunities, or 

 

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conversely, we may scale our business too quickly and therate of increase in our expenses may exceed the rate of increase in ourrevenue, either of which would materially and adversely affect our current orfuture business.

 

***Our operations located in the State of Israel maybe harmed by adverse political, economic and military conditions affectingIsrael.***

 

We have substantialoperations, including approximately 20% of our workforce as of August 2, 2008, inIsrael. These operations are directly influenced by the political, economic andmilitary conditions affecting Israel. Any potential hostilities involving orwithin Israel could disrupt these operations. For example, past hostilitiesbetween Israel and the Palestinian authority and other groups have causedsubstantial political unrest, which could lead to a potential economic downturnin Israel. Additionally, the ongoing situation in Iraq could lead to moreeconomic instability and uncertainty in the State of Israel and the MiddleEast. Also, the interruption or curtailment of trade between Israel and itspresent trading partners or a significant downturn in the economic or financialcondition of Israel could negatively impact the business operations andfinancial results of our operations in Israel.

 

***We rely on******third******party distributors and manufacturers’ representatives and the failureof these distributors and manufacturers’ representatives to perform as expectedcould reduce our future sales.***

 

We sell many of our productsto customers through distributors and manufacturers’ representatives. From timeto time, we enter into relationships with new distributors and manufacturers’representatives, and we are unable to predict the extent to which newdistributors and manufacturers’ representatives will be successful in marketingand selling our products. Moreover, many of our distributors and manufacturers’representatives also market and sell competing products. Our distributors andmanufacturer’s representatives may terminate their relationships with us at anytime. Our future performance will also depend, in part, on our ability toattract additional distributors or manufacturers’ representatives that will beable to market and support our products effectively, especially in markets inwhich we have not previously distributed our products. If we cannot retain ourcurrent distributors or manufacturers’ representatives or recruit additional orreplacement distributors or manufacturers’ representatives, our sales andoperating results will be harmed. The loss of one or more of our distributorsor manufacturers’ representatives could harm our sales and results ofoperations. We generally realize a higher gross margin on direct sales and fromsales through manufacturers’ representatives than on sales throughdistributors. Accordingly, if our distributors were to account for an increasedportion of our net sales, our gross margins may decline.

 

***We are subject to order and shipment uncertainties,and if we are unable to accurately predict customer demand, we may hold excessor obsolete inventory, which would reduce our profit margin, or, conversely, wemay have insufficient inventory, which would result in lost revenueopportunities and potentially in loss of market share and damaged customerrelationships.***

 

We typically sell productspursuant to purchase orders rather than long-term purchase commitments.Customers can generally cancel or defer purchase orders on short notice withoutincurring a significant penalty. In the recent past, some of our customers havedeveloped excess inventories of their own products and have, as a consequence, deferredpurchase orders for our products. We cannot accurately predict what or how manyproducts our customers will need in the future. Anticipating demand isdifficult because our customers face volatile pricing and unpredictable demandfor their own products and are increasingly focused more on cash preservationand tighter inventory management. In addition, as an increasing number of ourchips are being incorporated into consumer products, we anticipate greaterfluctuations in demand for our products, which makes it more difficult toforecast customer demand. We place orders with our suppliers based on forecastsof customer demand and, in some instances, may establish buffer inventories toaccommodate anticipated demand. Our forecasts are based on multipleassumptions, each of which may introduce error into our estimates. If weoverestimate customer demand, we may allocate resources to manufacturingproducts that we may not be able to sell when we expect to, if at all. As aresult, we would hold excess or obsolete inventory, which would reduce ourprofit margins and adversely affect our financial results. Conversely, if weunderestimate customer demand or if insufficient manufacturing capacity isavailable, we would forgo revenue opportunities and potentially lose marketshare and damage our customer relationships. In addition, any futuresignificant cancellations or deferrals of product orders or the return ofpreviously sold products could materially and adversely affect our profitmargins, increase product obsolescence and restrict our ability to fund ouroperations. Furthermore, we generally recognize revenue upon shipment ofproducts to a customer. If a customer refuses to accept shipped products ordoes not timely pay for these products, we could incur significant chargesagainst our income.

 

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***Our future success depends in significant part onstrategic relationships with customers. If we cannot maintain theserelationships or if these customers develop their own solutions or adopt acompetitor’s solutions instead of buying our products, our operating resultswould be adversely affected.***

 

In the past, we have reliedin significant part on our strategic relationships with customers that aretechnology leaders in our target markets. We intend to pursue and continue toform these strategic relationships in the future but we cannot assure you thatwe will be able to do so. These relationships often require us to develop newproducts that may involve significant technological challenges. Our customersfrequently place considerable pressure on us to meet their tight developmentschedules. Accordingly, we may have to devote a substantial amount of ourlimited resources to our strategic relationships, which could detract from ordelay our completion of other important development projects. Delays in thedevelopment could impair our relationships with our strategic customers andnegatively impact sales of the products under development. Moreover, it ispossible that our customers may develop their own solutions or adopt acompetitor’s solution for products that they currently buy from us. If thathappens, our business, financial condition and results of operations could bematerially harmed.

