Table of Contents

 

 

 

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

**x****                   ****Quarterly Report Pursuant to Section 13 or 15(d) of theSecurities Exchange Act of 1934**

 

**For the quarterly period ended November 1, 2008**

 

**or**

 

**o****                     ****Transition Report Pursuant to Section 13 or 15(d) of theSecurities Exchange Act of 1934**

 

**For the transition period from                  to                   **

** **

**Commission file number: 0-30877**

 

**Marvell Technology Group Ltd.**(Exact name of registrantas 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 ZipCode, of principal executive offices andregistrant’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 smaller  reporting company) |   |                              |

 

Indicate by check mark whether the registrant isa shell 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 November 30, 2008 was 613,308,520 shares.

 

 

 

----

Table of Contents

 

**TABLEOF CONTENTS**

 
| ** **                             | ** ** | ** **                                                                                                                                      | ** ** | **Page** |
|----------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| **PART I. FINANCIAL INFORMATION** |
| Item 1.                                |       | Financial Statements:                                                                                                                           |       |     |
|                                   |       | Unaudited Condensed  Consolidated Balance Sheets as of November 1, 2008 and February 2,  2008                                         |       | 3        |
|                                   |       | Unaudited Condensed  Consolidated Statements of Operations for the three and nine months ended November 1,  2008 and October 27, 2007 |       | 4        |
|                                   |       | Unaudited Condensed  Consolidated Statements of Cash Flows for the nine months ended  November 1, 2008 and October 27, 2007           |       | 5        |
|                                   |       | Notes  to Unaudited Condensed Consolidated Financial Statements                                                                                 |       | 6        |
| Item 2.                                |       | Management’s Discussion and Analysis of Financial Condition  and Results of Operations                                                     |       | 29       |
| Item 3.                                |       | Quantitative  and Qualitative Disclosures About Market Risk                                                                                     |       | 40       |
| Item 4.                                |       | Controls and Procedures                                                                                                                         |       | 42       |
| **PART II. OTHER  INFORMATION**   |
| Item 1.                                |       | Legal Proceedings                                                                                                                               |       | 43       |
| Item 1A.                               |       | Risk  Factors                                                                                                                                   |       | 43       |
| Item 2.                                |       | Unregistered Sales of Equity  Securities and Use of Proceeds                                                                                    |       | 60       |
| Item 3.                                |       | Defaults Upon Senior Securities                                                                                                                 |       | 60       |
| Item 4.                                |       | Submission  of Matters to a Vote of Security Holders                                                                                            |       | 60       |
| Item 5.                                |       | Other Information                                                                                                                               |       | 60       |
| Item 6.                                |       | Exhibits                                                                                                                                        |       | 60       |
| Signatures                             |       | 61                                                                                                                                              |
| Exhibit Index                     |       | 62                                                                                                                                              |

 

2

----

Table ofContents

 

**PART I: FINANCIALINFORMATION**

 

**Item 1. *FinancialStatements***

 

**MARVELL TECHNOLOGY GROUP LTD.UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS(In thousands)**

 
| ** **                                         | ** ** | **November 1,  2008** | ** ** | **February 2,  2008** | ** ** |
|----------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| **ASSETS**                                         |
| Current assets:                                    |       |                       |       |                       |       |
| Cash and cash equivalents                          |       | $                          | 1,020,007  |                       | $          | 615,648 |   |
| Restricted cash                                    |       | 24,500                     |       | —                     |       |
| Short-term investments                             |       | —                     |       | 15,254                     |       |
| Accounts receivable, net                           |       | 397,836                    |       | 332,020                    |       |
| Inventories                                        |       | 339,533                    |       | 419,494                    |       |
| Prepaid expenses and other  current assets         |       | 63,836                     |       | 105,809                    |       |
| Deferred income taxes                              |       | 15,516                     |       | 15,516                     |       |
| Total current assets                               |       | 1,861,228                  |       | 1,503,741                  |       |
| Property and equipment, net                        |       | 401,521                    |       | 416,241                    |       |
| Long-term investments                              |       | 40,310                     |       | 45,628                     |       |
| Goodwill                                           |       | 1,995,151                  |       | 1,994,068                  |       |
| Acquired intangible assets,  net                   |       | 328,704                    |       | 433,809                    |       |
| Other non-current assets                           |       | 123,591                    |       | 157,107                    |       |
| Total assets                                       |       | $                          | 4,750,505  |                       | $          | 4,550,594 |   |
| ** **                                         |       |                       |       |                       |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**      |
| Current liabilities:                               |       |                       |       |                       |       |
| Accounts payable                                   |       | $                          | 224,119    |                       | $          | 231,135 |   |
| Accrued liabilities                                |       | 98,711                     |       | 122,961                    |       |
| Accrued employee compensation                      |       | 141,491                    |       | 118,101                    |       |
| Income taxes payable                               |       | 37,513                     |       | 39,132                     |       |
| Deferred income                                    |       | 64,720                     |       | 69,420                     |       |
| Current portion of capital  lease obligations      |       | 1,751                      |       | 2,463                      |       |
| Total current liabilities                          |       | 568,305                    |       | 583,212                    |       |
| Capital lease obligations, net  of current portion |       | 2,911                      |       | 4,238                      |       |
| Non-current income taxes  payable                  |       | 110,062                    |       | 108,543                    |       |
| Term loan obligations,  long-term portion          |       | 187,750                    |       | 390,750                    |       |
| Other long-term liabilities                        |       | 50,390                     |       | 52,332                     |       |
| Total liabilities                                  |       | 919,418                    |       | 1,139,075                  |       |
| Commitments and contingencies  (Note 9)            |       |                       |       |                       |       |
| Shareholders’ equity:                         |       |                       |       |                       |       |
| Common shares                                      |       | 1,226                      |       | 1,200                      |       |
| Additional paid-in capital                         |       | 4,309,512                  |       | 4,100,659                  |       |
| Accumulated other  comprehensive income (loss)     |       | (948                       | )          | 615                        |       |
| Accumulated deficit                                |       | (478,703                   | )          | (690,955                   | )          |
| Total shareholders’ equity                    |       | 3,831,087                  |       | 3,411,519                  |       |
| Total liabilities and  shareholders’ equity   |       | $                          | 4,750,505  |                       | $          | 4,550,594 |   |

 

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

 

3

----

Table ofContents

 

**MARVELL TECHNOLOGY GROUP LTD.UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(In thousands, except per share amounts)**

 
| ** **                                  | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                  | ** ** | **November 1,  2008**       | ** ** | **October 27,  2007**      | ** ** | **November 1,  2008** | ** ** | **October 27,  2007** | ** ** |
| Net revenue                                 |       | $                                | 791,046    |                            | $          | 758,246 |   | $ | 2,437,696 |   | $ | 2,050,007 |   |
| Operating costs and expenses:               |       |                             |       |                            |       |   |   |   |   |
| Cost of goods sold                          |       | 379,137                          |       | 396,209                         |       | 1,173,892 |   | 1,059,156 |   |
| Research and development                    |       | 234,222                          |       | 252,205                         |       | 722,411 |   | 722,532 |   |
| Selling and marketing                       |       | 41,158                           |       | 46,423                          |       | 129,080 |   | 150,757 |   |
| General and administrative                  |       | 28,869                           |       | 32,537                          |       | 72,809 |   | 90,300 |   |
| Amortization of acquired  intangible assets |       | 34,814                           |       | 37,311                          |       | 105,049 |   | 111,924 |   |
| Total operating costs and  expenses         |       | 718,200                          |       | 764,685                         |       | 2,203,241 |   | 2,134,669 |   |
| Operating income (loss)                     |       | 72,846                           |       | (6,439                          | )          | 234,455 |   | (84,662 | ) |
| Interest and other income, net              |       | 15,109                           |       | 1,109                           |       | 21,973 |   | 3,127 |   |
| Interest expense                            |       | (3,566                           | )          | (10,518                         | )          | (15,876 | ) | (30,435 | ) |
| Income (loss) before income  taxes          |       | 84,389                           |       | (15,848                         | )          | 240,552 |   | (111,970 | ) |
| Provision (benefit) for income  taxes       |       | 13,443                           |       | (9,412                          | )          | 28,300 |   | 3,750 |   |
| Net income (loss)                           |       | $                                | 70,946     |                            | $          | (6,436 | ) | $ | 212,252 |   | $ | (115,720 | ) |
| Net income (loss) per share:                |       |                             |       |                            |       |   |   |   |   |
| Basic                                       |       | $                                | 0.12       |                            | $          | (0.01 | ) | $ | 0.35 |   | $ | (0.20 | ) |
| Diluted                                     |       | $                                | 0.11       |                            | $          | (0.01 | ) | $ | 0.34 |   | $ | (0.20 | ) |
| Weighted average shares:                    |       |                             |       |                            |       |   |   |   |   |
| Basic                                       |       | 611,945                          |       | 590,759                         |       | 606,676 |   | 588,573 |   |
| Diluted                                     |       | 630,810                          |       | 590,759                         |       | 630,997 |   | 588,573 |   |

 

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

 

4

----

Table ofContents

 

**MARVELL TECHNOLOGY GROUP LTD.UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)**

 
| ** **                                                                                          | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                          | ** ** | **November 1,  2008**      | ** ** | **October 27,  2007** | ** ** |
| **Cash flows from operating  activities:**                                                          |       |                            |       |   |   |
| Net income (loss)                                                                                   |       | $                               | 212,252    |   | $ | (115,720 | ) |
| Adjustments to reconcile net  income (loss) to net cash provided by operating activities:           |       |                            |       |   |   |
| Depreciation and amortization                                                                       |       | 85,786                          |       | 78,804 |   |
| Stock-based compensation                                                                            |       | 132,431                         |       | 161,020 |   |
| Amortization of acquired  intangible assets                                                         |       | 105,049                         |       | 111,924 |   |
| Gain from sale of asset under  construction                                                         |       | —                          |       | (5,122 | ) |
| Fair market value adjustment  to Intel inventory sold                                               |       | (14,163                         | )          | (103,914 | ) |
| Interest expense related to  supply contract                                                        |       | —                          |       | 4,668 |   |
| Excess tax benefits from  stock-based compensation                                                  |       | (356                            | )          | (300 | ) |
| Changes in assets and  liabilities, net of assets acquired and liabilities assumed in acquisitions: |       |                            |       |   |   |
| Restricted cash                                                                                     |       | (24,500                         | )          | — |   |
| Accounts receivable                                                                                 |       | (65,816                         | )          | (56,932 | ) |
| Inventories                                                                                         |       | 95,850                          |       | (158,834 | ) |
| Prepaid expenses and other  assets                                                                  |       | 61,847                          |       | 99,523 |   |
| Accounts payable                                                                                    |       | (6,004                          | )          | (31,107 | ) |
| Accrued liabilities and other                                                                       |       | (23,693                         | )          | (6,254 | ) |
| Accrued employee compensation                                                                       |       | 17,659                          |       | 10,497 |   |
| Income taxes payable                                                                                |       | (100                            | )          | (4,192 | ) |
| Deferred income                                                                                     |       | (4,700                          | )          | 29,833 |   |
| Net cash provided by operating  activities                                                          |       | 571,542                         |       | 13,894 |   |
| **Cash flows from investing  activities:**                                                          |       |                            |       |   |   |
| Cash paid in acquisitions, net                                                                      |       | —                          |       | (8,349 | ) |
| Purchases of investments                                                                            |       | (10,172                         | )          | (166,230 | ) |
| Sales and maturities of  investments                                                                |       | 29,181                          |       | 120,516 |   |
| Purchases of technology  licenses                                                                   |       | (2,650                          | )          | (19,525 | ) |
| Purchases of property and  equipment                                                                |       | (59,312                         | )          | (81,135 | ) |
| Proceeds from sale of asset  under construction                                                     |       | —                          |       | 5,122 |   |
| Net cash used in investing  activities                                                              |       | (42,953                         | )          | (149,601 | ) |
| **Cash flows from financing  activities:**                                                          |       |                            |       |   |   |
| Proceeds from the issuance of  common shares                                                        |       | 80,453                          |       | 32,289 |   |
| Principal payments on capital  lease and debt obligations                                           |       | (205,039                        | )          | (9,589 | ) |
| Excess tax benefits from  stock-based compensation                                                  |       | 356                             |       | 300 |   |
| Net cash provided by (used in)  financing activities                                                |       | (124,230                        | )          | 23,000 |   |
| Net increase (decrease) in  cash and cash equivalents                                               |       | 404,359                         |       | (112,707 | ) |
| Cash and cash equivalents at  beginning of period                                                   |       | 615,648                         |       | 568,008 |   |
| Cash and cash equivalents at  end of period                                                         |       | $                               | 1,020,007  |   | $ | 455,301 |   |

 

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

 

5

----

Table ofContents

 

**MARVELL TECHNOLOGY GROUP LTD.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

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

 

**The Company**

 

Marvell Technology Group Ltd., a Bermuda company (the “Company”), is aleading global semiconductor provider of high-performance analog, mixed-signal,digital signal processing and embedded microprocessor integrated circuits. TheCompany’s diverse product portfolio includes switching, transceivers, wireless,PC connectivity, gateways, communications controllers, storage and powermanagement solutions that serve diverse applications used in businessenterprise, consumer electronics 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-week period and fiscal 2008 was comprised of a53-week period.

 

The unaudited interim condensed consolidatedfinancial statements have been prepared in accordance with accounting principlesgenerally accepted in the United States (“GAAP”) for interim financialinformation and with the instructions to Form 10-Q and Article 10 ofRegulation S-X. Accordingly, they do not include all of the information andnotes required by GAAP for annual financial statements. In the opinion of management, all adjustments consisting of normal andrecurring entries considered necessary for a fair statement of the results forthe interim periods have been included in the Company’s financial position asof November 1, 2008, the results of its operations for the three and ninemonths ended November 1, 2008 and October 27, 2007, and its cashflows for the nine months ended November 1, 2008 and October 27,2007. The February 2, 2008 condensed consolidated balance sheet data wasderived from audited consolidated financial statements included in the Company’s2008 Annual Report on Form 10-K but does not include all disclosuresrequired by GAAP.  Certainreclassifications have been made to the prior period balances in the Statementsof Operations and Statementsof Cash Flows in order to conform to the current period’s presentation.

 

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”).  Theresults of operations for the three and nine months ended November 1, 2008are not necessarily indicative of the results that may be expected for anyother 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 ofcontingent assets and liabilities. On an on-going basis, the Company evaluatesits estimates, 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 intercompanyaccounts and transactions have been eliminated. The functional currency of theCompany and its subsidiaries is the United States dollar.

 

6

----

Table ofContents

 

**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 consist of cash on deposit with banks and money market funds.

 

**Investments**

 

The Company’s marketable investments are classified asavailable-for-sale securities and are reported at fair value. Unrealized gainsand losses are reported, net of tax, if any, in accumulated other comprehensiveincome (loss), a component of shareholders’ equity. Realized gains and lossesand declines in value judged to be other than temporary on available-for-salesecurities are included 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 financialinstitutions, the composition and maturities of which are regularly monitoredby management. The Company believes that the concentration of credit risk inits trade receivables with respect to its served markets, as well as thelimited customer base located primarily in the Asia Pacific Region, aresubstantially mitigated by the Company’s credit evaluation process, relativelyshort collection terms and the high level of credit worthiness of itscustomers. The Company performs ongoing credit evaluation of its customers’financial condition and limits the amount of credit extended when deemednecessary based upon payment history and the customer’s current creditworthiness, but generally requires no collateral. The Company regularly reviewsthe allowance for bad debt and doubtful accounts by considering factors such ashistorical experience, credit quality, age of the account receivable balancesand current economic conditions that may affect a customer’s ability to pay.

 

**Inventories**

 

Inventories are stated at the lower of cost ormarket, determined under the first-in, first-out method. We establish inventoryexcess and obsolescence provisions for estimated obsolete or unmarketableinventory equal to the difference between the cost of inventory and estimatednet realizable value based upon assumptions about future demand and marketconditions.  Shipping and handling costsare classified as a component of cost of goods sold in the unaudited condensedconsolidated statements of operations.

 

**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 30 years andbuilding improvements are depreciated over estimated useful lives of 15 years.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, net**

 

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.

 

7

----

Table ofContents

 

Goodwill is measured and tested for impairment on an annual basisduring the fourth fiscal quarter or more frequently if the Company believesindicators of impairment exist. The performance of the test involves a two-stepprocess. The first step requires comparing the fair value of the reporting unitto its net book value, including goodwill. As the Company has only onereporting unit, the fair value of the reporting unit is determined by takingthe market capitalization of the reporting unit as determined through quotedmarket prices and adjusted for control premiums and other relevant factors. Apotential impairment exists if the fair value of the reporting unit is lowerthan its net book value. The second step of the process is only performed if apotential impairment exists, and it involves determining the difference betweenthe fair value of the reporting unit’s net assets other than goodwill and thefair value of the reporting unit. If the difference is less than the net bookvalue of goodwill, impairment exists and is recorded. In the event that theCompany determines that the value of goodwill has become impaired, the Companywill record an accounting charge for the amount of impairment during the fiscalquarter in which the determination is made. The Company has not been requiredto perform this second step of the process since its implementation ofStatement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwilland Other Intangible Assets,” because the fair value of the reporting unit hasexceeded 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.