 

***We may experience difficulties in transitioning tosmaller geometry process technologies or in achieving higher levels of designintegration, which may result in reduced manufacturing yields, delays inproduct deliveries and increased expenses.***

 

In order to remaincompetitive, we expect to continue to transition our semiconductor products toincreasingly smaller line width geometries. This transition requires us tomodify the manufacturing processes for our products and to redesign someproducts. We periodically evaluate the benefits, on a product-by-product basis,of migrating to smaller geometry process technologies to reduce our costs. Inthe past, we have experienced some difficulties in shifting to smaller geometryprocess technologies or new manufacturing processes, which resulted in reducedmanufacturing yields, delays in product deliveries and increased expenses. Wemay face similar difficulties, delays and expenses as we continue to transitionour products to smaller geometry processes. We are dependent on ourrelationships with our foundry subcontractors to transition to smaller geometryprocesses successfully. We cannot assure you that the foundries that we usewill be able to effectively manage the transition or that we will be able tomaintain our existing foundry relationships or develop new ones. If any of ourfoundry subcontractors or we experience significant delays in this transitionor fail to efficiently implement this transition, we could experience reducedmanufacturing yields, delays in product deliveries and increased expenses, allof which could harm our relationships with our customers and our results ofoperations. As smaller geometry processes become more prevalent, we expect tocontinue to integrate greater levels of functionality, as well as customer andthird party intellectual property, into our products. However, we may not beable to achieve higher levels of design integration or deliver new integratedproducts on a timely basis, if at all. Moreover, even if we are able to achievehigher levels of design integration, such integration may have a short-termadverse impact on our results of operations, as we may reduce our revenue byintegrating the functionality of multiple chips into a single chip.

 

***We have a large amount of debt and our debt serviceobligations may prevent us from taking actions that we would otherwise considerto be in our best interests.***

 

As of August 2, 2008, theaggregate principal amount of our total consolidated debt was$292.8 million. Covenants in the agreements governing our existing debt,and debt we may incur in the future, may materially restrict our operations,including our ability to incur debt, pay dividends, make certain investments andpayments, make acquisitions and encumber or dispose of assets. In addition,financial covenants contained in agreements relating to our existing and futuredebt could lead to a default in the event our results of operations do not meetour plans and we are unable to amend those financial covenants. A default andacceleration under one debt instrument may also trigger cross-accelerationunder our other debt instruments. An event of default under any debtinstrument, if not cured or waived, could result in the lenders requiring us torepay the debt, and could make it more difficult for us to obtain additionaldebt financing arrangements, any of which could have a material adverse effecton our business, financial condition, results of operations and cash flows.

 

In addition, the level of ourindebtedness could have significant negative consequences for our futureoperations, including:

 

·                  increasing our vulnerabilityto general adverse economic and industry conditions;

 

·                  limiting our ability toobtain additional financing for working capital, capital and research anddevelopment expenditures, and general corporate purposes;

 

·                  requiring the dedication of asubstantial portion of our expected cash flow or our existing cash to serviceour indebtedness, thereby reducing the amount of our cash available for otherpurposes, including working capital, capital expenditures and research and developmentexpenditures;

 

·                  limiting our flexibility inplanning for, or reacting to, changes in our business and the industry in whichwe compete; and

 

·                  placing us at a possiblecompetitive disadvantage compared to less leveraged competitors and competitorsthat have better access to capital resources.

 

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***We are subject to the risks of owning realproperty.***

 

Our U.S. headquarters locatedin Santa Clara California, our building in Singapore, our buildings inMalaysia, our buildingsin Switzerland and ourbuildings in Shanghai, China subject us to the risks ofowning real property, whichincludes:

 

·                  the possibility ofenvironmental contamination and the costs associated with fixing anyenvironmental problems;

 

·                  adverse changes in the valueof these properties, due to interest rate changes, changes in the neighborhoodin which the property is located, or other factors;

 

·                  the possible need forstructural improvements in order to comply with zoning, seismic and other legalor regulatory requirements;

 

·                  the potential disruption ofour business and operations arising from or connected with a relocation due tomoving to or renovating the facility;

 

·                  increased cash commitmentsfor improvements to the buildings or the property or both;

 

·                  increased operating expensesfor the buildings or the property or both;

 

·                  possible disputes withtenants or other third parties related to the buildings or the property orboth; and

 

·                  the risk of financial loss inexcess of amounts covered by insurance, or uninsured risks, such as the losscaused by damage to the buildings as a result of earthquakes, floods and orother natural disasters.

 

***We depend on key personnel with whom we do not haveemployment agreements to manage our business, and if we are unable to retainour current personnel and hire additional personnel, our ability to develop andsuccessfully market our products could be harmed.***

 

We believe our future successwill depend in large part upon our ability to attract and retain highly skilledmanagerial, engineering and sales and marketing personnel. The loss of any keyemployees or the inability to attract or retain qualified personnel, includingengineers and sales and marketing personnel could delay the development andintroduction of and harm our ability to sell our products. We do not haveemployment agreementswith anyof our key technical personnel, and their knowledge ofour business and industry would be extremely difficult to replace.

 

There is currently a shortageof qualified technical personnel with significant experience in the design,development, manufacturing, marketing and sales of integrated circuits. Inparticular, there is a shortage of engineers who are familiar with theintricacies of the design and manufacture of products based on analogtechnology, and competition for these engineers is intense. Our key technicalpersonnel represent a significant asset and serve as the source of ourtechnological and product innovations. We may not be successful in attractingand retaining sufficient numbers of technical personnel to support ouranticipated growth.

 

***A few of our******officers own a large percentage of our voting stock, and two of them, togetherwith another employee, are also significant shareholders and are related byblood or marriage. These factors may allow the officers and directors as agroup or the three related employees to greatly influence the election ofdirectors and the approval or disapproval of significant corporate actions.***

 

Dr. Sehat Sutardja, ourPresident and Chief Executive Officer, and Weili Dai, who serves as our VicePresident of Sales for Communications and Consumer Business of MSI, are husbandand wife, and Dr. Sehat Sutardja and Dr. Pantas Sutardja, our VicePresident, Chief Technology Officer and Chief Research and Development Officer,are brothers. Together, these three individuals held approximately 19.0% of ouroutstanding common shares as of August 2, 2008. As aresult, if theseindividuals act together, they may significantly influence theelection of our directors and the approval or disapproval of any significantcorporate actionsthat require shareholder approval. Thisinfluence over our affairs might be adverse to the interests of othershareholders. For instance, the voting 

 

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power of these individuals could havethe effect of delaying or preventing an acquisition of us on terms that othershareholders may desire. Furthermore, we have a classified board, which couldalso further delay or prevent an acquisition, under certain circumstances.

 

Under Bermuda law, all of ourofficers, in exercising their powers and discharging their duties, must acthonestly and in good faith with a view to our best interests and exercise thecare, diligence and skill that a reasonably prudent person would exercise incomparable circumstances. Majority shareholders do not owe fiduciary duties tominority shareholders. As a result, the minority shareholders will not have adirect claim against the majority shareholders in the event the majority shareholderstake actions that damage the interests of minority shareholders. Class actionsand derivative actions are generally not available to shareholders under thelaws of Bermuda, except that Bermuda courts would be expected to follow Englishcase law precedent, which would permit a shareholder to bring an action in ourname if the directors or officers are alleged to be acting beyond our corporatepower, committing illegal acts or violating our Memorandum of Association orBye-laws. In addition, minority shareholders would be able to challenge acorporate action that allegedly constituted a fraud against them or requiredthe approval of a greater percentage of our shareholders than actually approvedit. The winning party in such an action generally would be able to recover aportion of attorneys’ fees incurred in connection with the action.

 

***We face foreign business, political and economicrisks, which may harm our results of operations, because a majority of ourproducts and our customers’ products are manufactured and sold outside of theUnited States.***

 

A substantial portion of ourbusiness is conducted outside of the United States and, as a result, we aresubject to foreign business, political and economic risks. All of our productsare manufactured outside of the United States. Our current qualified integratedcircuit foundries are located in the same region within Taiwan, and our primaryassembly and test subcontractors are located in the Pacific Rim region. Inaddition, many of our customers are located outside of the United States,primarily in Asia, which further exposes us to foreign risks. Sales tocustomers located in Asia represented approximately 86% of our net revenue forthe six months ended August 2,2008, 84% of our net revenue in fiscal 2008 and 89% of our net revenue infiscal 2007.