 

**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 isfixed or 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, shipped from stock pricingadjustment rights and limited rights of return on product unsold by the distributors.Although title passes to the distributor upon shipment terms and payment by theCompany’s distributors is not contingent on resale of the product, productrevenue on sales made through distributors with price protection, ship fromstock pricing adjustment and stock rotation rights is deferred until thedistributors sell the product to end customers because the Company’s sellingprice is not fixed and determinable and the Company is not able to estimatefuture returns.  Deferred revenue lessthe related cost of the inventories is reported as deferred income.  The Company does not believe that there isany significant exposure related to impairment of deferred cost of sales, asits historical returns have been minimal and inventory turnover for its distributorsgenerally ranges from 60 to 90 days.  TheCompany’s sales to direct customers are made primarily pursuant to standardpurchase orders for delivery of products. The Company generally allowscustomers to cancel or change purchase orders with limited notice prior to thescheduled shipment dates and from time to time it also may request a customerto accept a shipment of product before its original requested delivery date, inwhich case, revenue is not recognized until there is written confirmation fromthe customer accepting early shipment, delivery has occurred, the fee is fixedor determinable, and collection is reasonably assured. Additionally, collectionis not deemed to be “reasonably assured,” fixed or determinable if customersreceive extended payment terms. As a result, revenue on sales to customers withpayment terms substantially greater than the Company’s normal payment terms isdeferred and is recognized as revenue as the payments become due.  Revenue related to the sale of consignment inventoryis not recognized until the product is pulled from inventory stock by thecustomer.

 

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 and other expense.

 

8

----

Table ofContents

 

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 services. For multiple element arrangements, revenueis allocated to the separate elements based on fair value. If an arrangementincludes undelivered elements that are not essential to the functionality ofthe delivered elements, the Company defers the fair value of the undeliveredelements and the residual revenue is allocated to the delivered elements. Ifthe undelivered elements are essential to the functionality of the deliveredelements, no revenue is recognized. Undelivered elements typically aresoftware, warranty and maintenance services.

 

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.

 

**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 basis 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 basis 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 would establish avaluation allowance. The Company accounts for uncertain tax positions inaccordance with the Financial Accounting Standards Board (“FASB”)Interpretation No. 48, “Accounting for Uncertainty in Tax Positions” (“FIN48”). The Company classifies accrued interest and penalties as part of theaccrued FIN 48 liability and records the expense within the provision forincome taxes.

 

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 12 - 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 Accounting Pronouncements**

 

In December 2007, the FASB issued SFAS No. 141 (revised2007), “Business Combinations”**(“SFAS 141R”).  The standard changes the accounting forbusiness combinations including the measurement of acquirer shares issued inconsideration for a business combination, the recognition of contingentconsideration, the accounting for pre-acquisition gain and loss contingencies,the recognition of capitalized in-process research and development, the accountingfor acquisition-related restructuring cost accruals, the treatment ofacquisition related transaction costs and the recognition of changes in theacquirer’s income tax valuation allowance. The adoption of SFAS 141R will change the Company’s accounting treatmentfor business combinations on a prospective basis beginning on or after December 15,2008.

 

9

----

Table ofContents

 

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 Companyis currently evaluating the impact of the adoption of FSP157-2 and does notanticipate that FSP 157-2 will have a material impact on its financial positionand 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 thedisclosure requirements of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,”**and requires qualitativedisclosures about objectives and strategies for using derivatives, quantitativedisclosures about fair value amounts of and gains and losses on derivativeinstruments, and disclosures about credit-risk-related contingent features inderivative agreements. SFAS 161 is effective for financial statements issuedfor fiscal years and interim periods beginning after November 15, 2008,with early application encouraged.  TheCompany will adopt SFAS 161 in the first quarter of fiscal 2010 and does notanticipate that SFAS 161 will have a significant impact on its financialposition and results of operations.

 

In April 2008, the FASB issued FASB Staff Position FAS 142-3,“Determination of Useful Life of Intangible Assets” (“FSP FAS 142-3”). FSPFAS 142-3 amends the factors that should be considered in developing therenewal or extension assumptions used to determine the useful life of arecognized intangible asset under SFAS 142, “Goodwill and Other IntangibleAssets.” 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 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.”  TheCompany does not expect the adoption of SFAS 162 will have a significant impacton its financial position and results of operations.

 

In October 2008, the FASB issued FASB Staff PositionFAS 157-3, “Determining the Fair Value of a Financial Asset When theMarket for That Asset Is Not Active” (“FSP 157-3”). FSP 157-3clarified the application of SFAS 157. FSP 157-3 demonstrated how thefair value of a financial asset is determined when the market for thatfinancial asset is inactive. FSP 157-3 was effective upon issuance,including prior periods for which financial statements had not been issued. Theimplementation of this standard did not have an impact on the Company’sfinancial position and results of operations.

 

**Note3. Available-For-Sale-Investments**

 

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

 
| ** **                          | ** ** | **As of November 1, 2008** | ** ** |
|-------------------------------------|------------|------------------------------------------------|------------|
| ** **                          | ** ** | **Amortized  Cost**                            | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Fair Value** | ** ** |
| Long-term investments:              |       |                                           |       |   |   |   |   |   |   |
| Auction rate securities             |       | $                                              | 41,850     |   | $ | — |   | $ | (1,540 | ) | $ | 40,310 |   |
| Total long-term investments         |       | $                                              | 41,850     |   | $ | — |   | $ | (1,540 | ) | $ | 40,310 |   |
| Total available-for-sale securities |       | $                                              | 41,850     |   | $ | — |   | $ | (1,540 | ) | $ | 40,310 |   |

 

10

----

Table ofContents

 
| ** **                          | ** ** | **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 November 1, 2008, the Company’s investmentportfolio included $41.8 millionin par value of auction rate securities. Auction rate securities are usually found in the form of municipalbonds, 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 anauction process. At the end of each reset period, investors can sell orcontinue to hold the securities at par. The Company’s auction rate securitiesare all backed by student loans originated under the Federal Family EducationLoan Program and are over-collateralized, insured and guaranteed by the UnitedStates 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 theguidelines of the Company’s 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 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 ofNovember 1, 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 $1.5 million. During the nine months ended November 1, 2008, the Company recorded atemporary impairment charge for this amount in accumulated other comprehensive(loss), a component of shareholders’ equity. When evaluating whether the impairment is temporary or other thantemporary, the Company reviewed factors such as the length of time and extentto which fair value has been below cost basis, the financial condition andnear-term prospects of the issuer, and the Company’s ability and intent to holdthe investment for a period of time which may be sufficient for anticipatedrecovery in the market value.  TheCompany specifically noted that it had approximately 4% of its total cash invested in these auction rate securities, acash balance of approximately $1.0 billionin cash and cash equivalents other than auction rate securities, and that theCompany continues to generate positive cash flow on 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 notcertain when liquidity will return to the markets or if any other secondarymarkets will become available, and the Company has continued to classify itsauction rate securities in long-term investments as of November 1, 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.

 

11

----

Table ofContents

 

The contractualmaturities of available-for-sale debt securities at November 1, 2008 and February 2,2008 are presented in the following table (in thousands):

 
| ** **                     | ** ** | **November 1, 2008** | ** ** | **February 2, 2008** | ** ** |
|--------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **                     | ** ** | **Amortized  Cost**            | ** ** | **Estimated  Fair Value** | ** ** | **Amortized  Cost** | ** ** | **Estimated  Fair Value** | ** ** |
| Due in one year or less        |       | $                              | —     |                           | $          | — |   | $ | 15,231 |   | $ | 15,254 |   |
| Due between one and five years |       | —                         |       | —                         |       | — |   | — |   |
| Due over five years            |       | 41,850                         |       | 40,310                         |       | 45,628 |   | 45,628 |   |
|                           |       | $                              | 41,850     |                           | $          | 40,310 |   | $ | 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):

 
| ** **              | ** ** | **November 1, 2008**     |       |
|-------------------------|------------|------------------------------------|------------|
| ** **              | ** ** | **Less than  12 months** | ** ** | **Total** |   |
| ** **              | ** ** | **Fair  Value**                    | ** ** | **Unrealized  Loss** | ** ** | **Fair  Value** | ** ** | **Unrealized  Loss** |   |
| Auction rate securities |       | $                                  | 41,850     |   | $ | 1,540 |   | $ | 41,850 |   | $ | 1,540 |   |
| Total securities        |       | $                                  | 41,850     |   | $ | 1,540 |   | $ | 4,1850 |   | $ | 1,540 |   |

 

**Note 4. Supplemental Financial Information**

 

**Inventories (in thousands)**

 
| ** **      | ** ** | **November 1,  2008** | ** ** | **February 2,  2008** | ** ** |
|-----------------|------------|----------------------------|------------|----------------------------|------------|
| Work-in-process |       | $                          | 209,234    |                       | $          | 270,449 |   |
| Finished goods  |       | 130,299                    |       | 149,045                    |       |
|            |       | $                          | 339,533    |                       | $          | 419,494 |   |

 

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

 
| ** **                        | ** ** | **November 1,  2008** | ** ** | **February 2,  2008** | ** ** |
|-----------------------------------|------------|----------------------------|------------|----------------------------|------------|
| Prepayments for foundry  capacity |       | $                          | 16,000     |                       | $          | 23,200 |   |
| Prepayments for wafers            |       | —                     |       | 13,938                     |       |
| Receivable from foundry           |       | 8,392                      |       | 10,240                     |       |
| Other                             |       | 39,444                     |       | 58,431                     |       |
|                              |       | $                          | 63,836     |                       | $          | 105,809 |   |

 

12

----

Table of Contents

 

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

 
| ** **                                      | ** ** | **November 1,  2008** | ** ** | **February 2,  2008** | ** ** |
|-------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| **Property and equipment:**                     |       |                       |       |                       |       |
| Machinery and equipment                         |       | $                          | 337,044    |                       | $          | 315,797 |   |
| Computer software                               |       | 75,789                     |       | 72,736                     |       |
| Furniture and fixtures                          |       | 22,882                     |       | 22,303                     |       |
| Leasehold improvements                          |       | 33,627                     |       | 33,659                     |       |
| Buildings                                       |       | 107,660                    |       | 105,091                    |       |
| Building improvements                           |       | 44,741                     |       | 44,340                     |       |
| Land                                            |       | 71,198                     |       | 61,096                     |       |
| Construction in progress                        |       | 42,464                     |       | 32,287                     |       |
|                                            |       | 735,405                    |       | 687,309                    |       |
| Less: Accumulated depreciation and amortization |       | (333,884                   | )          | (271,068                   | )          |
|                                            |       | $                          | 401,521    |                       | $          | 416,241 |   |

 

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

 
| ** **                                  | ** ** | **November 1,  2008** | ** ** | **February 2,  2008** |   |
|---------------------------------------------|------------|----------------------------|------------|----------------------------|--------|
| Long term prepayments for  foundry capacity |       | $                          | 12,000     |                       | $      | 22,800 |   |
| Cost investments in private  companies      |       | 7,058                      |       | 7,058                      |   |
| Severance fund                              |       | 45,718                     |       | 50,235                     |   |
| Technology licenses                         |       | 21,667                     |       | 25,209                     |   |
| Deferred tax assets,  non-current           |       | 22,975                     |       | 22,975                     |   |
| Other                                       |       | 14,173                     |       | 28,830                     |   |
|                                        |       | $                          | 123,591    |                       | $      | 157,107 |   |

 

**Accrued liabilities (inthousands)**

 
| ** **                              | ** ** | **November 1,  2008** | ** ** | **February 2,  2008** | ** ** |
|-----------------------------------------|------------|----------------------------|------------|----------------------------|------------|
|                                    |       |                       |       |                       |       |
| Term loan obligations, current portion  |       | $                          | 4,000      |                       | $          | 4,000 |   |
| Accrued royalties                       |       | 7,752                      |       | 8,859                      |       |
| Accrued rebates                         |       | 28,924                     |       | 22,756                     |       |
| Accrued legal and professional services |       | 27,427                     |       | 25,562                     |       |
| Accrued contingent consideration        |       | —                     |       | 27,000                     |       |
| Other                                   |       | 30,608                     |       | 34,784                     |       |
|                                    |       | $                          | 98,711     |                       | $          | 122,961 |   |

 

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

 
| ** **                                | ** ** | **November 1,  2008** | ** ** | **February 2,  2008** | ** ** |
|-------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
|                                      |       |                       |       |                       |       |
| Accrued severance                         |       | $                          | 48,659     |                       | $          | 49,819 |   |
| Long-term facilities consolidation charge |       | 717                        |       | 1,326                      |       |
| Other                                     |       | 1,014                      |       | 1,187                      |       |
|                                      |       | $                          | 50,390     |                       | $          | 52,332 |   |

 

13

----

Table of Contents

 

**Note 5. 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** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                            | ** ** | **November 1,  2008**       | ** ** | **October 27,  2007**      | ** ** | **November 1,  2008** | ** ** | **October 27,****2007** | ** ** |
| Numerator:                                            |       |                             |       |                            |       |   |   |   |   |
| Net income (loss)                                     |       | $                                | 70,946     |                            | $          | (6,436 | ) | $ | 212,252 |   | $ | (115,720 | ) |
| Denominator:                                          |       |                             |       |                            |       |   |   |   |   |
| Weighted average shares of  common shares outstanding |       | 611,945                          |       | 590,759                         |       | 606,676 |   | 588,573 |   |
| Weighted average shares —  basic                 |       | 611,945                          |       | 590,759                         |       | 606,676 |   | 588,573 |   |
| Effect of dilutive securities-                        |       |                             |       |                            |       |   |   |   |   |
| Warrants                                              |       | —                           |       | —                          |       | 420 |   | — |   |
| Common share options and other                        |       | 18,865                           |       | —                          |       | 23,901 |   | — |   |
| Weighted average shares —  diluted               |       | 630,810                          |       | 590,759                         |       | 630,997 |   | 588,573 |   |
| Net income (loss) per share                           |       |                             |       |                            |       |   |   |   |   |
| Basic                                                 |       | $                                | 0.12       |                            | $          | (0.01 | ) | $ | 0.35 |   | $ | (0.20 | ) |
| Diluted                                               |       | $                                | 0.11       |                            | $          | (0.01 | ) | $ | 0.34 |   | $ | (0.20 | ) |

 

Options to purchase 66,079,306 common shares at a weighted average exerciseprice of $19.34 have been excluded from the computation ofdiluted net income per share for the three months ended November 1, 2008 becausethe exercise price of the stock options was greater than the average shareprice of the Company’s common shares and therefore, the effect would have beenanti-dilutive.  Warrants, common share options,restricted stock and other securities totaling 38,808,757 shares were excludedfrom diluted net loss per share for the three months ended October 27, 2007as their impact would be anti-dilutive in a net loss period.

 

Options to purchase 60,499,458 common shares at a weighted average exerciseprice of $20.25 have been excluded from the computation ofdiluted net income per share for the nine months ended November 1, 2008becausethe exercise price of the stock options was greater than the average shareprice of the Company’s common shares and therefore, the effect would have beenanti-dilutive. Warrants, common stockoptions, restricted stock and other securities totaling 41,265,093 wereexcluded from diluted net loss per share for the nine months ended October 27,2007 as their impact would be anti-dilutive in a net loss period.

 

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

 
| ** **                                                                      | ** ** | **Three Months Ended** | ** ** | **Nine**** Months Ended** | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------------------|------------|-------------------------------------|------------|
| ** **                                                                      | ** ** | **November 1,  2008**       | ** ** | **October 27,  2007**          | ** ** | **November 1,  2008** | ** ** | **October 27,  2007** | ** ** |
| Net income (loss)                                                               |       | $                                | 70,946     |                                | $          | (6,436 | ) | $ | 212,252 |   | $ | (115,720 | ) |
| Other comprehensive income  (loss):                                             |       |                             |       |                                |       |   |   |   |   |
| Unrealized gain (loss) on  available-for-sale investments and other, net of tax |       | 316                              |       | 143                                 |       | (1,563 | ) | 467 |   |
| Total comprehensive income  (loss)                                              |       | $                                | 71,262     |                                | $          | (6,293 | ) | $ | 210,689 |   | $ | (115,253 | ) |

 

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.

 

14

----

Table of Contents

 

**Note 6. 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 littleor 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 above).  Someof the 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 November 1, 2008.