 

We anticipate that ourmanufacturing, assembly, testing and sales outside of the United States willcontinue to account for a substantial portion of our operations and revenue infuture periods. Accordingly, we are subject to risks associated withinternational operations, including:

 

·                  difficulties in obtainingdomestic and foreign export, import and other governmental approvals, permitsand licenses;

 

·                  compliance with foreign laws,and laws and practices that favor local companies;

 

·                  difficulties in staffing andmanaging foreign operations;

 

·                  trade restrictions or highertariffs;

 

·                  transportation delays;

 

·                  difficulties of managingdistributors, especially because we expect to continue to increase our salesthrough international distributors;

 

·                  withholding tax obligationson revenues that we may not be able to offset fully against our U.S. taxobligations, including the further risk that foreign tax authorities mayincrease tax rates, which could result in increased tax withholdings andpenalties;

 

·                  less effective protection ofintellectual property than is afforded to us in the United States or otherdeveloped countries;

 

·                  political and economicinstability, including wars, terrorism, other hostilities and political unrest,boycotts, curtailment of trade and other business restrictions; and

 

·                  inadequate localinfrastructure.

 

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Moreover, the internationalnature of our business subjects us to risk associated with the fluctuation ofthe U.S. dollar versus foreign currencies. Decreases in the value of the U.S.dollar versus currencies in jurisdictions where we have large fixed costs willincrease the cost of such operations, which could harm our results ofoperations. For example, we have large fixed costs in Israel, which becomerelatively greater if the U.S. dollar declines in value versus the Israelishekel. On January 27, 2007, the U.S. dollar - Israeli shekelexchange ratio was 4.25, but on August 2, 2008, thisexchange ratio had fallen to 3.52. On the other hand, because substantially allof our sales to date have been denominated in U.S. dollars, increases in thevalue of the U.S. dollar will increase the price of our products so that theybecome relatively more expensive to customers in the local currency of aparticular country, potentially leading to a reduction in sales andprofitability for us in that country. A portion of our international revenuemay be denominated in foreign currencies in the future, which will subject usto risks associated with fluctuations in exchange rates for those foreigncurrencies.

 

***The average selling prices of products in our marketshave historically decreased rapidly and will likely do so in the future, whichcould harm our revenues and gross profits.***

 

The products we develop andsell are used for high volume applications. As a result, the prices of thoseproducts have historically decreased rapidly. We may not be able to maintain orimprove the gross margins and our gross profits and financial results willsuffer if we are unable to offset any reductions in our average selling pricesby increasing our efficiency through increasing sales volumes, reducing ourcosts, or developing new or enhanced products on a timely basis with higherselling prices or gross profits.

 

Additionally, because we donot operate our own manufacturing, assembly or testing facilities, we may notbe able to reduce our costs as rapidly as companies that operate their ownfacilities, and our costs may even increase, which could also reduce ourmargins. In the past, we have reduced the average selling prices of ourproducts in anticipation of future competitive pricing pressures, new productintroductions by us or our competitors and other factors. We expect that wewill have to do so again in the future.

 

***We have a lengthy and expensive product sales cyclethat does not assure product sales, and that if unsuccessful, may harm ourresults******of operations******.***

 

The sales cycle for many ofour products is long and requires us to invest significant resources with eachpotential customer without any assurance of sales to that customer. Our salescycle typically begins with an extended evaluation and test period, also knownas qualification, during which our products undergo rigorous reliabilitytesting by our customers.

 

Qualification is typicallyfollowed by an extended development period by our customers and an additionalthree to nine month period before a customer commences volume production ofequipment incorporating our products. This lengthy sales cycle creates the riskthat our customers will decide to cancel or change product plans for productsincorporating our integrated circuits. During our sales cycle, our engineersassist customers in implementing our products into the customers’ products. Weincur significant research and development, selling and marketing, general andadministrative expenses as part of this process, and this process may nevergenerate related revenues. We derive revenue from this process only if ourdesign is selected. Once a customer selects a particular integrated circuit foruse in its storage product, the customer generally uses solely that integratedcircuit for a full generation of its product. Therefore, if we do not achieve adesign win for a product, we will be unable to sell our integrated circuit to acustomer until that customer develops a new product or a new generation of itsproduct. Even if we achieve a design win with a customer, the customer may notultimately ship products incorporating our products or may cancel orders afterwe have achieved a sale. In addition, we will have to begin the qualificationprocess again when a customer develops a new generation of a product for whichwe were the successful supplier for the prior generation.

 

Our typical customer contractdoes not obligate the customer to any minimum purchase commitment. We may buildinventory in anticipation of receiving customer orders, but if such customerdemand does not develop as we anticipate, it may become necessary for us towrite-off such inventory. Also, during the final production of a matureproduct, our customers typically exhaust their existing inventory of ourintegrated circuits. Consequently, orders for our products may decline in thosecircumstances, even if our products are incorporated into both our customers’mature and replacement products. A delay in a customer’s transition tocommercial production of a replacement product may cause the customer to losesales, which would delay our ability to recover the lost sales from thediscontinued mature product. In addition, customers may defer orders inanticipation of new products or product enhancements from our competitors orus.

 

***We must keep pace with rapid technological changeand evolving industry standards in the semiconductor industry to remaincompetitive.***

 

Our future success willdepend on our ability to anticipate and adapt to changes in technology andindustry standards and our customers’ changing demands. We sell products inmarkets that are characterized by rapid technological change, evolving industry

 

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standards, frequent new product introductions, short productlife cycles and increasing demand for higher levels of integration and smallerprocess geometries. Our past sales and profitability have resulted, to a largeextent, from our ability to anticipate changes in technology and industrystandards and to develop and introduce new and enhanced products incorporatingthe new standards and technologies. Our ability to adapt to these changes andto anticipate future standards, and the rate of adoption and acceptance ofthose standards, will be a significant factor in maintaining or improving ourcompetitive position and prospects for growth. If new industry standardsemerge, our products or our customers’ products could become unmarketable orobsolete, and we could lose market share. We may also have to incur substantialunanticipated costs to comply with these new standards. In addition, our targetmarkets continue to undergo rapid growth and consolidation. A significantslowdown in any of these markets could materially and adversely affect ourbusiness, financial condition and results of operations. Our success will alsodepend on the ability of our customers to develop new products and enhanceexisting products for the markets we serve and to introduce and promote thoseproducts successfully.

 

***We may be unable to protect our intellectualproperty, which would negatively affect our ability to compete.***

 

We believe one of our keycompetitive advantages results from our collection of proprietary technologiesthat we have developed since our inception. If we fail to protect theseintellectual property rights, competitors could sell products based ontechnology that we have developed that could harmour competitive position and decrease our revenues. We believe that theprotection of our intellectual property rights is and will continue to beimportant to the success of our business. We rely on a combination of patent,copyright, trademark and trade secret laws, as well as nondisclosure agreementsand other methods, to protect our proprietary technologies. We also enter intoconfidentiality or license agreements with our employees, consultants andbusiness partners, and control access to and distribution of our documentationand other proprietary information. We have been issued several U.S. and foreignpatents and have a number of pending U.S. and foreign patentapplications. However, a patent may not be issued as a result of anyapplications or, if issued, claims allowed may not be sufficiently broad toprotect our technology. In addition, it is possible that existing or futurepatents may be challenged, invalidated or circumvented. Despite our efforts,unauthorized parties may attempt to copy or otherwise obtain and use ourproducts or proprietary technology. Monitoring unauthorized use of ourtechnology is difficult, and the steps that we have taken may not preventunauthorized use of our technology, particularly in foreign countries where thelaws may not protect our proprietary rights as fully as in the United States. If our patents do not adequately protectour technology, our competitors may be able to offer products similar to ours.

 

***We may become involved with costly and lengthylitigation, which could subject us to liability, require us to obtain or renewlicenses or stop selling our products or force us to redesign our products.***

 

Litigation involving patentsand other intellectual property is widespread in the high-technology industryand is particularly prevalent in the integrated circuit industry, where anumber of companies and other entities aggressively bring numerous infringementclaims to assert their patent portfolios. From time to time our subsidiariesand customers receive, and may continue to receive in the future, notices thatallege claims of infringement, misappropriation or misuse of the intellectualproperty rights of third parties. For example, in recent years, multiple claimshave been made against our subsidiaries and our customers related to standards-basedtechnologies such as wireless local area networking. In addition, we havecertain patent licenses with third parties that are up for renewal in calendaryear 2009, and if we cannot successfully renew these licenses, our subsidiariesand customers could face claims of infringement. These claims could result inlitigation and/or claims for indemnification, which, in turn, could subject usto significant liability for damages, attorneys fees and costs. Any potentialintellectual property litigation also could force us to do one or more of thefollowing:

 

·                  stop selling, offering forsale, making, having made or exporting products or using technology thatcontains the allegedly infringing intellectual property;

 

·                  limit or restrict the type ofwork that employees involved in such litigation may perform for us;

 

·                  pay substantial damagesand/or license fees and/or royalties to the party claiming infringement thatcould adversely impact our liquidity or operating results;

 

·                  attempt to obtain or renewlicenses to the relevant intellectual property, which licenses may not beavailable on reasonable terms or at all; and

 

·                  attempt to redesign thoseproducts that contain the allegedly infringing intellectual property.