 

15

----

Table of Contents

 

The table belowsets forth, by level, our financial assets that were accounted for at fairvalue as of November 1, 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  November 1,  2008** | ** ** | **Level 1** | ** ** | **Level 3** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|
| **Items measured at fair value on a recurring  basis:** |       |                                                                                            |       |             |       |             |       |
|                                                    |       |                                                                                            |       |             |       |             |       |
| Cash equivalents:                                       |       |                                                                                            |       |             |       |             |       |
| U.S. Treasury bills                                     |       | $                                                                                               | 53,685     |             | $          | 53,685           |       |   |   |
| Money market funds                                      |       | 202,000                                                                                         |       | 202,000          |       |             |       |
| Long-term investments:                                  |       |                                                                                            |       |             |       |             |       |
| Auction rate securities                                 |       | 40,310                                                                                          |       |             |       | 40,310           |       |
| Total                                                   |       | $                                                                                               | 295,995    |             | $          | 255,685          |       | $ | 40,310 |   |
|                                                         |            |                                                                                                 |            |                  |            |                  |            |  |  |  |

 

The following tablesummarizes the change in fair values for Level 3 items for the nine monthsended November 1, 2008:

 
| ** **                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** | **Level 3** | ** ** |
|-------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------------|------------|
| **Changes in fair value during  the period ended November 1, 2008 (pre-tax):** |       |       |       |       |       |
|                                                                                |       |       |       |       |       |             |       |
| Beginning Balance at February 3, 2008                                          |       |       |       |       |       | $                | 45,628     |   |
| Purchases                                                                           |       |       |       |       |       | 10,000           |       |
| Sales                                                                               |       |       |       |       |       | (13,778          | )          |
| Unrealized loss included in other comprehensive  income (loss)                      |       |       |       |       |       | (1,540           | )          |
| Ending Balance at November 1, 2008                                             |       |       |       |       |       | $                | 40,310     |   |

 

**Note 7. 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 andintangible assets based on their fair values with the remainder recorded asgoodwill.  In conjunction with theseacquisitions, the Company recorded acquired net tangible assets of$4.1 million, deferred tax assets of $0.9 million, deferred taxliabilities 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.

 

During the three months ended November 1, 2008,the Company paid $1.3 million in cash to shareholders of one of the unrelatedprivate companies based on the achievement of certain defined milestones.  Approximately $1.1 million of the amount paidwas recorded to goodwill as additional purchase consideration.  The remainder was recorded as compensationexpense.

 

16

----

Table of Contents

 

**Note 8.Acquired Intangible Assets,****Net**

 
| ** **                   | ** ** | **As of November 1, 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    |                                           | $          | (588,678 | ) | $ | 119,720 |   | $ | 708,398 |   | $ | (538,765 | ) | $ | 169,633 |   |
| Core technology              |       | 212,650                                        |       | (91,372                                        | )          | 121,278 |   | 212,650 |   | (62,758 | ) | 149,892 |   |
| Trade name                   |       | 350                                            |       | (199                                           | )          | 151 |   | 350 |   | (130 | ) | 220 |   |
| Customer contracts           |       | 183,300                                        |       | (96,271                                        | )          | 87,029 |   | 183,300 |   | (70,029 | ) | 113,271 |   |
| Supply contract              |       | 900                                            |       | (735                                           | )          | 165 |   | 900 |   | (642 | ) | 258 |   |
| Non-competition              |       | 700                                            |       | (339                                           | )          | 361 |   | 700 |   | (165 | ) | 535 |   |
| Total intangible assets, net |       | $                                              | 1,106,298  |                                           | $          | (777,594 | ) | $ | 328,704 |   | $ | 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$34.8 million for the three months ended November 1, 2008 and $37.3million for the three months ended October 27, 2007, $105.0 million forthe nine months ended November 1, 2008 and $111.9 million for the ninemonths ended October 27, 2007.

 

Based on the identified intangible assets recorded at November 1,2008, the future amortization expense of identified intangibles for the nextfive fiscal years is as follows (inthousands):

 
| **Fiscal year**     | ** ** | **Amount** | ** ** |
|--------------------------|------------|------------|------------|
| Remainder of fiscal 2009 |       | $          | 32,801     |   |
| 2010                     |       | 113,496    |       |
| 2011                     |       | 83,283     |       |
| 2012                     |       | 41,713     |       |
| 2013                     |       | 34,979     |       |
| Thereafter               |       | 22,432     |       |
|                     |       | $          | 328,704    |   |

 

**Note 9. Commitments and Contingencies**

 

**Warranty****obligations**

 

The following table presents changes in the warranty accrual includedin accrued liabilities during the three and nine months ended November 1,2008 and October 27, 2007 (in thousands):

 
| ** **                                          | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                          | ** ** | **November 1,  2008**       | ** ** | **October 27,  2007**      | ** ** | **November 1,  2008** | ** ** | **October 27,  2007** | ** ** |
| Warranty accrual (included in accrued liabilities): |       |                             |       |                            |       |   |   |   |   |
| Beginning balance                                   |       | $                                | 2,521      |                            | $          | 2,380 |   | $ | 2,532 |   | $ | 2,567 |   |
| Accruals                                            |       | 286                              |       | 397                             |       | 1,106 |   | 756 |   |
| Settlements                                         |       | (367                             | )          | (310                            | )          | (1,198 | ) | (856 | ) |
| Ending balance                                      |       | $                                | 2,440      |                            | $          | 2,467 |   | $ | 2,440 |   | $ | 2,467 |   |

 

**Intellectual property indemnification**

 

The Company has agreed to indemnify select customers for claims madeagainst the Company’s products, where such claims allege infringement of thirdparty intellectual property rights, including, but not limited to, patents,registered trademarks, and/or copyrights.  Under the aforementionedindemnification clauses, the Company may be obligated to defend the customerand pay for the damages awarded against the customer under an infringementclaim, including paying for the customer’s attorneys’ fees and costs.  TheCompany’s indemnification obligations generally do not expire after terminationor expiration of the agreement containing the indemnification obligation. In certain cases, there are limits on and exceptions to the Company’spotential liability for 

 

17

----

Table ofContents

 

indemnification. Although, historically, the Company has not made significant paymentsunder these indemnification obligations, the Company cannot estimate the amountof potential future payments, if any, that it might be required to make as aresult of these agreements.  However, the maximum potential amount of anyfuture payments that the Company could be required to make under theseindemnification obligations could be significant.

 

**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 originalacquisition.  As of November 1,2008, the Company had non-cancellablepurchase orders outstanding of $11.4 million under the amendedarrangement.

 

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 November 1, 2008, these foundries had incurred approximately$123.4 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 November 1, 2008,payments totaling $174.2 million, which is included in prepaid expenses andother current assets and other non-current assets have been made andapproximately $146.2 million of the prepayment has been utilized as of November 1,2008.  At November 1, 2008, therewere no outstanding commitments under the agreement.

 

As of November 1,2008, the Company had approximately $58.1 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 filedin the Southern District of New York relating to the Company’s IPO. In thissecond action, plaintiffs named three underwriters as defendants and also namedas defendants the Company and two of its officers, one of whom is also adirector. Relying on many of the same allegations contained in the initialcomplaint, plaintiffs allege that the defendants violated various provisions ofthe Securities 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 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 theCompany and the underwriters. Claims against the individual officers have beenvoluntarily dismissed with prejudice by agreement with plaintiffs. In June 2004,a stipulation of settlement and release of claims against the issuerdefendants, 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.

 

18

----

Table ofContents

 

*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. Numerous similar suits were filed by the same plaintiff against otherunderwriters relating to other issuers.  A hearing on motions to dismiss filed by the underwriter defendants andsome of the issuer defendants (excluding the Company) is scheduled for January 16,2009.  All discovery is stayed pendingresolution 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 officersused such information and technologies after the Company signed anon-disclosure agreement with Jasmine. The Company believes the claims assertedagainst its officers and the Company are without merit and the Company intendsto defend all claims vigorously.

 

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, a determinationthat Jasmine held no proprietary interest in the “JSLIP” algorithm, which wasone of the core technologies Jasmine asserts was misappropriated by theCompany. The motion was denied on November 14, 2007. However, in itsopposition, Jasmine admitted that JSLIP had been taken from the work of a thirdparty and is embodied in patents held by the University of California and CiscoSystems. These admissions are significant with respect to both Jasmine’sassertion of trade secret rights and any damages claimed 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 itsdecision in *Rico v. Mitsubishi*, on April 23,2008, the California Supreme Court issued an order dismissing the Company’spetition for review.  As a result thedecision of the Court of Appeal, which remains unpublished, became final.

 

The case is now proceeding in the trial court, and atrial date has been set for March 2, 2009. The parties are engaged in extensive discovery.  The Company and its officers intend to seeksummary judgment and/or summary adjudication of issues as to the claims allegedagainst them, and to vigorously assert their cross-claims and defenses in thetrial court.

 

*CSIRO Litigation.*  As of January 2007, Australia’sCommonwealth Scientific and Industrial Research Organisation (“CSIRO”) wasinvolved in three patent litigations in the Eastern District of Texas in whichit has accused a number of wireless LAN system manufacturers, including some ofthe Company’s customers, of infringing CSIRO’s patent, U.S. Patent No. 5,487,069(the “‘069 Patent”).  CSIRO’s claims ofinfringement relate to IEEE 802.11a, 802.11g and 802.11n wireless standards. Asa result of CSIRO’s claims for patent infringement, a number of the Company’scustomers have sought indemnification from the Company.  In response to these demands forindemnification, the Company has acknowledged the demands and incurred costs inresponse to them.

 

19

----

Table of Contents

 

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 two of the 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.

 

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 “CAFC”).   On October 23, 2008, the CAFC affirmedthe Court’s decision in a nonprecedential opinion.

 

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.  Trial for the three actions described in thefirst paragraph is currently set to begin on April 13, 2009.  Trial for the Company’s declaratory judgmentaction is set to begin on May 10, 2010. CSIRO and the Company are currently engaging in discovery and motionpractice.  The Court has set a CaseManagement Conference for December 16, 2008 for the *Marvell*action and related CSIRO actions, including those actions involving the Company’scustomers.  At the December 16 CaseManagement Conference, the Court may take some action that would affect theschedules and/or other aspects of the various CSIRO litigations.

 

*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 consolidatedcomplaint on November 1, 2006. On January 16, 2007, the Company fileda motion to 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.*

 

20

----

Table of Contents

 

*Derivative Litigation*.  On May 29, 2007, the Court entered anorder staying discovery in this matter pending resolution of the Company’smotion 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 the Company topay up to $16 million in plaintiffs’ attorneys’ fees, an amount less thanthe $24.5 million that the Company received from a settlement with itsdirectors’ and officers’ 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 fiscal2008.  The Company anticipates that theparties will finalize and submit formal settlement documentation to the courtin the next few months for both preliminary and final approval, at which timepayment of 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 misleading statements and omissionsrelating to the grants of stock options. The complaints seek, on behalf ofpersons who purchased the Company’s 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, the Company filed a motion to dismiss the consolidated class actioncomplaint.  On September 29, 2008,the District Court issued an order granting in part and denying in part Marvell’smotion to dismiss the consolidated class action complaint.  The District Court gave the plaintiffs thirtydays to amend their complaint. Plaintiffs elected not to amend the complaint and instead will proceed with theclaims that the court did not dismiss. Defendants’ responses to thecomplaint are due on December 12, 2008.

 

*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 documentsubpoenas from the SEC. On October 11, 2007, the Company received a “WellsNotice” 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.  TheCompany accrued the $10 million civil penalty in the first quarter of fiscal2009 and paid 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.

 

21

----

Table of Contents

 

*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.  On September 10, 2008, theCourt granted the defendant’s motion to consolidate both actions but denied aspremature having the defendant suppliers’ case proceed first.  The Claim Construction Hearing is scheduledfor 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.

 

*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 entered into a stipulated dismissal from this litigation on November 3,2008.

 

*General.*  The Company is also party to other legalproceedings and claims arising in the normal course of business.  The legal proceedings and claims described abovecould result in substantial costs and could divert the attention and resourcesof the Company’s management. Although the legal responsibility and financialimpact with respect to these proceedings and claims cannot currently beascertained, an unfavorable outcome in such actions could have a materialadverse effect on the Company’s cash flows. Litigation is subject to inherent uncertainties and unfavorable rulingscould occur. An unfavorable ruling in litigation could require the Company topay damages or one-time license fees or royalty payments, which could adverselyimpact gross margins in future periods, or could prevent the Company frommanufacturing or selling some of its products or limit or restrict the type ofwork that employees involved in such litigation may perform for the Company.There can be no assurance that these matters will be resolved in a manner thatis not adverse to the Company’s business, financial condition, results ofoperations or cash flows.

 

**Note 10. 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.

 

22

----

Table ofContents

 

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

 
| ** **                 | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                 | ** ** | **November 1,  2008**       | ** ** | **October 27,  2007**      | ** ** | **November 1,  2008** | ** ** | **October 27,  2007** | ** ** |
| Cost of goods sold         |       | $                                | 1,795      |                            | $          | 4,326 |   | $ | 8,623 |   | $ | 10,619 |   |
| Research and development   |       | 30,607                           |       | 39,989                          |       | 93,537 |   | 106,622 |   |
| Selling and marketing      |       | 6,896                            |       | 6,949                           |       | 20,403 |   | 25,097 |   |
| General and administrative |       | 280                              |       | 4,092                           |       | 9,868 |   | 18,682 |   |
|                       |       | $                                | 39,578     |                            | $          | 55,356 |   | $ | 132,431 |   | $ | 161,020 |   |

 

Stock-based compensation of $2.5 million wascapitalized into inventory as of November 1, 2008.

 

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** | ** ** |
| ** **                  | ** ** | **November 1,  2008**       | ** ** | **October 27,  2007**       | ** ** | **November 1,  2008** | ** ** | **October 27,  2007** | ** ** |
| Volatility                  |       | 44                               | %          | 45                               | %          | 45 | % | 45 | % |
| Expected life (in years)    |       | 5.3                              |       | 5.0                              |       | 1.3 |   | 1.3 |   |
| Risk-free interest rate     |       | 3.3                              | %          | 4.3                              | %          | 4.3 | % | 4.9 | % |
| Dividend yield              |       | —                           |       | —                           |       | — |   | — |   |
| Weighted average fair value |       | $                                | 4.99       |                             | $          | 7.33 |   | $ | 6.05 |   | $ | 5.62 |   |
| ** **                  | ** ** | ** **                       | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                  | ** ** | **Stock Option Plans** | ** ** | **ESPP**                         | ** ** |
| ** **                  | ** ** | **Nine Months Ended**  | ** ** | **Nine Months Ended**  | ** ** |
| ** **                  | ** ** | **November 1,  2008**       | ** ** | **October 27,  2007**       | ** ** | **November 1,   2008** | ** ** | **October 27,  2007** | ** ** |
| Volatility                  |       | 44                               | %          | 45                               | %          | 45 | % | 45 | % |
| Expected life (in years)    |       | 5.2                              |       | 5.0                              |       | 1.3 |   | 1.3 |   |
| Risk-free interest rate     |       | 3.3                              | %          | 4.4                              | %          | 4.3 | % | 4.9 | % |
| Dividend yield              |       | —                           |       | —                           |       | — |   | — |   |
| Weighted average fair value |       | $                                | 5.23       |                             | $          | 7.41 |   | $ | 6.05 |   | $ | 5.62 |   |

 

Indeveloping estimates used in the adoption of SFAS 123R, the Company establishedthe expected term for employee options and awards, as well as expectedforfeiture rates, based on the historical settlement experience and after givingconsideration to vesting schedules. Assumptions for option exercises and pre-vesting terminations of optionswere stratified by employee groups with sufficiently distinct behaviorpatterns.

 

Expectedvolatility under SFAS 123R was developed based on the average of the Company’shistorical daily stock price volatility. The risk-free interest rate assumption is based on observed interestrates appropriate for the expected terms of our stock options.

 

SFAS123R also requires forfeitures to be estimated at the time of grant andrevised, if necessary, in subsequent periods if actual forfeitures differ frominitial estimates.

 

**Note 11. 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 November 1, 2008.  Options granted under the Option Plangenerally have a term of ten years and generally must be issued at prices notless than 100% and 85% for incentive and nonqualified stock options,respectively, of the fair market value of the stock on the date of grant.Incentive stock options granted to shareholders who own greater than 10% of theoutstanding stock are for periods not to exceed five years and must be issuedat prices not less than 

 

23

----

Table of Contents

 

110% of the fair market value of the stock on the date of grant. The optionsgenerally vest 20% one year after the vesting commencement date, and theremaining shares vest one-sixtieth per month over the remaining 48 months.Options granted under the Option Plan prior to March 1, 2000 may beexercised prior to vesting and the exercised shares remain unvested untilvested in accordance with the terms of the grant. The Company has the right torepurchase such shares at their original purchase price if the optionee isterminated from service prior to vesting. Such right expires as the optionsvest over a five-year period. Options granted under the Option Plan subsequentto March 1, 2000 may only be exercised upon or after 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”). The 2007Directors’ Plan had 750,000 common shares reserved for issuance thereunder asof November 1, 2008.  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 theone year anniversary of the date of grant 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 2000 Employee Stock Purchase Plan (the “Purchase Plan”).The Purchase Plan, as amended, had 49,871,612 common shares reserved for issuance thereunder as of November 1,2008.  Under the Purchase Plan, employeesare granted the right to purchase common shares at a price per share that is85% of the lesser of the fair market value of the shares at (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 their totalcash compensation.  Effective on August 20,2007, offering and purchase periods begin on December 8 and June 8 ofeach year.  Included in the Purchase Planis a limitation on the number of shares that may be purchased in the event thatthe market price of the Company’s common shares decreases by more than 25% fromone purchase date to the next.  In the event the share limitation istriggered, the number of shares an employee may purchase on the subsequentpurchase date may not exceed 75% of the number the employee could havepurchased at 85% of the market price on the earlier purchase date.