 

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For example, one of oursubsidiaries is a named thirdparty defendant in a patent infringement lawsuit againstNETGEAR filed in Wisconsin by Fujitsu Limited, LG Electronics and U.S. PhilipsCorp.  In addition, three of our subsidiaries filed an action in Texasagainst Australia’s Commonwealth Scientific and Industrial ResearchOrganisation (“CSIRO”) seeking a declaratory judgment that CSIRO’s patent isinvalid and unenforceable and that our subsidiary does not infringe the CSIROpatent.  Furthermore, one of our subsidiaries is a named defendant in apatent infringement lawsuit, also in Texas, filed by Wi-Lan, a Canadiancompany, which likewise alleges that its asserted patents are infringed. We believe that our subsidiaries do not infringe any of the asserted Fujitsu,CSIRO or Wi-Lan patents, and we will vigorously defend ourselves in thesematters.

 

We and/or our subsidiariesare also parties to other claims and litigation proceedings arising in thenormal course of business. The impact on us as a result of such claims andlitigation cannot currently be ascertained. Any litigation, regardless of theoutcome, is time-consuming and expensive to resolve and can divert managementtime and attention. There can be no assurance that these matters will beresolved in a manner that is not adverse to our business, financial condition,results of operations or cash flows.

 

***Our intellectual property indemnification practicesmay adversely impact our business.***

 

Some of our contracts requireour subsidiaries to indemnify customers under certain circumstances for variouscosts and damages of intellectual property infringement. This practice maysubject our subsidiaries to significant indemnification claims by our customersor others for the payment of legal expenses and damages should a court findinfringement. In the past, our subsidiaries have received notice from customersinforming them that they have received allegations from certain patent holdersthat the inclusion of our chipsets into our customer’s products requires thepayment of patent license fees. We cannot assure you that such claims will notbe pursued or that these claims, if pursued, would not harm our business. For example, customers have requested our subsidiaries to indemnify themin connection with a patent infringement lawsuits filed in Texas by CSIRO.Similarly, certain customers have asked one of our subsidiaries to indemnifythem in connection with patent infringement lawsuits filed in Texas by Wi-Lan.In addition, NETGEAR has filed suit against one of our subsidiaries inWisconsin demanding that its component suppliers, including one of oursubsidiaries, indemnify NETGEAR for damages stemming from the patent lawsuitfiled by Fujitsu.

 

***We are incorporated in Bermuda, and, as a result,it may not be possible for our shareholders to enforce civil liabilityprovisions of the securities laws of the United States.***

 

We are organized under thelaws of Bermuda. As a result, it may not be possible for our shareholders toeffect service of process within the United States upon us, or to enforceagainst us in United States courts judgments based on the civil liabilityprovisions of the securities laws of the United States. Most of our executiveofficers and directors are residents of the United States. However, there issignificant doubt as to whether the courts of Bermuda would recognize orenforce judgments of United States courts obtained against us or our directorsor officers based on the civil liability provisions of the securities laws ofthe United States or any state or hear actions brought in Bermuda against us orthose persons based on those laws. The United States and Bermuda do notcurrently have a treaty providing for the reciprocal recognition andenforcement of judgments in civil and commercial matters. Therefore, a finaljudgment for the payment of money rendered by any federal or state court in theUnited States based on civil liability, whether or not based solely on UnitedStates federal or state securities laws, would not be automatically enforceablein Bermuda.

 

***Our Bye-laws contain a waiver of claims or rightsof action by our shareholders against our officers and directors, which willseverely limit our shareholders’ right to assert a claim against our officersand directors under Bermuda law.***

 

OurBye-laws contain a broad waiver by our shareholders of any claim or right ofaction, both individually and on our behalf, against any of our officers anddirectors. The waiver applies to any action taken by an officer or director, orthe failure of an officer or director to take any action, in the performance ofhis or her duties with or for us, other than with respect to any matterinvolving any fraud or dishonesty on the part of the officer or director. Thiswaiver will limit the rights of our shareholders to assert claims against ourofficers and directors unless the act complained of involves actual fraud ordishonesty. Thus, so long as acts of business judgment do not involve actualfraud or dishonesty, they will not be subject to shareholder claims underBermuda law. For example, shareholders will not have claims against officersand directors for a breach of trust, unless the breach rises to the level of actualfraud or dishonesty.

 

***Tax benefits we receive may be terminated orreduced in the future, which would increase our costs.***

 

Under current Bermuda law, weare not subject to tax on our income and capital gains. We have obtained fromthe Minister of Finance of Bermuda under the Exempt Undertakings Tax ProtectionAct 1966, as amended, an undertaking that, in the event that 

 

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Bermuda enacts any legislation imposing tax computed onincome and capital gains, those taxes should not apply to us until March 28,2016.  However, it is possible that this exemption would not be extendedbeyond that date.