 

For the three and nine months ended November 1,2008, the Company recognized $7.2 million and $25.2million of stock-based compensation expense related to the activity under thePurchase Plan, respectively.  The Company did not issue any shares underthe Purchase Plan in the three months ended November 1, 2008.  The Company issued 1,741,158 shares under thePurchase Plan in the nine months ended November 1, 2008 at a price of$12.95.  As of November 1, 2008,there was $14.1 million of unrecognized compensation cost related to thePurchase Plan.

 

24

----

Table of Contents

 

Stock option activity under the Company’sstock option plans for the nine months ended November 1, 2008 issummarized below (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                                     |       | 12,016                   |       | $                                      | 12.11      |   |
| Options forfeited/canceled/expired                  |       | (6,799                   | )          | $                                      | 19.24      |   |
| Options exercised                                   |       | (8,674                   | )          | $                                      | 6.45       |   |
|                                                |       |                     |       |                                   |       |
| Balance at November 1, 2008                    |       | 105,701                  |       | $                                      | 14.73      |   |
| Vested or expected to vest at November 1, 2008 |       | 101,821                  |       | $                                      | 14.60      |   |
| Exercisable at November 1, 2008                |       | 59,881                   |       | $                                      | 11.49      |   |

 

Included in the preceding table are options for 1,683,800 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.  For the three months ended November 1,2008, the Company has estimated that specified annual earnings per sharetargets for common shares granted to certain officers may not be achieved byfiscal 2010 and fiscal 2011.  As aresult, the Company reversed $6.7 million of stock-based compensation recordedfrom inception through November 1, 2008 for these common shares granted tocertain officers.  The underlying stockoptions continue to be treated as outstanding until the performance periodlapses.

 

The aggregate intrinsic value and weighted average remainingcontractual term of options vested and expected to vest at November 1,2008 was $44.0 millionand 6.2 years, respectively.  The aggregate intrinsic value and weightedaverage remaining contractual term of options exercisable at November 1,2008 was $44 million and 4.9 years, respectively.  The aggregate intrinsic value is calculatedbased on the Company’s closing stock price for all in-the-money options as of November 1,2008.

 

The aggregate intrinsicvalue and weighted average remaining contractual term of restricted stock unitsvested and expected to vest as of November 1, 2008 was $22.1 million and 0.7 years, respectively.

 

Included in the tablebelow 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                          |       | 2,438                                         |       | $                                                       | 11.09      |   |
| Vested                           |       | (877                                          | )          | $                                                       | 17.44      |   |
| Canceled/Forfeited               |       | (289                                          | )          | $                                                       | 13.37      |   |
| Balance at November 1, 2008 |       | 3,383                                         |       | $                                                       | 13.12      |   |

 

The Company’scurrent practice is to issue new shares to satisfy share option exercises. Asof November 1, 2008, compensation costs related to nonvested awards notyet recognized amounted to $281.4 million. The unamortized compensation expensefor stock options and restricted stock will be amortized on a straight-linebasis and is expected to be recognized over a weighted-average period of 2.2years and 1.2 years, respectively.

 

The total taxbenefit attributable to options exercised in the nine months ended November 1,2008 was $0.4 million and the excess tax benefits from stock-based compensationof $0.4 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.

 

25

----

Table of Contents

 

***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 $6.96 as reported on the NASDAQ Stock Market on October 31, 2008, the total pretaxintrinsic value of all outstanding restricted stock was $0.5 million.

 

**Note 12.Income Taxes**

 

For the three months ended November 1,2008 and October 27, 2007, the Company’s effective tax rate was an incometax expense of 15.9% and an income tax benefit of 59.4%, respectively. The income tax provision recorded for the three months ended November 1,2008 was $13.4 million and the income tax benefit recorded for the three monthsended October 27, 2007 was $9.4 million. The income tax provision forthese periods was affected by non-tax-deductible expenses such as stock-basedcompensation expense, amortization of acquired intangibles and accrual ofunrecognized tax benefits, interest and penalties associated with FIN 48.  In addition, the November 1, 2008 incometax expense was increased by a California budget trailer bill (A.B. 1452)signed into law on September 30, 2008, adjusting the income tax provisionfor prior interim reporting periods due to changes in the economic forecast,and truing-up the fiscal 2008 U.S. federal income tax return to the fiscal 2008income tax provision.  The fiscal 2007income tax benefit was affected by closure of a non-U.S. audit and the releaseof income tax reserves.

 

The Company’s total unrecognizedtax benefits as of November 1, 2008 and February 2, 2008 were $112.8million and $109.6 million, respectively. During the three months ended November 1, 2008, there was a net$5.6 million decrease in cumulative foreign exchange related to foreign taxreserves partially offset by unrecognized tax benefits, penalties and interest.During the nine months ended November 1, 2008, there was a net $3.2million increase in unrecognized tax benefits, penalties and interest partiallyoffset by cumulative foreign exchange related to foreign tax reserves.  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 FIN48.  In previous periods, the Company hadrecorded unrealized foreign exchange gains and losses related to uncertain taxpositions in its provision (benefit) for income taxes line item in the incomestatement.  In the third quarter offiscal 2009, the Company began presenting this amount in interest and otherincome, net.  During the three monthsended November 1, 2008, foreign exchange gains on uncertain tax positionswere $11.5 million included in interest and other income, net.  As these amounts were in included in theprovision (benefit) for income taxes in previous periods, in order to conformthe comparative amounts to the current presentation, during the three monthsended October 27, 2007, the Company reclassified $3.4 million of foreignexchange losses related to uncertain tax positions from provision (benefit) forincome taxes to other income, net. During the nine months ended November 1, 2008, the Companyreclassified $12.7 million of foreign exchange gains and during the nine monthsended October 27, 2007, the Company reclassified $5.8 million of foreignexchange losses related to uncertain tax positions from income tax expense toother income, net.

 

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 three months ended November 1, 2008, non-U.S. subsidiaries andU.S. subsidiaries were notified by federal and state tax authorities that theywould begin an income tax audit for fiscal years 2004 through 2007.  The audit field work by U.S. tax authoritiesof the Company’s U.S. subsidiaries is complete for the fiscal years 2004through 2006; however, there is no closing agreement.  The U.S. taxauthorities are reviewing employment taxes with regard to the re-measured stockoptions and have proposed audit assessments for calendar years 2003 through2006.  During the three months ended November 1, 2008, the U.S.subsidiary filed a protest with regard to a portion of the assessment.  The Company believes that it has adequatelyprovided for all issues related to these examinations, and the ultimatedisposition of these matters is unlikely to have a material adverse affect theCompany’s consolidated financial position.

 

26

----

Table ofContents

 

**Note 13. 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, Weili Dai, through their control and ownership of EstopiaAir, own the aircraft provided by ACM.  Dr. SehatSutardja and Weili Dai are husband and wife. During the three months ended November 1, 2008 and October 27,2007, the Company incurred none and $14,000, respectively, of expenses from ACMfor charter aircraft services provided to MSI. During the nine months ended November 1,2008 and October 27, 2007, the Company incurred none and approximately $0.1 million, respectively, of expenses fromACM, for charter aircraft services provided to the Company.

 

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 no revenue under theLicense Agreement with C2 Micro during the three months ended November 1,2008, $0.2 million of revenue during the three months ended October 27,2007, $2.6 million of revenue during the first nine months ended November 1,2008 and $0.2 million of revenue during the nine months ended October 27,2007.  As of November 1, 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, is a member ofthe board of directors of C2Micro and, through his ownership and control ofC-Squared venture entities, is also an indirect shareholder of C2Micro.  Dr. Pantas Sutardja, the Company’s VicePresident, Chief Technology Officer, and Chief Research and DevelopmentOfficer, 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$31,000 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 November 1, 2008 and October 27,2007, respectively.  The Company incurred$140,000 and $428,000 of royalty expense under the same license agreementduring the nine months ended November 1, 2008 and October 27, 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 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 incurredrelated to the Technology Agreement during the three and nine months ended November 1,2008 and October 27, 2007.

 

On October 31, 2007, the Company entered into aLicense Agreement with Vivante Corporation (“Vivante”).  This License Agreement has substantiallysimilar terms as the Company would expect to obtain for license agreements withother third parties for similar technology. The Company recorded none and $0.2 million of expense during the threeand nine months ended November 1, 2008, respectively, in connection withthis License Agreement with Vivante.  On August 5,2008, the Company entered into a Technology License Agreement withVivante.  This Technology LicenseAgreement, as amended, also has substantially similar terms as the Companywould expect to obtain for license agreements with other third parties forsimilar technology.  The Company recorded$2.0 million for the license fee and $0.2 million of maintenance during thethree and nine months ended November 1, 2008, respectively, in connectionwith this Technology License Agreement.  Dr. SehatSutardja and Weili Dai, through their ownership and control of Estopia, areindirect shareholders of Vivante.  Inaddition, Dr. Sehat Sutardja is also a direct shareholder and Chairman ofthe board of directors of Vivante.  WeiliDai’s brother (and Dr. Sehat Sutardja’s brother-in-law) is the ChiefExecutive Officer of Vivante.  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 Vivante.

 

27

----

Table of Contents

 

**Note 14. Subsequent Event**

 

On November 4, 2008,the Company made a full repayment of $191.9 million outstanding in the form ofterm loans under the credit agreement dated November 8, 2006, among theCompany, the lenders party thereto, Credit Suisse, Cayman Islands Branch, asadministrative agent, LaSalle Bank National Association, as syndication agent,and Keybank National Association and Commerzbank AG, as co-documentationagents.  The Company will write-off $2.0million of remaining unamortized debt issuance costs to interest expense in thefourth quarter of fiscal 2009.

 

28

----

Table of Contents

 

**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.**Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,”“seeks,” “estimates,”**“can,” and similar expressions identify such forward-lookingstatements. These are statements that relate to future periods and includestatements relating to our anticipation that the rate of new orders and shipments will vary significantly fromquarter to quarter; industry trends; our anticipation that the total amount ofsales through distributors will increase in future periods; our expectationthat a significant percentage of our sales will continue to come from directsales to key customers; our expectations regarding the number of days in inventory,inventory levels and levels of accounts receivable; our expectations regardingcompetition; our intention to reduce product costs to offset decreases inaverage selling prices; our continued efforts relating to the protection of ourintellectual property; our expectations regarding the amount of customerconcentration in the future; our expectations regarding the amount of ourfuture sales in Asia; our intention to continue to invest significant resourcesfor research and development; our expectation regarding the effect of auctionrate securities on our working capital needs or other requirements; ourexpected results, cash flows, and expenses, including those related to researchand development, sales and marketing and general and administrative; ourintention to complete acquired in-process research and development projects;our intention to make acquisitions, investments, strategic alliances and jointventures; our expectations regarding revenue, revenue in the fourth quarter offiscal 2009;  sources of revenue andmake-up of revenue; our expectations regarding the impact of legal proceedingsand claims; our expectations regarding the reduction of our unrecognized taxbenefit during the next 12 months; our expectations regarding the adequacy of ourcapital resources to meet our capital needs for the next 12 months; our plan toattract and retain highly skilled personnel; our expectations regarding thegrowth in business and operations; our expectations regarding our compliancewith periodic reporting requirements; our expectations regarding the impact ofthe restatement of our financial statements in connection with the internalreview of our historic stock option granting**practices; our plans regarding remediation of 2008material weakness and expectations regarding the effectiveness of thoseremediation efforts; our plan regarding forward exchange contracts; and theeffect of recent accounting pronouncements and changes in taxation rules; andour plan of sourcing certain legacy application processor cellular and handsetinventory from Intel. These forward-looking statements are subject to risks anduncertainties that could cause actual results to differ materially from thoseindicated in the forward-looking statements. Factors that could cause actualresults to differ materially from those predicted, include but are not limitedto, the impact of the recent worldwide financial crisis; the internationalconflict and continued economic volatility in either domestic or foreignmarkets; the outcome and impact of the litigation related to our historic stockoption granting practices**; 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 

 

29

----

Table of Contents

 

products. In February 2006, we acquired the semiconductor designbusiness of UTStarcom, Inc. for $40.8 million, including $16.0 millionsubsequently recognized when milestones were achieved.  This business designs and supplies chipsetsfor personal phone applications.  In May 2006,we acquired the printer semiconductor business of Avago Technologies Limitedfor $288.0 million, including earnout payments of $35.0 million subsequentlyrecognized during fiscal 2007 and fiscal 2008 based on the achievement ofcertain levels of revenue.  The printersemiconductor business of Avago designs and develops System-on-Chip (“SoC”) andsystem level solutions for both inkjet and laser jet printer systems.  In November 2006, we completed theacquisition of the communications and applications processor business of IntelCorporation for approximately $605.6 million.  The communications and applications processorbusiness of Intel designs and develops cellular baseband processors formulti-mode, multi-band wireless handheld devices such as cellular handsets,PDAs and smartphones.  In addition, wehave also completed several smaller acquisitions over the last three fiscalyears.

 

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 wide arrayof enterprise applications including hard disk drives, high-speed networkingequipment, PCs, wireless local area network solutions for small office/homeoffice and residential gateway solutions, and consumer applications such ascell phones, printers, digital cameras, MP3 devices, speakers, game consolesand PDAs.

 

Our sales have historically been made on the basis of purchase ordersrather than long-term agreements. In addition, the sales cycle for our productsis long, which may cause us to experience a delay between the time we incurexpenses and the time revenue is generated from these expenditures. Weanticipate that the rate of new orders may vary significantly from quarter toquarter. Consequently, if anticipated sales and shipments in any quarter do notoccur when expected, expenses and inventory levels could be disproportionatelyhigh, and our operating results for that quarter and future quarters may beadversely 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 a 52-week period and fiscal 2008 was comprised of a53-week period. 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 Policiesand 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.

 

30

----

Table ofContents

 

**Results of Operations**

 

The following table sets forth informationderived from our unaudited condensed consolidated statements of operationsexpressed as a percentage of net revenue:

 
| ** **                                  | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                  | ** ** | **November 1,****2008**     | ** ** | **October 27,****2007**    | ** ** | **November 1,****2008** | ** ** | **October 27,****2007** | ** ** |
| ** **                                  | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net revenue                                 |       | 100.0                            | %          | 100.0                           | %          | 100.0 | % | 100.0 | % |
| Operating costs and expenses:               |       |                             |       |                            |       |   |   |   |   |
| Cost of goods sold                          |       | 47.9                             |       | 52.3                            |       | 48.2 |   | 51.7 |   |
| Research and development and  other         |       | 29.6                             |       | 33.2                            |       | 29.6 |   | 35.2 |   |
| Selling and marketing                       |       | 5.2                              |       | 6.1                             |       | 5.3 |   | 7.3 |   |
| General and administrative                  |       | 3.6                              |       | 4.3                             |       | 3.0 |   | 4.4 |   |
| Amortization of acquired  intangible assets |       | 4.4                              |       | 4.9                             |       | 4.3 |   | 5.5 |   |
| Total operating costs and  expenses         |       | 90.7                             |       | 100.8                           |       | 90.4 |   | 104.1 |   |
| Operating income (loss)                     |       | 9.3                              |       | (0.8                            | )          | 9.6 |   | (4.1 | ) |
| Interest and other income, net              |       | 1.9                              |       | 0.1                             |       | 0.9 |   | 0.2 |   |
| Interest expense                            |       | (0.5                             | )          | (1.4                            | )          | (0.7 | ) | (1.5 | ) |
| Income (loss) before income  taxes          |       | 10.7                             |       | (2.0                            | )          | 9.8 |   | (5.4 | ) |
| Provision (benefit) for income  taxes       |       | 1.7                              |       | (1.2                            | )          | 1.1 |   | 0.2 |   |
| Net income (loss)                           |       | 9.0                              | %          | (0.8                            | )%         | 8.7 | % | (5.6 | )% |

 

**Three and Nine Months Ended November 1, 2008and October 27, 2007**

 

*Net Revenue*

 
| ** **  | ** ** | **Three Months Ended** | ** ** | ** **                   | ** ** | **Nine Months Ended** | ** ** | ** **                 | ** ** |
|-------------|------------|----------------------------------|------------|------------------------------|------------|---------------------------------|------------|----------------------------|------------|
| ** **  | ** ** | **November 1,  2008**       | ** ** | **October 27,****2007** | ** ** | **%  Change**                   | ** ** | **November 1,  2008** | ** ** | **October 27,****2007** | ** ** | **%  Change** | ** ** |
|        |       |                             |       |                         |       |                            |       |                       |       |   |   |   |   |
| Net revenue |       | $                                | 791,046    |                         | $          | 758,246                         |       | 4.3                        | %          | $ | 2,437,696 |   | $ | 2,050,007 |   | 18.9 | % |
|             |            |                                  |            |                              |            |                                 |            |                            |            |  |  |  |  |  |  |  |  |

 

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 ninemonths ended November 1, 2008 compared to the net revenue for the threeand nine months ended October 27, 2007 reflects an increase in volumeshipments of our storage SoCs and wireless products.  The increase in net revenue was due to increaseddemand from our primary hard disk drive customers and the overall hard diskdrive industry demand for notebook PC two and a half inch drives and consumer products markets along withincreased demand for our wireless products in consumer applications.  Offsetting the increases were decreases indemand for our cellular and handheld products and printer semiconductorsolution products.  Net revenue derivedfrom development contracts increased in absolute dollars during the three andnine months ended November 1, 2008 compared to the three and nine monthsended October 27, 2007, but represented less than 10% of net revenue foreach period.  We expect that revenue inthe fourth quarter of fiscal 2009 will decline significantly from the level ofrevenue that we reported in the third quarter of fiscal 2009 due to thecontinued impact of poor economic conditions worldwide.