 

The Economic DevelopmentBoard of Singapore granted Pioneer Status to our wholly-owned subsidiary inSingapore in July 1999. Initially, this tax exemption was to expire after 10 years, butthe Economic Development Board in June 2006 agreed to extend the term to 15 years. As aresult, we anticipate that a significant portion of the income we earn inSingapore during this period will be exempt from the Singapore income tax. Weare required to meet several requirements as to investment, headcount andactivities in Singapore to retain this status. If our Pioneer Status isterminated early, our financial results could be harmed.

 

The Israeli government hasgranted Approved Enterprise Status to two of our wholly-owned subsidiaries inIsrael, which provides a tax holiday on undistributed income derived fromoperations within certain “development regions” in Israel. In order to maintainour qualification, we must continue to meet specified conditions, including themaking of investments in fixed assets in Israel. As our tax holidays expire, weexpect that we will start paying income tax on our operations within thesedevelopment regions.

 

During fiscal 2007, ourSwitzerland subsidiary received from both the Swiss Federal Department ofEconomy and the Vaud Cantonal Tax Administration a ten-year tax holiday on a design andresearch centreand any wafersupply trading activity revenues earned in Switzerland.  Each jurisdictionhas separate requirements that need to be met such as the ten-year businessrequirement and investment in head count, intellectual property, officeequipment, software and other expense items.  If the requirements are notmet, there would be tax dollars to be paid that may affectour financial conditionand results of operations.

 

***Our Bye-laws contain provisions that could delay orprevent a change in corporate control, even if the change in corporate controlwould benefit our shareholders.***

 

Our Bye-laws contain changein corporate control provisions, which include:

 

·                  authorizing the issuance ofpreferred stock without shareholder approval;

 

·                  providing for a classifiedboard of directors with staggered, three-year terms; and

 

·                  requiring a vote oftwo-thirds of the outstanding shares to approve any change of corporatecontrol.

 

These changes in corporatecontrol provisions could make it more difficult for a third party toacquire us, even if doing so would be a benefit to our shareholders.

 

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**Item 2. *UnregisteredSales of Equity Securities and Use of Proceeds***

 

During the three months ended August 2,2008, we issued 1,678,735 common shares as a result of the exercise of warrantsat an exercise price of $4.60.  Wereceived an aggregate $2,410,752.68 from the issuance of 523,792 common sharesexercised pursuant to the foregoing warrants. The remaining 1,154,943 common shares were exercised by net issuancefrom warrants that were exercisable for 1,578,247 common shares.  The issuance of these common shares wasconsidered to be exempt from registration under the Securities Act in relianceon Section 4(2) promulgated thereunder as a transaction not involvingany public offering.

 

**Item 3. *DefaultsUpon Senior Securities***

 

Notapplicable.

 

**Item 4. *Submissionof Matters to a Vote of Security Holders***

 

At our 2008 annual general meeting of shareholders held on July 11,2008, the following proposals were adopted by the votes indicated.

 

1.                                       To elect three Class 2 directors, tohold office for a three-year term until the 2011 annual general meeting ofshareholders or until their successors are duly elected and qualified, and one Class 1director, to hold office for a two-year term until the 2010 annual generalmeeting of shareholders or until his successor is duly elected and qualified.

 
| ** **                                            | ** ** | **For**     | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker Non-  Votes** | ** ** |
|-------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-----------------------------|------------|
| John G.  Kassakian – Class 1 Director       |       | 508,484,775 |       | 40,602,072  |       | 5,338,697   |       | —                      |       |
| Kuo Wei  (Herbert) Chang – Class 2 Director |       | 344,907,936 |       | 204,277,609 |       | 5,240,000   |       | —                      |       |
| Juergen Gromer,  Ph.D. – Class 2 Director   |       | 508,094,127 |       | 41,054,471  |       | 5,276,947   |       | —                      |       |
| Arturo Krueger –  Class 2 Director          |       | 495,097,406 |       | 54,117,363  |       | 5,210,775   |       | —                      |       |

 

The term of office for directors Dr. Sehat Sutardja and Dr. PantasSutardja continued after the annual general meeting of shareholders.

 

2.                                       To re-appointPricewaterhouseCoopers LLP as our auditors and independent registeredpublic accounting firm, and authorize the audit committee, acting on behalf ofour board of directors, to fix the remuneration of the auditors and independentregistered public accounting firm, in both cases for our fiscal year ending January 31,2009.

 
| ** ** | ** ** | **For**     | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker Non-  Votes** | ** ** |
|------------|------------|-------------|------------|-------------|------------|-------------|------------|-----------------------------|------------|
| ** ** | ** ** | 545,617,515 | ** ** | 3,971,858   | ** ** | 4,836,176   | ** ** | —                      |       |

 

**Item 5. *OtherInformation***

 

None.