 

Historically,a relatively small number of customers have accounted for a significant portionof our revenue.  For the three and ninemonths ended November 1, 2008, one customer represented more than 10% ofour net revenue, with a total of 21% of our net revenue.  For the three months ended October 27, 2007, two customers eachrepresented more than 10% of our net revenue, for a combined total of 27% of ournet revenue.  For the nine months ended October 27, 2007, twocustomers accounted for more than 10% of our net revenue, for a combined totalof 26% of our net revenue.  Nodistributors accounted for more than 10% of our net revenue in the three andnine months ended November 1, 2008 and October 27, 2007,respectively.

 

31

----

Table of Contents

 

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 88% and 84% of our net revenue for the three months ended November 1,2008 and October 27, 2007, respectively, and represented 86% and 83% ofour net revenue for the nine months ended November 1, 2008 and October 27,2007, respectively.  The rest of oursales are to customers located in the United States and other geographicregions.  We expect that a significant portion of our revenue will continue to berepresented by sales to our customers in Asia. Substantially all of our sales to date have been denominated in U.S.dollars.

 

*Cost of Goods Sold*

 
| ** **         | ** ** | **Three Months Ended** | ** ** | ** **                   | ** ** | **Nine Months Ended** | ** ** | ** **                 | ** ** |
|--------------------|------------|----------------------------------|------------|------------------------------|------------|---------------------------------|------------|----------------------------|------------|
| ** **         | ** ** | **November 1,****2008**     | ** ** | **October 27,****2007** | ** ** | **%  Change**                   | ** ** | **November 1,  2008** | ** ** | **October 27,****2007** | ** ** | **%  Change** | ** ** |
|               |       |                             |       |                         |       |                            |       |                       |       |   |   |   |   |
| Cost of goods sold |       | $                                | 379,137    |                         | $          | 396,209                         |       | 4.3                        | %          | $ | 1,173,892 |   | $ | 1,059,156 |   | 10.8 | % |
| % of net revenue   |       | 47.9                             | %          | 52.3                         | %          |                            |       | 48.2                       | %          | 51.7 | % |   |   |
|                    |            |                                  |            |                              |            |                                 |            |                            |            |  |  |  |  |  |  |  |  |

 

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.  Cost of goods sold as a percentage of revenuefor the three and nine months ended November 1, 2008 compared to the threeand nine months ended October 27, 2007 decreased primarily due to reducedcosts for cellular and handset products resulting from the transition ofmanufacturing to our fabrication partners. In addition, cost of goods sold improved as we experienced lowermaterial and manufacturing costs due to volume efficiencies and yieldimprovements.  Partially offsetting theimprovements for the three months ended November 1, 2008 was an increasein excess and obsolescence provisions due to the mix and quantities on handcompared to forecasted demand.  Cost ofgoods sold as a percentage of revenue for the nine months ended November 1,2008 decreased primarily due to the mix of products with higher standard grossmargins, which included increased revenue of our storage SoC products.  Our cost of goods sold as a percentage ofrevenue 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 and Development*

 
| ** **               | ** ** | **Three Months Ended** | ** ** | ** **                           | ** ** | **Nine Months Ended** | ** ** | ** **                 | ** ** |
|--------------------------|------------|----------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|----------------------------|------------|
| ** **               | ** ** | **November 1,  2008**       | ** ** | **October 27,****   2007** | ** ** | **%  Change**                   | ** ** | **November 1,  2008** | ** ** | **October 27,****2007** | ** ** | **%  Change** | ** ** |
|                     |       |                             |       |                                 |       |                            |       |                       |       |   |   |   |   |
| Research and development |       | $                                | 234,222    |                                 | $          | 252,205                         |       | (7.1                       | )%         | $ | 722,411 |   | $ | 722,532 |   | 0.0 | % |
| % of net revenue         |       | 29.6                             | %          | 33.2                                 | %          |                            |       | 29.6                       | %          | 35.2 | % |   |   |
|                          |            |                                  |            |                                      |            |                                 |            |                            |            |  |  |  |  |  |  |  |  |

 

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

 

The decrease in research and development expensefor the three months ended November 1, 2008 compared to the three monthsended October 27, 2007 of $18.0 million was primarily due to a decrease instock-based compensation of $9.4 million as recent awards have a lowervaluation due to the depressed stock price along with the reversal of expensesrelated to performance related grants due to the unlikely nature of theachievement of the specified performance targets due to poor economicconditions.  In addition, non-recurringengineering (“NRE”) and development wafer costs decreased by $8.7 millionpartially offset by lower photomask spending. Patent investigation and filing fees declined by $2.1 million and otherresearch and development costs declined by $4.7 million primarily due to focuson cost controls in the quarter. Partially offsetting the decreases in research and development expenseswas an increase in depreciation and amortization expense of $2.5 millionarising from purchases of property, equipment and technology licenses, and anincrease in salary and related costs of $1.5 million due to selective headcountadditions.  We expect that research and developmentexpense in the fourth quarter of fiscal 2009 will moderately decline from thelevel of expense reported in the third quarter of fiscal 2009 due to thecontinued focus on cost controls.

 

32

----

Table of Contents

 

Overall research and development expense for thenine months ended November 1, 2008 compared to the nine months ended October 27,2007 were consistent and the components followed similar trends to those discussedabove in the quarter over quarter comparison as stock-based compensationdecreased by $13.1 million.  In addition,NRE and development wafer and other pre-production costs declined by $18.4million partially offset by lower photomask spending while outside services andvarious other discretionary spending declined significantly.  Partially offsetting the decreases describedabove was higher salary and related costs of $19.1 million due to the increasesin headcount to support key areas. Additionally, we incurred increased costs for depreciation andamortization expense of $7.9 million arising from purchases of property,equipment and technology licenses and an increase in facilities costs of $5.8million related to our expanding operations.

 

*Selling and Marketing*

 
| ** **            | ** ** | **Three Months Ended** | ** ** | ** **                   | ** ** | **Nine Months Ended** | ** ** | ** **                 | ** ** |
|-----------------------|------------|----------------------------------|------------|------------------------------|------------|---------------------------------|------------|----------------------------|------------|
| ** **            | ** ** | **November 1,  2008**       | ** ** | **October 27,****2007** | ** ** | **%  Change**                   | ** ** | **November 1,  2008** | ** ** | **October 27,****2007** | ** ** | **%  Change** | ** ** |
|                  |       |                             |       |                         |       |                            |       |                       |       |   |   |   |   |
| Selling and marketing |       | $                                | 41,158     |                         | $          | 46,423                          |       | (11.3                      | )%         | $ | 129,080 |   | $ | 150,757 |   | (14.4 | )% |
| % of net revenue      |       | 5.2                              | %          | 6.1                          | %          |                            |       | 5.3                        | %          | 7.3 | % |   |   |
|                       |            |                                  |            |                              |            |                                 |            |                            |            |  |  |  |  |  |  |  |  |

 

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 November 1, 2008 comparedto the three months ended October 27, 2007 of $5.3 million was primarilydue to lower salary and related expenses of $1.7 million due to lower overallheadcount of sales and marketing personnel. Additionally, various other selling and marketing costs declinedincluding customer samples and discretionary spending. We expect that sellingand marketing expense in the fourth quarter of fiscal 2009 will moderatelydecline from the level of expense reported in the third quarter of fiscal 2009due to the continued focus on cost controls.

 

The decrease in selling and marketing expense inabsolute dollars for the nine months ended November 1, 2008 compared tothe nine months ended October 27, 2007 of $21.7 million was primarily dueto lower overall headcount of selling and marketing personnel thatresulted in a decrease in salary and related costs of $6.4 million.  Additionally, stock-based compensationexpense decreased by $4.7 million, primarily due to lower valuation of recentgrants and various discretionary spending declined significantly as we focusedon controlling discretionary spending along with lower costs related tocustomer samples and evaluation units. Offsetting these declines, sales representation costs increased inconnection with higher revenues.

 

*General and Administrative*

 
| ** **                 | ** ** | **Three Months Ended** | ** ** | ** **                   | ** ** | **Nine Months Ended** | ** ** | ** **                 | ** ** |
|----------------------------|------------|----------------------------------|------------|------------------------------|------------|---------------------------------|------------|----------------------------|------------|
| ** **                 | ** ** | **November 1,  2008**       | ** ** | **October 27,****2007** | ** ** | **%  Change**                   | ** ** | **November 1,  2008** | ** ** | **October 27,****2007** | ** ** | **%  Change** | ** ** |
|                       |       |                             |       |                         |       |                            |       |                       |       |   |   |   |   |
| General and administrative |       | $                                | 28,869     |                         | $          | 32,537                          |       | (11.3                      | )%         | $ | 72,809 |   | $ | 90,300 |   | (19.4 | )% |
| % of net revenue           |       | 3.6                              | %          | 4.3                          | %          |                            |       | 3.0                        | %          | 4.4 | % |   |   |
|                            |            |                                  |            |                              |            |                                 |            |                            |            |  |  |  |  |  |  |  |  |

 

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 general and administrativeexpense for the three months ended November 1, 2008 compared to the threemonths ended October 27, 2007 of $3.7 million was the result of a $2.0million 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 October 27, 2007.  Additionally, stock-based compensationexpense decreased $3.8 million primarily due to the reversal of expensesrelated to performance related grants due to the unlikely nature of theachievement of the specified performance targets due to poor economicconditions.  Partially offsetting thedecrease in general and administrative expense was a $3.1 million increase insalary and related costs due to the net hiring of additional administrativepersonnel.  We expect that general andadministrative expense in the fourth quarter of fiscal 2009 will moderatelydecline from the level of expense reported in the third quarter of fiscal 2009.

 

33

----

Table of Contents

 

The decrease in general administrative expensefor the nine months ended November 1, 2008 compared to the nine monthsended October 27, 2007 of $17.5 million was primarily due to a decrease inlegal and professional fees of $22.2 million as a result of $24.5million of insurance recoveries for shareholder derivative, class action andrelated lawsuits 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 $8.4 millionprimarily due to the cancellation of grants to a former and a current executiveof the Company in the second quarter of fiscal 2008 that was not accompanied byconcurrent replacement grants or other valuable consideration.  Partially offsetting the decrease in generaland administrative expense was an increase in salary and related costs of $8.1million due to the net hiring of additional administrative personnel and a $5.1million gain from the sale of an asset under construction recorded during thenine months ended October 27, 2007.

 

*Amortization of Acquired IntangibleAssets*

 
| ** **                                 | ** ** | **Three Months Ended** | ** ** | ** **                 | ** ** | **Nine Months Ended** | ** ** | ** **                 | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|----------------------------|------------|---------------------------------|------------|----------------------------|------------|
| ** **                                 | ** ** | **November 1,  2008**       | ** ** | **October 27,  2007** | ** ** | **%  Change**                   | ** ** | **November 1,  2008** | ** ** | **October 27,  2007** | ** ** | **%  Change** | ** ** |
| Amortization of acquired intangible assets |       | $                                | 34,814     |                       | $          | 37,311                          |       | (6.7                       | )%         | $ | 105,049 |   | $ | 111,924 |   | (6.1 | )% |
| % of net revenue                           |       | 4.4                              | %          | 4.9                        | %          |                            |       | 4.3                        | %          | 5.5 | % |   |   |
|                                            |            |                                  |            |                            |            |                                 |            |                            |            |  |  |  |  |  |  |  |  |

 

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 nine months ended November 1, 2008 compared to the three and ninemonths ended October 27, 2007 was due to amortization of intangible assetsfrom certain acquisitions being fully amortized.

 

*Interest and Other Income, Net*

 
| ** **                     | ** ** | **Three Months Ended** | ** ** | ** **                   | ** ** | **Nine Months Ended** | ** ** | ** **                 | ** ** |
|--------------------------------|------------|----------------------------------|------------|------------------------------|------------|---------------------------------|------------|----------------------------|------------|
| ** **                     | ** ** | **November 1,****2008**     | ** ** | **October 27,****2007** | ** ** | **%  Change**                   | ** ** | **November 1,  2008** | ** ** | **October 27,****2007** | ** ** | **%  Change** | ** ** |
|                           |       |                             |       |                         |       |                            |       |                       |       |   |   |   |   |
| Interest and other income, net |       | $                                | 15,109     |                         | $          | 1,109                           |       | 1,261.2                    | %          | $ | 21,973 |   | $ | 3,127 |   | 602.7 | % |
| % of net revenue               |       | 1.9                              | %          | 0.1                          | %          |                            |       | 0.9                        | %          | 0.2 | % |   |   |
|                                |            |                                  |            |                              |            |                                 |            |                            |            |  |  |  |  |  |  |  |  |

 

Interest and other income, net, consistsprimarily of interest earned on cash, cash equivalents and short-terminvestment balances and other realized and unrealized gains and losses.  The increase in interest and other income forthe three months ended November 1, 2008 compared to the three months endedOctober 27, 2007 was primarily due to cumulative foreign exchange gainsrelated to foreign tax reserves as a result of the strengthening of the U.S.dollar of $11.5 million for the three months ended November 1, 2008 andcumulative foreign exchange losses of $3.4 million in the three months ended October 27,2007.  The results for each of theperiods reflect the effect of the reclassification of foreign exchange gainsand losses related to uncertain tax positions from provision (benefit) forincome taxes to interest and other income, net.

 

The increase in interest and other income, net,for the nine months ended November 1, 2008 compared to the nine monthsended October 27, 2007 was due primarily to cumulative foreign exchangegains of $12.7 million related to foreign tax reserves for the nine monthsended November 1, 2008, cumulative foreign exchange losses of $5.8 millionfor the nine months ended October 27, 2007 and to a $4.9 million write-off of an equity investment in a private companyrecorded for the nine months ended October 27, 2007.  Partially offsetting the increases discussedabove was a decrease in interest income due to a decrease in market interestrates.

 

*Interest Expense*

 
| ** **       | ** ** | **Three Months Ended** | ** ** | ** **                   | ** ** | **Nine Months Ended** | ** ** | ** **                 | ** ** |
|------------------|------------|----------------------------------|------------|------------------------------|------------|---------------------------------|------------|----------------------------|------------|
| ** **       | ** ** | **November 1,  2008**       | ** ** | **October 27,****2007** | ** ** | **%  Change**                   | ** ** | **November 1,  2008** | ** ** | **October 27,****2007** | ** ** | **%  Change** | ** ** |
|             |       |                             |       |                         |       |                            |       |                       |       |   |   |   |   |
| Interest expense |       | $                                | 3,566      |                         | $          | 10,518                          |       | (66.1                      | )%         | $ | 15,876 |   | $ | 30,435 |   | (47.8 | )% |
| % of net revenue |       | 0.5                              | %          | 1.4                          | %          |                            |       | 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 nine months ended November 1, 2008 compared tothe three and nine months ended October 27, 2007 was primarily due torepayment of principal on the outstanding debt and lower interest rates, lowerinterest expense from a supply agreement with Intel and lower capital leaseinterest expense.

 

34

----

Table of Contents

 

*Provision (Benefit) for Income Taxes*

 
| ** **                           | ** ** | **Three Months Ended** | ** ** | ** **                   | ** ** | **Nine Months Ended** | ** ** | ** **                 | ** ** |
|--------------------------------------|------------|----------------------------------|------------|------------------------------|------------|---------------------------------|------------|----------------------------|------------|
| ** **                           | ** ** | **November 1,  2008**       | ** ** | **October 27,****2007** | ** ** | **%  Change**                   | ** ** | **November 1,  2008** | ** ** | **October 27,****2007** | ** ** | **%  Change** | ** ** |
|                                 |       |                             |       |                         |       |                            |       |                       |       |   |   |   |   |
| Provision (benefit) for income taxes |       | $                                | 13,443     |                         | $          | (9,412                          | )          | 242.8                      | %          | $ | 28,300 |   | $ | 3,750 |   | 654.7 | % |
| % of pre-tax income (loss)           |       | 15.9                             | %          | 59.4                         | %          |                            |       | 11.8                       | %          | (3.3 | )% |   |   |
|                                      |            |                                  |            |                              |            |                                 |            |                            |            |  |  |  |  |  |  |  |  |

 

For the three months ended November 1,2008, we recorded an income tax provision of $13.4 million as compared to anincome tax benefit of $9.4 million for  the comparable period of theprior year  For the nine months ended November 1, 2008, werecorded an income tax provision of $28.3 million as compared to a provision of$3.8 million for the comparable period of the prior year.  The effective tax rates (benefits) areinfluenced by non-tax-deductible expenses, such as stock-based compensationexpense, amortization of acquired intangibles, and accounting for uncertain taxbenefits under Financial Accounting Standards Board (“FASB”) Interpretation No. 48,“Accounting for Uncertainty in Tax Positions” (“FIN 48”). For the three andnine months ended November 1, 2008, the effective tax rate was increasedby California budget trailer bill (A.B. 1452) signed into law on September 30,2008, adjusting the income tax provision for prior interim reporting periodsdue to changes in the economic forecast, and truing-up the fiscal 2008 U.S.federal income tax return to the fiscal 2008 income tax provision.  In fiscal 2008, there was a income taxprovision for the nine month period ended October 27, 2007 due to the factthat a smaller proportion of profit was earned in low or zero taxjurisdictions, but for the three months ended October 27, 2007, there wasa release of FIN 48 reserves after the closure of the non U.S. income taxaudit.

 

**Liquidityand Capital Resources**

 

Our principal source of liquidity as of November 1,2008 consisted of $1,044.5 million of cash, cash equivalents, restricted cashand short-term investments of which $24.5 million is restricted for use in alegal settlement.  Since our inception,we have financed our operations through a combination of sales of equitysecurities, debt financing and cash generated by operations.

 

***Net Cash Provided by Operating Activities***

 

Net cash provided by operating activities was$571.5 million for the nine months ended November 1, 2008 compared to netcash provided by operating activities of $13.9 million for the nine monthsended October 27, 2007.  The cashinflow from operations in the nine months ended November 1, 2008 wasprimarily due to net income of $212.3 million and significant improvements inworking capital.  Non-cash charges for the nine months ended November 1, 2008 included $85.8 million of depreciation andamortization expense, $132.4 million of stock-based compensation expense and$105.0 million related to amortization of acquired intangible assets.  A significant working capital change contributingto positive cash flow in the nine months ended November 1, 2008 was thedecrease in inventories of $95.9 million primarily due to the completion ofcontractual obligations under the original supply agreement with Intel inconnection with our acquisition of their communications and applicationsprocessor business as well as concentrated efforts to reduce inventorylevels.  The number of days in inventorydecreased to 82 days as of November 1, 2008 compared to 87 days as of October 27, 2007.  Also contributing to the increase in cashflows was a decrease in prepaid expenses and other assets of $61.8 millionprimarily due to the utilization of prepaid foundry capacity and prepaidwafers.  In addition, accrued employeecompensation increased $17.7 million due primarily to an increase in accruedvacation, accrued salaries due to timing of the payroll cycle and to accruedbonuses.

 

Significant working capital changes offsettingpositive cash flows for the nine months ended November 1, 2008 included anincrease in accounts receivable of $65.8 million due primarily to the timing ofrevenue recorded toward the end of the quarter as well as timing of paymentsreceived from customers.  Days salesoutstanding (“DSO”) remained flat at 46 days as of November 1, 2008 and October 27,2007.  Many of our largercustomers have regularly scheduled payment dates that fall immediately beforeor after our fiscal quarter-end. As a result, our accounts receivable balanceand DSO may fluctuate depending on the timing of large payments made by ourcustomers.  Also contributing to the use of cash in operating activities wasa decrease in accrued liabilities and other of $23.7 million.  The decrease in accrued liabilities and otherwas attributable to the payment of accrued contingent consideration as certainmilestones were met related to various acquisitions.  Restricted cash increased $24.5 million dueto proceeds from settlement with our directors’ and officers’ insurancecarriers requiring the proceeds to be used towards the consolidated derivativeactions settlement and any future class action securities litigationsettlement.

 

35

----

Table of Contents

 

Significant working capital changes contributingto the use of cash in operating activities for the nine months ended October 27,2007 included an increase in inventories of $158.8 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 $56.9million due primarily to the timing of payments received from ourcustomers.  Additionally, cash used inoperating activities decreased as accounts payable declined by $31.1 millionprimarily as a result of the timing of payments.

 

Significant working capital changes contributingto positive cash flows for the nine months ended October 27, 2007 includeda decrease in prepaid expense and other assets of $99.5 million due primarilyto the utilization of prepaid foundry capacity and prepaid wafers.

 

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

 

Net cash used in investing activities was $43.0million for the nine months ended November 1, 2008 compared to $149.6million for the nine months ended October 27, 2007.  The net cash used in investing activities inthe nine month ended November 1, 2008 was due to purchases of property andequipment of $59.3 million and purchases of investments of $10.2 million,partially offset by sales and maturities of investments of $29.2 million.  The net cash used in investing activities forthe nine months ended October 27, 2007 was due to purchases of short-terminvestments of $166.2 million, purchases of property and equipment of $81.1million, purchases of technology licenses of $19.5 million and $8.3 millionpaid in acquisitions, partially offset by sales and maturities of short-terminvestments of $120.5 million.

 

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

 

Net cash used in financing activities was $124.2million for the nine months ended November 1, 2008 compared to net cashprovided by financing activities of $23.0 million for the nine months ended October 27,2007.  For the nine months ended November 1,2008 and October 27, 2007, net cash used in financing activities wasattributable to principal payments on debt obligations and capital leasespartially offset by proceeds from the issuance of common shares under our stockoption 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 November 1, 2008, we hadnon-cancellable purchase orders outstanding of $11.4 million under the amendedarrangement.

 

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 November 1,2008, these foundries had incurred approximately $123.4 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 November 1, 2008,payments totaling $174.2 million, which is included in prepaid expenses andother current assets and other non-current assets, had been made andapproximately $146.2 million of the prepayment had been utilized as of November 1,2008.  At November 1, 2008, therewere no outstanding commitments under the agreement.

 

As of November 1, 2008, we had approximately $58.1 million of other outstandingnon-cancelable purchase orders for capital purchase obligations.

 

As a result of afacility consolidation in February 2002, we obtained a sublease on one ofour facilities that had a non-cancelable lease. Actual sublease incomehas approximated estimated sublease income, but was less than our actual leasecommitment, resulting in future negative cash flow over the remaining term ofthe sublease.  As of November 1,2008, cash payments of $11.8 million, net of sublease income, have been made inconnection with this sublease. Approximately $1.3 million remains accrued forthis facility’s consolidation charge as of November 1, 2008 of which $0.6million is current and $0.7 million is long-term, payable through 2010.

 

36

----

Table of Contents

 

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, investmentrequirements and commitments for at least the next 12months. However, our capital requirements will depend on many factors,including our rate of sales growth, market acceptance of our products, costs ofsecuring access to adequate manufacturing capacity, the timing and extent ofresearch and development projects, costs of making improvements to facilitiesand increases in operating expenses, which are all subject to uncertainty. Tothe extent that our existing cash, cash equivalents and short-term investmentbalances and cash generated by operations are insufficient to fund our futureactivities, we may need to raise additional funds through public or privatedebt or equity financing. We may enter into additional acquisitions or otherstrategic arrangements in the future, which could also require us to seek additionaldebt or equity financing. Additional equity financing or convertible debtfinancing may be dilutive to our current shareholders. Additional funds may notbe available on terms favorable to us or at all.

 

The following table summarizes our contractualobligations as of November 1, 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  three months)**        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |
| Contractual obligations:            |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating leases                    |       | $                                         | 15,569     |   | $ | 38,386 |   | $ | 27,579 |   | $ | 16,699 |   | $ | 9,960 |   | $ | 10,441 |   | $ | 118,634 |   |
| Capital lease obligations           |       | 521                                       |       | 2,085 |   | 2,084 |   | 521 |   | — |   | — |   | 5,211 |   |
| Purchase commitments to  foundries  |       | 134,807                                   |       | — |   | — |   | — |   | — |   | — |   | 134,807 |   |
| Capital purchase obligations        |       | 58,124                                    |       | — |   | — |   | — |   | — |   | — |   | 58,124 |   |
| Long-term debt obligations          |       | 1,063                                     |       | 190,750 |   | — |   | — |   | — |   | — |   | 191,813 |   |
| Total contractual cash  obligations |       | $                                         | 210,084    |   | $ | 231,221 |   | $ | 29,663 |   | $ | 17,220 |   | $ | 9,960 |   | $ | 10,441 |   | $ | 508,589 |   |

 

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 November 1, 2008 and February 2, 2008were $112.8 million and $109.6 million, respectively.  During the three months ended November 1,2008, there was a net $5.6 million decrease in cumulative foreign exchangerelated to foreign tax reserves partially offset by unrecognized tax benefits,penalties and interest. During the nine months ended November 1, 2008,there was a net $3.2 million increase in unrecognized tax benefits, penaltiesand interest partially offset by cumulative foreign exchange related to foreigntax reserves as discussed above in Note 12 — Income Taxes of the notes to ourunaudited condensed consolidated financial statements. During the next 12months, we believe that audit resolutions and the expiration of statute oflimitations could potentially reduce our unrecognized tax benefit by up to$34.8 million.  However, this amount canchange because we continue to have ongoing negotiations with various taxauthorities throughout the year.  At thistime, we are unable to make a reasonably reliable estimate of the amount ofpayments in individual years beyond 12 months due to uncertainties in thetiming of tax audit outcomes.

 

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 November 1, 2008.  Until repayment, we were required to payinterest and principal amounts equal to 0.25% of the aggregate principal amountof loans on a quarterly basis on the last business day of each March, June, September andDecember.  During the three months ended November 1,2008, we paid an additional principal amount of $100.0 million.  On November 4, 2008, we made a fullrepayment of $191.9 million outstanding in the form of term loans under thecredit agreement dated November 8, 2006, among us, the lenders partythereto, Credit Suisse, Cayman Islands Branch, as administrative agent, LaSalleBank National Association, as syndication agent, and Keybank NationalAssociation and Commerzbank AG, as co-documentation agents.  The loan was repayable in November 2009.  No early termination penalties were incurredin connection with the repayment.  Wewill write-off $2.0 million of remaining unamortized debt issuance costs tointerest expense in the fourth quarter of fiscal 2009.

 

37

----

Table of Contents

 

*Prospective capital needs:*Webelieve that our existing cash, cash equivalents and marketable securities,together with cash generated from operations and from exercise of employeestock options will be sufficient to cover our working capital needs, capitalexpenditures, investment requirements and commitments for at least the next 12months.  However, we are named asdefendants to several litigation actions and an unfavorable outcome in such actionscould have a material adverse effect on our cash flows, including potentialimpacts to certain covenants under our existing credit agreement.  In the event that we may need or desire toraise additional funds consummate acquisitions of other businesses, assets,products or technologies, we could raise such funds by electing to sell equityor debt securities to the public or to selected investors, or by borrowingmoney from financial institutions.

 

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,preferences or privileges senior to our common shares.

 

**Off-BalanceSheet Arrangements**

 

As of November 1, 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 Statement of FinancialAccounting Standards (“SFAS”) No. 141 (revised 2007), “Business Combinations”**(“SFAS 141R”).  The standard changes the accounting for businesscombinations including the measurement of acquirer shares issued inconsideration for a business combination, the recognition of contingentconsideration, the accounting for pre-acquisition gain and loss contingencies,the recognition of capitalized in-process research and development, theaccounting for acquisition-related restructuring cost accruals, the treatmentof acquisition related transaction costs and the recognition of changes in theacquirer’s income tax valuation allowance. The adoption of SFAS 141R will change our accounting treatment forbusiness combinations on a prospective basis beginning on or after December 15,2008.

 

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 arecurrently evaluating the impact of the adoption of FSP 157-2 and do not anticipatethat FSP 157-2 will have a material impact on our financial position andresults of operations.

 

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments andHedging Activities” (“SFAS161”). SFAS 161 amends and expandsthe disclosure requirements of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,”**and requires qualitativedisclosures about objectives and strategies for using derivatives, quantitativedisclosures about fair value amounts of and gains and losses on derivativeinstruments, and disclosures about credit-risk-related contingent features inderivative agreements. SFAS 161 is effective for financial statements issuedfor fiscal years and interim periods beginning after November 15, 2008,with early application encouraged.  Wewill adopt SFAS 161 in the first quarter of fiscal 2010 and do not anticipatethat SFAS 161 will have a significant impact on our financial position andresults of operations.

 

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.

 

38

----

Table of Contents

 

In October 2008, the FASB issued FSP FAS 157-3, “Determiningthe Fair Value of a Financial Asset When the Market for That Asset Is NotActive” (“FSP 157-3”). FSP 157-3 clarified the application ofFAS 157. FSP 157-3 demonstrated how the fair value of a financialasset is determined when the market for that financial asset is inactive.FSP 157-3 was effective upon issuance, including prior periods for whichfinancial statements had not been issued. The implementation of this standarddid not have an impact on our financial position and 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 Chairman, President and ChiefExecutive Officer, Dr. Sehat Sutardja and Vice President of Sales forCommunications and Consumer Business, Weili Dai, through their control andownership in Estopia Air, own the aircraft provided by ACM. Dr. SehatSutardja and Weili Dai are husband and wife. During the three months ended November 1, 2008 and October 27,2007, we incurred none and $14,000, respectively, of expenses from ACM, forcharter aircraft services provided to MSI. During the nine months ended November 1, 2008 and October 27,2007, we incurred none and approximately$0.1 million, respectively, of expenses from ACM, for charter aircraftservices provided to us.

 

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 our other license andmanufacturing services agreements with other third parties.  We recognized no revenue under the LicenseAgreement with C2Micro during the three months ended November 1, 2008,$0.2 million of revenue during the three months ended October 27, 2007,$2.6 million of revenue during the nine months ended November 1, 2008 and$0.2 million of revenue during the nine months ended October 27,2007.  As of November 1, 2008, wehad a receivable of $1.4 million from C2Micro. Dr. Sehat Sutardja 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 and,through his ownership and control of C-Squared venture entities, is also anindirect shareholder of C2Micro.  Dr. PantasSutardja, our Vice President, Chief Technology Officer and Chief Research andDevelopment Officer, is also a shareholder of C2Micro.

 

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 $31,000 and $119,000 of royalty expense from VeriSilicon under thesame license agreement during the three months ended November 1, 2008 and October 27,2007, respectively.  We also incurred$140,000 and $428,000 of royalty expense from VeriSilicon under a core licenseagreement assumed from our acquisition of the semiconductor design business ofUTStarcom, Inc. during the nine months ended November 1, 2008 and October 27,2007, respectively.  Weili Dai’s brother(and Dr. Sehat Sutardja’s brother-in-law) is the Chairman, President andChief Executive Officer of VeriSilicon.  Ms. Daiis also a shareholder of VeriSilicon.

 

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 our other licenseagreements with other third parties.  Wepaid $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 and ninemonths ended November 1, 2008 and October 27, 2007.

 

On October 31, 2007, we entered into a LicenseAgreement with Vivante Corporation (“Vivante”). This License Agreement has substantially similar terms as we wouldexpect to obtain for license agreements with other third parties for similartechnology.  We recorded none and $0.2million of expense during the three and nine months ended November 1,2008, respectively, in connection with this License Agreement withVivante.  On August 5, 2008, weentered into an additional Technology License Agreement with Vivante.  This Technology License Agreement, asamended, also has substantially similar terms as we would expect to obtain forlicense agreements with other third parties for similar technology.  We recorded $2.0 million for the license feeand $0.2 million of maintenance during the three and nine months ended November 1,2008, respectively, in connection with this Technology License Agreement.  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 ourBoard of Directors, through his ownership and control of C-Squared ventureentities, is also an indirect shareholder of Vivante.