 

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**Item 6. *Exhibits***

 

(a)      The following exhibits are filedas part of this report:

 
| 10.1  |   | Policy for Non-Business Use of Corporate Aircraft,  is incorporated herein by reference to Exhibit 10.1 of our Current  Report on Form 8-K as filed with the SEC on May 23, 2008.                                           |
|-------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.2# |   | Employment Offer Letter executed on May 29,  2008 between the Company and Clyde Hosein, is incorporated herein by  reference to Exhibit 10.1 of our Current Report on Form 8-K as  filed with the SEC on May 30, 2008. |
| 10.3# |   | Form of Indemnification Agreement between the  Company and Clyde Hosein, is incorporated herein by reference to  Exhibit 10.2 of our Current Report on Form 8-K as filed with the  SEC on May 30, 2008.                |
| 31.1  |   | Certification Pursuant to 18 U.S.C.  Section 1350, as Adopted Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 of Sehat Sutardja Ph.D., President and Chief  Executive Officer.                                        |
| 31.2  |   | Certification Pursuant to 18 U.S.C.  Section 1350, as Adopted Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 of Clyde Hosein, Chief Financial Officer.                                                               |
| 32.1* |   | Certification Pursuant to 18 U.S.C. Section 1350,  as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of  Sehat Sutardja Ph.D., President and Chief Executive Officer.                                         |
| 32.2* |   | Certification  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 of Clyde Hosein, Chief  Financial Officer.                                                              |

 

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#                 Denotes an executive or directorcompensation plan or arrangement.

 

*                 In accordance with Item 601(b)(32)(ii) ofRegulation S-K and SEC Release No. 33-8238 and 34-47986, Final Rule:Management’s Reports on Internal Control Over Financial Reporting andCertification of Disclosure in Exchange Act Periodic Reports, thecertifications furnished in Exhibits 32.1 and 32.2 hereto are deemed toaccompany this Form 10-Q and will not be deemed “filed” for purposes of Section 18of the Exchange Act. Such certifications will not be deemed to be incorporatedby reference into any filings under the Securities Act or the Exchange Act,except to the extent that the registrant specifically incorporates it byreference.

 

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**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

 
|                    | MARVELL TECHNOLOGY GROUP LTD. |
|-------------------------|-------------------------------|
|                    |                          |
|                    |                          |   |
| September 10, 2008 |                          | By: | /s/ CLYDE R. HOSEIN |
| Date                    |                          | Clyde R. Hosein |
|                    |                          | Chief Financial Officer |
|                         |                               |  |  |

 

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**EXHIBIT INDEX**

 
| **Exhibit   Number** | ** ** | **Description**                                                                                                                                                                                                                            |
|---------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                      |       |                                                                                                                                                                                                                                       |
| 10.1                      |       | Policy for Non-Business  Use of Corporate Aircraft, is incorporated herein by reference to Exhibit 10.1  of our Current Report on Form 8-K as filed with the SEC on May 23,  2008.                                          |
| 10.2#                     |       | Employment Offer Letter  executed on May 29, 2008 between the Company and Clyde Hosein, is  incorporated herein by reference to Exhibit 10.1 of our Current Report on  Form 8-K as filed with the SEC on May 30, 2008. |
| 10.3#                     |       | Form of  Indemnification Agreement between the Company and Clyde Hosein, is  incorporated herein by reference to Exhibit 10.2 of our Current Report  on Form 8-K as filed with the SEC on May 30, 2008.                |
| 31.1                      |       | Certification Pursuant  to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002 of Sehat Sutardja Ph.D., President and Chief  Executive Officer.                                        |
| 31.2                      |       | Certification Pursuant  to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002 of Clyde Hosein, Chief Financial Officer.                                                               |
| 32.1*                     |       | Certification Pursuant  to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002 of Sehat Sutardja Ph.D., President and Chief  Executive Officer.                                        |
| 32.2*                     |       | Certification Pursuant  to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002 of Clyde Hosein, Chief Financial Officer.                                                               |

 

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#                 Denotes an executive or directorcompensation plan or arrangement.

 

*                 In accordance with Item 601(b)(32)(ii) ofRegulation S-K and SEC Release No. 33-8238 and 34-47986, Final Rule:Management’s Reports on Internal Control Over Financial Reporting andCertification of Disclosure in Exchange Act Periodic Reports, thecertifications furnished in Exhibits 32.1 and 32.2 hereto are deemed toaccompany this Form 10-Q and will not be deemed “filed” for purposes of Section 18of the Exchange Act. Such certifications will not be deemed to be incorporatedby reference into any filings under the Securities Act or the Exchange Act,except to the extent that the registrant specifically incorporates it byreference.

 

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