 

39

----

Table of Contents

 

**Item 3.  *Quantitative andQualitative Disclosures About Market Risk***

 

*Interest Rate Risk.*  The primary objective of our investmentactivities is to preserve principal while at the same time maximize the incomewe receive from our investments without significantly increasing risk. Some ofthe securities in which we have invested may be subject to market risk. Thismeans that a change in prevailing interest rates may cause the principal amountof the investment to fluctuate. For example, if we hold a security that wasissued with a fixed interest rate at the then-prevailing rate and theprevailing interest rate later rises, the principal amount of our investmentwill probably decline. Also, variable rate securities may produce less incomethan expected if interest rates fall. To minimize this risk, we maintain ourportfolio of cash equivalents and short-term investments in a variety of fixedand variable rate securities including money market funds, corporate debtsecurities, Federal, State, county and municipal debt securities and auctionrate securities. In general, money market funds are not subject to market riskbecause the interest paid on such funds fluctuates with the prevailing interestrate. The following table presents the amounts of our cash equivalents andshort-term investments that are subject to market risk by range of expectedmaturity and weighted-average interest rates as of November 1, 2008 (inthousands). This table does not include money market funds because those fundsare not subject to market risk. Auction rate securities are presented belowwith an expected fiscal year maturity date beyond five years because of recentauction failures.  As a result, webelieve that we have the ability to hold the securities for a period of longerthan 12 months and thus haveclassified the auction rate securities based on the stated maturity date.

 
| ** **            | ** ** | **Expected Fiscal Year Maturity Date** |       |
|-----------------------|------------|------------------------------------------------------------|------------|
| ** **            | ** ** | **2009**                                                   | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **2013** | ** ** | **Thereafter** | ** ** | **Total** | ** ** | **Fair Value** |   |
| Variable Rate         |       | $                                                          | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 41,850 |   | $ | 41,850 |   | $ | 40,310 |   |
| Average Interest Rate |       | —                                                     |       | — |   | — |   | — |   | — |   | 3.06 | % | 3.06 | % |   |   |
|                       |            |                                                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

As of November 1, 2008, our investment portfolioincluded $41.8 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 days through an auction process.At the end of each reset period, investors can sell or continue to hold thesecurities at par.  Our auction ratesecurities are all backed by student loans originated under the Federal FamilyEducation Loan Program (“FFELP”) and are over-collateralized, insured andguaranteed by the United States Federal Department of Education (the “DOE”).  All auction rate securities held by us arerated by the major independent rating agencies as either AAA or Aaa at the timeof purchase and their current ratings are still within the guidelines of ourcorporate 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 November 1, 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 investors to own these securities in thecurrent environment.  Utilizing theseassumptions, we found that our auction rate securities had a fair value of$40.3 million, which indicated an impairment of approximately $1.5million.  During the nine months ended November 1,2008, we recorded a temporary impairment charge for this amount in accumulatedother comprehensive (loss), a component of shareholders’ equity.  When evaluating whether the impairment of theinvestments 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 wehad approximately 4% of our total cash invested in these auction ratesecurities, a cash balance of approximately $1.0 billion in cash and cashequivalents in other than auction rate securities, and that we continue togenerate positive cash flow.

 

40

----

Table of Contents

 

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 notcertain when liquidity will return to the markets or if any other secondarymarkets will become available, and we have continued to classify these auctionrate securities in long-term investments as of November 1, 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 November 1, 2008 would have an immaterial effect onour financial position, results of operations and cash flows.

 

On November 4, 2008,we made a full repayment of $191.9 million outstanding in the form of termloans under the credit agreement dated November 8, 2006, among us, thelenders party thereto, Credit Suisse, Cayman Islands Branch, as administrativeagent, LaSalle Bank National Association, as syndication agent, and KeybankNational Association and Commerzbank AG, as co-documentation agents.  We will write-off $2.0 million of remainingunamortized debt issuance costs to interest expense in the fourth quarter offiscal 2009.

 

Our term debt bore 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 bore interest at arate equal to the Adjusted London Interbank Offered Rate, or LIBOR, plus 2%margin.  Such margins were subject toreductions or increases depending on our future credit rating if obtained.  We paid 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 November 1, 2008was 5.5%.

 

*InvestmentRisk.*  We invest inequity instruments of privately-held companies for business and strategicpurposes. These investments are included in other non-current assets in theaccompanying balance sheets and are accounted for under the cost method becauseour ownership is less than 20% and we do not have the ability to exercisesignificant influence over the operations on these companies. We monitor theseinvestments for impairment and make appropriate reductions in carrying valuewhen an impairment is deemed to be other than temporary.

 

*ForeignCurrency 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. As of November 1,2008, we had no foreign currency forward contracts outstanding.  We do not enter into any other derivativefinancial instruments for trading or speculative purposes.

 

41

----

Table ofContents

 

**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 Exchange Act of 1934, as amended (the “Exchange Act”)as of November 1, 2008. Disclosure controls and procedures are designed toensure that information required to be disclosed is recorded, processed,summarized and reported within the time periods specified in the rules andforms of the SEC and that such information is accumulated and communicated tomanagement, including the Chief Executive Officer and Chief Financial Officer,as appropriate, to allow timely decisions regarding required disclosure. Basedon this evaluation, our management, including our Chief Executive Officer andChief Financial Officer, has concluded that our disclosure controls andprocedures were not effective because of the material weakness described under “Management’sReport on Internal Control Over Financial Reporting” in Item 9A of ourAnnual Report on Form 10-K for the year ended February 2, 2008, whichwe are still in the process of remediating. This material weakness is describedbelow:

 

*        Controlenvironment.*     We did not maintain aneffective control environment based on criteria established in the Committee ofSponsoring Organizations of the Treadway Commission (“COSO”) framework.Specifically: (1) internal control deficiencies were not remediated in atimely manner as our management did not exercise the necessary rigor andcommitment to internal control over financial reporting and senior managementwas unable to timely implement the planned remediation actions of the controldeficiencies identified in fiscal 2007; (2) we did not maintain asufficient complement of personnel with a level of accounting knowledge,experience and training in the application of generally accepted accountingprinciples commensurate with our financial reporting requirements; and (3) wedid not maintain effective, timely and sufficient communication within ourfinance department and between our finance department 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 thatwould not be prevented or detected. Accordingly, our management has determinedthat these 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 November 1, 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-Q fairly presents in all material aspects our financial position,results of operations and cash flows as of, and for the period presented inaccordance 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 November 1, 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 threequarters 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 and havereassessed internal controls financial reporting over other processes that maybe susceptible to potential material misstatements.

 

42

----

Table of Contents

 

(2) Wehired a new Chief Financial Officer effective June 23, 2008 and a newGeneral Counsel effective October 30, 2008.  We continue to search for a new ChiefOperating Officer and Compliance Executive. The Compliance Executive willreport directly to 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 ourBoard of Directors decided to implement the recommendation of the Board ofDirectors’ Special Committee Regarding Derivative Litigation that Dr. SehatSutardja remain Chief Executive Officer and a member of our Board of Directors,but step down as Chairman of the Board in favor of a non-executiveChairman.  This non-executive Chairmanwas to be selected from a group of new independent directors appointed to fillthe then-three vacancies on our Board of Directors.  Since that time, we have added two newindependent directors, Dr. Juergen Gromer and Dr. John Kassakian, toour Board of Directors, and our Board of Directors continues to search foradditional independent directors.  OurBoard of Directors is evaluating the roles of independent directors in thegovernance of the Board, and our Board of Directors will designate anindependent director either as non-executive Chairman or non-executive LeadDirector (if it retains an executive Chairman) once it has completed its searchfor additional new 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***

 

The information set forthunder Note 9 – Commitments and Contingencies (Contingencies) of our notes tounaudited condensed consolidated financial statements, included in Part I,Item 1, is incorporated herein by reference. For additional discussion of certain risks associated with legalproceedings, see Part II, Item 1A  “RiskFactors” immediately below.

 

**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 risks describedelsewhere and the other information contained in this quarterly report on Form 10-Qand in our other filings with the SEC, including our Annual Report on Form 10-Kfor the year ended February 2, 2008 and subsequent reports onForms 10-Q and 8-K.**Many of these risks anduncertainties are beyond our control, including business cycles and seasonaltrends of the computing, semiconductor and related industries.*

 

***Our business,financial condition and results of operations may be adversely impacted by therecent worldwide financial crisis. As a result, the market price of our commonshares may decline.***

 

We operate primarily in the hard disk drive andsemiconductor industries, which are cyclical and subject to rapid change andevolving industry standards. From time to time, these industries haveexperienced significant downturns. These downturns are

 

43

----

Tableof Contents

 

characterized by decreases in product demand, excess customerinventories, and accelerated erosion of prices. These factors could causesubstantial fluctuations in our revenue and in our results of operations. Inaddition, during these downturns some competitors may become more aggressive intheir pricing practices, which would adversely impact our gross margin.Furthermore, our foundry partners often require significant amounts offinancing in order to build wafer fabrication facilities. If they are unable toobtain financing and anticipated capacity is not completed, we may experience ashortage of capacity, which could increase our costs or reduce our ability tomeet customer demand. Any downturns in the current environment may be severeand prolonged, and any failure of the markets in which we operate to fullyrecover from downturns could seriously impact our revenue and harm ourbusiness, financial condition and results of operations.

 

Recently general worldwide economic conditionshave experienced a downturn due to the credit conditions impacted by thesub-prime mortgage turmoil and other factors, slower economic activity,concerns about inflation and deflation, increased energy costs, decreasedconsumer confidence, reduced corporate profits and capital spending, adverse businessconditions and liquidity concerns in the markets in which we operate, theongoing effects of the war in Iraq, recent international conflicts andterrorist and military activity, and the impact of natural disasters and publichealth emergencies. These conditions make it extremely difficult for ourcustomers, our vendors and us to accurately forecast and plan future businessactivities, and they could cause U.S. and foreign businesses to slowspending on our products and services, which would delay and lengthen salescycles. During challenging economic times our customers may face issues gainingtimely access to sufficient credit, which could result in an impairment oftheir ability to make timely payments to us. If that were to occur, we may berequired to increase our allowance for doubtful accounts and our days salesoutstanding would be negatively impacted. We cannot predict the timing,strength or duration of any economic slowdown or subsequent economic recovery,worldwide or in the hard disk drive and semiconductor industry. If the economyor markets in which we operate do not continue at their present levels, ourbusiness, financial condition and results of operations will likely bematerially and adversely affected. Additionally, the combination of our lengthysales cycle coupled with challenging macroeconomic conditions could harm ourresults of operations.

 

***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. The service of our Acting Chief Operating Officerconcluded in October 2008 and our Chief Financial Officer was appointed toserve as interim Chief Operating Officer until a permanent replacement can behired. We recently hired a new general counsel of our U.S. operatingsubsidiary. If we cannot recruit a qualified permanent replacement for theposition of Chief Operating Officer, our business may suffer.   Moreover, we continue to search for newindependent directors to fill the existing vacancies on our Board of Directors,and two of theindependent directors currently on our Board of Directors joined our Board ofDirectors in October 2007 and July 2008, respectively. An independent director will either succeed Dr. SehatSutardja as Chairman of the Board or be appointed to a new position of LeadDirector. Althoughwe will endeavor to implement any director and management transition in asnondisruptive a manner as possible, any such transition might impact ourbusiness, and give rise to uncertainty among customers, investors, vendors,employees and others concerning our future direction and performance. Ourfuture success will depend to a significant extent on the ability of ourmanagement team to work together effectively. The loss of any of our managementor other key personnel could harm our ability to implement our businessstrategy and respond to the rapidly changing market conditions in which weoperate. Moreover, our success will depend on our ability to attract, hire andretain qualified management and other key personnel and on the abilities of thenew management personnel to function effectively, both individually and as agroup, going forward. If we are unable to attract and retain effective qualifiedreplacements for our key executives and board of directors positions in atimely manner, our business, financial condition, results of operations andcash flows may be adversely affected and our ability to execute our businessmodel could be impaired.

 

***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 stock option granting practices, which seek to recover damages. Weand our current and

 

44

----

Table ofContents

 

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 in the shareholder derivative actions entered into a memorandum ofunderstanding that tentatively settles and resolves the pending consolidatedderivative action filed in connection with our historic stock option grantingpractices. This tentative settlement of the derivative actions requires courtapproval before it becomes final. The court may not preliminarily or finallyapprove the tentative settlement. If the court does not approve the tentativesettlement, the parties might elect or be required to continue litigating theconsolidated 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 results of 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 historicstock option 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 Dai also entered into asettlement with the SEC. The Court entered into the final judgment against Ms. Daion 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. This safe harbor provided us enhanced protection fromliability related to forward-looking statements if the forward-lookingstatements were either accompanied by meaningful cautionary statements or weremade without actual knowledge that they were false or misleading. Without thestatutory safe harbor, it may be more difficult for us to defend against anysuch 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 settledshareholder derivative actions and the pending class action litigation couldhave a negative impact on our relationships with customers, suppliers andbusiness partners, our ability to generate revenue, our ability to obtaindirector and officer insurance coverage, our ability to attract and retainemployees, officers and directors, our ability to access debt and equitymarkets, customer and investor confidence in our board and management, and ourrevenue, net income, expenses, results of operations, profitability,earnings-per-share and cash 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

 

45

----

Table ofContents

 

“excessive” and undisclosed commissions and entered intounlawful “tie-in” agreements with certain of their investment 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 in which we were not named as adefendant, plaintiffs allege that the defendants violated various provisions ofthe Securities Act and the Exchange Act in the course of our IPO. In bothactions, plaintiffs seek, among other items, unspecified damages, pre-judgmentinterest and reimbursement of attorneys’ and experts’ fees. These two actionsrelating to our IPO have been coordinated with hundreds of other similarlawsuits filed by plaintiffs against approximately 40 underwriters andapproximately 300 issuers across the United States. Defendants in thecoordinated proceedings moved to dismiss the actions. In February 2003,the trial court granted the motions in part and denied them in part, thusallowing the case to proceed against us and the underwriters and us as toalleged violations of Section 11 of the Securities Act and Section 10(b) of the ExchangeAct. Claims against the individual officers have been voluntarily dismissedwith prejudice by agreement with plaintiffs. In June 2004, a stipulationof settlement and release of claims against the issuer defendants, includingus, was submitted to the court for approval. On August 31, 2005, the courtpreliminarily approved the settlement. In December 2006, the appellatecourt overturned the certification of classes in the six focus cases that wereselected by the underwriter defendants and plaintiffs in the coordinatedproceedings (the action involving us is not one of the six cases). Becauseclass certification was a condition of the settlement, it was unlikely that thesettlement would receive final court approval. On June 25, 2007, the courtentered an order terminating the proposed settlement based upon a stipulationamong the parties to the settlement. Plaintiffs filed amended masterallegations and amended complaints in the six focus cases. Defendants’motions to dismiss those new complaints were denied in part and granted inpart. In the past,securities class action litigation often has been brought against a companyfollowing periods of volatility in the market price of its securities.Companies in the integrated circuit industry and other technology industriesare particularly vulnerable to this kind of litigation due to the highvolatility of their stock prices. Accordingly, we may in the future be thetarget of additional securities litigation. Any securities litigation couldresult in substantial costs, could divert the attention and resources of ourmanagement, and could have a material adverse effect on our reputation,business, financial condition, financial results, results of operations andcash flows.

 

***Wehave had and continue to have material weaknesses in internal control overfinancial reporting and cannot assure you that additional material weaknesseswill not be identified in the future. If our internal control over financialreporting or disclosure controls and procedures are not effective, there may beerrors in our financial statements that could require a restatement or ourfilings may not be filed on a timely basis and investors may lose confidence inour reported financial information, which could lead to a decline in our stockprice.***

 

We have assessed that wecontinue to have material weaknesses in our internal control overfinancial reporting. We are still in the process of remediating ourmaterial weaknesses. We strongly believe that effective internal controls are necessary for us to providereliable financial reports and effectively prevent fraud. Any inability toprovide reliable financial reports or prevent fraud could harm our business.The Sarbanes-Oxley Act of 2002 requires management and our auditors to evaluateand assess the effectiveness of our internal control over 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.  Inaddition, we are consistently evaluating the design and operating effectivenessof our internal controls in accordance with Auditing Standard No. 5, aprocess which sometimes leads to modifications in such controls. Thesemodifications could affect the overall effectiveness or evaluation of thecontrol system in the future by us or our independent registered publicaccounting firm. Theseinherent limitations include the realities that judgments in decision makingcan be faulty, breakdowns can occur because of simple error or mistake and errorsdiscovered by personnel within control systems may not be properly disclosedand addressed. Controls can also be circumvented by the individual acts of somepersons, by collusion of two or more people, or by management override of thecontrols. The design of any system of controls is based in part on certainassumptions about the likelihood of future events, and we cannot assure youthat any design will succeed in achieving its stated goals under all potentialfuture conditions. Over time, controls may become inadequate because of changesin conditions or deterioration in the degree of compliance with policies orprocedures. Because of the inherent limitations in a cost-effective controlsystem, misstatements due to error or fraud may occur and not be detected.

 

46

----

Table ofContents

 

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 additionalacquisitions, present challenges to maintain the internal control anddisclosure control standards applicable to public companies. Any failure tomaintain or implement required new or improved controls, or any difficulties weencounter in their implementation, could result in significant deficiencies ormaterial weaknesses, cause us to fail to timely meet our periodic reportingobligations, or result in material misstatements in our financial statements.Any such failure 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 andcompleteness of our financial reports. We cannot assure you that we will beable to fully comply with the requirements of the Sarbanes-Oxley Act of 2002 orthat management 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 to date through calendar 2008, leading to liquiditydisruption in asset-backed commercial paper and failed auctions in the auctionrate securities market.If the global credit market continues to deteriorate, our investment portfoliomay be impacted and we could determine that some of our investments areimpaired. This could materially adversely impact our results of operations andfinancial condition.

 

As of November 1,2008, ourinvestment portfolio included $41.8 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 7 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 securitiesare all backed by student loans originated under the FFELP and areover-collateralized, insured and 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 and their current ratings are still within theguidelines of our corporate investment 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 a discountedcash flow model to estimate the fair value of the auction rate securities as ofNovember 1, 2008. The assumptions used in preparing the discounted cash flow model includedestimates for the amount and timing of future interest and principal payments,the collateralization of underlying security investments, the credit worthinessof the issuer of the securities, the probability of full repaymentconsidering the guarantees by the DOE of the underlying studentloans, guarantees by other third parties, additional credit enhancementsincluded in the securities, and the rate of return required byinvestors to own these securities in the current environment.  Utilizing these assumptions, we found thatour auction rate securities had a fair value of $40.3 million, which indicatedan impairment of approximately $1.5 million. During the nine months ended November 1, 2008, we recorded a temporary impairment charge for this amountin accumulated other comprehensive (loss), a component of shareholders’equity.  When evaluating whether the impairment is temporary or other thantemporary, we reviewed factors such as the length of time and extent to whichfair value has been below cost basis, the financial condition and near-termprospects of the issuer, and our ability and intent to hold the investment fora period of time which may be sufficient for anticipated recovery in themarket value.  We specifically noted that we hadapproximately 4% of our total cash invested in these auction rate securities, acash balance of approximately $1.0 billion in cash and cash equivalents otherthan auction rate securities, and that we continue to generate positive cashflow 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 November 1, 2008.

 

47

----

Table ofContents

 

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.

 

In addition, in support of our internationaloperations, a portion of our cash and investment portfolio accumulatesoffshore. While these amounts are primarily invested in U.S. dollars, a portionis held in foreign currencies, and all offshore balances are exposed to localpolitical, banking, currency control and other risks. In addition, theseamounts may be subject to tax and other transfer restrictions. While we believeour cash and investments are secure, there is risk that some of our balances ininternational locations will not be adequately secured if the current creditcrisis continues.

 

***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.  Such acquisitions, as well as acquisitions in the future,could materially harm our operating results of operations or liquidity as a result ofpossible concurrent issuances of dilutive equity securities or payment of cash.In addition, the purchase price of any acquired businesses may exceed thecurrent fair values of the net tangible assets of the acquired businesses. As aresult, we would be required to record material amounts of goodwill, acquiredin-process research and development charges and other intangible assets, whichcould result in significant impairment and acquired in-process research anddevelopment charges and amortization expense in future periods. It may also benecessary for us to take other financial charges and reserves as a result ofacquisitions, such as inventory write-downs. These charges, in addition to theresults of operations of such acquired businesses, could have a materialadverse effect on our business, financial condition and results of operations.We cannot forecast the number, timing or size of future acquisitions, or theeffect that any such acquisitions might have on our operating or financialresults.

 

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 November 1, 2008. An impairment review couldresult in a write-down of all or a portion of these assets to their fairvalues. We intend to perform an annual impairment review during the fourthquarter of each fiscal year or more frequently if we believe indicators ofimpairment exist. In light of the large carrying value associated with ourgoodwill and intangible assets, any write-down of these assets may result in asignificant charge to our statement of operations in the period any impairmentis 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 of operations******.***

 

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.

 

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

 

48

----

Table ofContents

 

assumption or incurrence of contingent liabilities, possibleimpairment charges related to goodwill or other intangible assets, or otherunanticipated events or circumstances, any of which could harm our business. Wemight not be successful in integrating any acquired businesses, products ortechnologies, and might not achieve anticipated revenues and cost benefits.

 

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 party foundries or through continuing arrangements withIntel for certain legacy products, increase the gross margin of those products,and retain the business’ relationship with its principal customers.

 

***We are exposed to potential impairment charges on certainassets.***

 

Over the past several years, we have made several acquisitions. As aresult of these acquisitions, we have approximately $2 billion of goodwill and$329 million of intangible assets on our balance sheet as of November 1,2008. If the businesses acquired fail to meet our expectations set out at thetime of the acquisition or if our market capitalization adjusted for controlpremiums and other factors declines to below our carrying value, we could incursignificant impairment charges, which could negatively impact our financialresults. In addition, from time to time, we have made investments in otherprivate companies. If the companies that we invest in are unable to executetheir plans and succeed in their respective markets, we may not benefit fromsuch investments, and we could potentially lose the amounts we invest. Inaddition, we evaluate our investment portfolio on a regular basis to determineif impairments have occurred. Impairment charges could have a material impacton our results of operations in any period.

 

***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 couldbecome a significant source of competition to manufacturers of hard diskdrives. Flash memory has typically been more costly than disk drivetechnologies. However, flash memory manufacturers have been reducing the pricesfor their products, which could enable them to complete more effectively withvery small form factor hard disk drive products. Demand for hard disk drivescould be reduced if alternative storage technologies such as flash memory canmeet 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 nine monthsended November 1, 2008, one customer accounted for a total of approximately21% of our net revenue.Sales to our largest customers have fluctuated significantly from period toperiod primarily due to the timing and number of design wins with eachcustomer, as well as the continued diversification of our customer base as weexpand into new markets, and will likely continue to fluctuate dramatically inthe future. The loss of any of our large customers, a significant reduction insales we make to them, or any problems we encounter collecting amounts due fromthem would likely harm our financial condition and results of operations. Ouroperating results in the foreseeable future will continue to depend on sales toa relatively small number of customers, as well as the ability of thesecustomers to sell products that incorporate our products. In the future, thesecustomers may decide not to purchase our products at all, purchase fewerproducts than they did in the past, or alter their purchasing patterns in someother way, particularly because:

 

·                  substantially all of our sales are made on a purchase orderbasis, which permits our customers to cancel, change or delay product purchasecommitments with little or no notice to us and without penalty;

 

49

----

Table ofContents

 

·                  our customers may develop their own solutions;

 

·                  our customers may purchase integrated circuits from ourcompetitors; or

 

·                  our customers may discontinue sales or lose market share inthe markets for which they purchase our products.

 

***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 otherwiseperform as requested could damage our relationships with our customers,decrease our sales and limit our growth.***

 

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

 

*RegionalConcentration:*

 

Substantially all of ourproducts are manufactured by third party foundries located in Taiwan. Currently our onlyalternative manufacturing sources are located in Taiwan, China and Singapore.In addition, substantially all of our assembly and testing facilities arelocated in Singapore, Taiwan, Malaysia and the Philippines. Because of thegeographic concentration of these third party foundries, we are exposed to the risk that theiroperations may be disrupted by regional disasters. For example, the risk of anearthquake in Taiwan and elsewhere in the Pacific Rim region is significant dueto the proximity of major earthquake fault lines to the facilities of ourfoundries and assembly and test subcontractors. In September 1999, a majorearthquake in Taiwan affected the facilities of several of these third party contractors. As aconsequence of this earthquake, these contractors suffered power outages anddisruptions that impaired their production capacity. Major earthquakes alsooccurred in Taiwan in 2002, 2003, 2004 and more recently in 2006. In addition,the resurgence of severe acute respiratory syndrome, the outbreak of avian fluand any similar future outbreaks in Asia, where these foundries are located,could affect the production capabilities of our manufacturers by resulting inquarantines or closures. In the event of such a quarantine or closure, if wewere unable to quickly identify alternate manufacturing facilities, ourrevenues, cost of revenues and results of operations would be negativelyimpacted. If these vendors do not provide us with high-quality products andservices in a timely manner, or if one or more of these vendors terminates itsrelationship with us, we may be unable to obtain satisfactory replacements tofulfill customer orders on a timely basis, our relationships with our customerscould suffer, our sales could decrease and harm our business, financialcondition 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 ofproducts to some of our customers, we may not have sufficient levels ofproduction capacity with all of our foundries, despite signing a long-termguaranteed production capacity agreement with one of our foundries. Despitethis agreement, 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.

 

50

----

Table ofContents

 

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 capacity under the terms of theagreement. Moreover, if we are able to secure foundry capacity, we may beobligated to use all of that capacity or incur penalties. These penalties maybe expensive and could harm our 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, wouldlikely be time consuming and costly to defend. In addition, defects in ourexisting 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 of operations******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 of operations******may vary,******which may cause the priceof our common shares to decline.***

 

Our quarterly operatingresults have fluctuated in the past and are likely to do so in the future.Because our operating results are difficult to predict, you should not rely onquarterly comparisons of our results of operations as an indication of ourfuture performance.

 

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 shipment cancellations, rescheduling or deferralsof significant customer orders;

 

·                  our ability to scale our operations in response to changesin demand for our existing products and services or demand for new productsrequested by our customers;

 

·                  gain or loss of a key customer;

 

·                  our ability to maintain a competitive cost structure for ourmanufacturing and assembly and test processes;

 

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

 

·                  our ability to exercise stringent quality control measuresto obtain high yields;

 

51

----

Tableof Contents

 

·                  effective and timely updateof equipment and facilities as required for leading edge productioncapabilities; and

 

·                  our ability to realize the benefits expected from our recentacquisitions, including our acquisition of the communications and applicationsprocessor business of Intel.

 

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. Recently we haveexperienced a substantial downturn in the market price of our common shares.  In future periods, if our revenues oroperating results are below our estimates or the estimates or expectations ofpublic market analysts and investors, our stock price could decline. Onaverage, technology companies have been subject to a greater number of securitiesclass action claims than companies in many other industries as a result ofstock price volatility. If our stock price is volatile, we may become involvedin this type of litigation. Any litigation could result in substantial costsand a diversion of management’s attention and resources that are needed tosuccessfully 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 to achievemarket 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 5,541 employees, as of November 1,2008.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 ouroperations and workforce too rapidly in anticipation of increased demand for ourproducts, and such demand does not materialize at the pace at which weexpected, the rate of increase in our operating expenses may exceed the rate ofincrease in our revenue, which would adversely affect our results ofoperations.

 

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

 

52

----

Table ofContents

 

implemented an enterprise resource planning system to helpus improve our planning and management processes, we anticipate that we willalso need to continue to implement and improve a variety of new and upgradedoperational and financial systems, as well as additional procedures and otherinternal management systems. These processes can be time consuming andexpensive, increase management responsibilities, and divert managementattention. If we are unable to effectively manage our expanding operations, wemay be unable to scale our business quickly enough to meet competitivechallenges or exploit potential market opportunities, or conversely, we mayscale our business too quickly and the rate of increase in our expenses mayexceed the rate of increase in our revenue, either of which would materiallyand adversely affect our current or future business.

 

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

 

We have substantialoperations, including approximately 21% of our workforce as of November 1, 2008, in Israel. These operationsare directly influenced by the political, economic and military conditionsaffecting Israel. Any potential hostilities involving or within Israel coulddisrupt these operations. For example, past hostilities between Israel and thePalestinian authority and other groups have caused substantial politicalunrest, which could lead to a potential economic downturn in Israel.Additionally, the ongoing situation in Iraq could lead to more economicinstability and uncertainty in the State of Israel and the Middle East. Also,the interruption or curtailment of trade between Israel and its present tradingpartners or a significant downturn in the economic or financial condition of Israelcould negatively impact the business operations and financial results of ouroperations in Israel.

 

***We rely on third******party distributors andmanufacturers’ representatives and the failure of these distributors andmanufacturers’ representatives to perform as expected could reduce our futuresales.***

 

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,deferred purchase orders for our products. We cannot accurately predict what orhow many products 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 multiple assumptions,each of which may introduce error into our estimates. If we overestimatecustomer demand, we may allocate resources to manufacturing products that wemay not be able to sell when we expect to, if at all. As a result, we wouldhold excess or obsolete inventory, which would reduce our profit margins andadversely affect our financial results. Conversely, if we underestimatecustomer demand or if insufficient manufacturing capacity is available, wewould forgo revenue opportunities and potentially lose market share and damageour customer relationships. In addition, any future significant cancellationsor deferrals of product orders or the return of previously sold products couldmaterially and adversely affect our profit margins, increase product obsolescenceand restrict our ability to fund our operations. Furthermore, we generallyrecognize revenue upon shipment of products to a customer. If a customerrefuses to accept shipped products or does not timely pay for these products,we could incur significant charges against our income.

 

53

----

Table ofContents

 

***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 relied in significant part on our strategic relationships withcustomers that are technology leaders in our target markets. We intend topursue and continue to form these strategic relationships in the future but wecannot assure you that we will be able to do so. These relationships oftenrequire us to develop new products that may involve significant technologicalchallenges. Our customers frequently place considerable pressure on us to meettheir tight development schedules. Accordingly, we may have to devote asubstantial amount of our limited resources to our strategic relationships,which could detract from or delay our completion of other important developmentprojects. Delays in the development could impair our relationships with ourstrategic customers and negatively impact sales of the products underdevelopment. Moreover, it is possible that our customers may develop their ownsolutions or adopt a competitor’s solution for products that they currently buyfrom us. If that happens, our business, financial condition and results ofoperations could be materially 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 toremain competitive, we expect to continue to transition our semiconductorproducts to increasingly smaller line width geometries. This transitionrequires us to modify the manufacturing processes for our products and toredesign some products. We periodically evaluate the benefits, on aproduct-by-product basis, of migrating to smaller geometry process technologiesto reduce our costs. In the past, we have experienced some difficulties inshifting to smaller geometry process technologies or new manufacturingprocesses, which resulted in reduced manufacturing yields, delays in productdeliveries and increased expenses. We may face similar difficulties, delays andexpenses as we continue to transition our products to smaller geometryprocesses. We are dependent on our relationships with our foundrysubcontractors to transition to smaller geometry processes successfully. Wecannot assure you that the foundries that we use will be able to effectivelymanage the transition or that we will be able to maintain our existing foundryrelationships or develop new ones. If any of our foundry subcontractors or weexperience significant delays in this transition or fail to efficientlyimplement this transition, we could experience reduced manufacturing yields,delays in product deliveries and increased expenses, all of which could harmour relationships with our customers and our results of operations. As smallergeometry processes become more prevalent, we expect to continue to integrategreater levels of functionality, as well as customer and third partyintellectual property, into our products. However, we may not be able toachieve higher levels of design integration or deliver new integrated productson a timely basis, if at all. Moreover, even if we are able to achieve higherlevels of design integration, such integration may have a short-term adverseimpact on our results of operations, as we may reduce our revenue by integrating thefunctionality of multiple chips into a single chip.

 

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

 

Our U.S.headquarters located in Santa Clara California, our buildings in Singapore,Malaysia, Switzerland and Shanghai, China subject us to the risks of owningreal property, which includes:

 

·                  the possibility of environmental contamination and the costsassociated with fixing any environmental problems;

 

·                  adverse changes in the value of these properties, due tointerest rate changes, changes in the neighborhood in which the property islocated, or other factors;

 

·                  the possible need for structural improvements in order tocomply with zoning, seismic and other legal or regulatory requirements;

 

·                  the potential disruption of our business and operationsarising from or connected with a relocation due to moving to or renovating thefacility;

 

·                  increased cash commitments for improvements to the buildingsor the property or both;

 

·                  increased operating expenses for the buildings or theproperty or both;

 

54

----

Table ofContents

 

·                  possible disputes with tenants or other third partiesrelated to the buildings or the property or both; and

 

·                  the risk of financial loss in excess of amounts covered byinsurance, or uninsured risks, such as the loss caused by damage to thebuildings as a result of earthquakes, floods and or other 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 believeour future success will depend in large part upon our ability to attract andretain highly skilled managerial, engineering and sales and marketingpersonnel. The loss of any key employees or the inability to attract or retainqualified personnel, including engineers and sales and marketing personnelcould delay the development and introduction of and harm our ability to sellour products. We do not have employment agreements with any of our key technical personnel, and theirknowledge of our business and industry would be extremely difficult to replace.

 

There iscurrently a shortage of qualified technical personnel with significantexperience in the design, development, manufacturing, marketing and sales ofintegrated circuits. In particular, there is a shortage of engineers who arefamiliar with the intricacies of the design and manufacture of products basedon analog technology, and competition for these engineers is intense. Our keytechnical personnel represent a significant asset and serve as the source ofour technological and product innovations. We may not be successful inattracting and retaining sufficient numbers of technical personnel to supportour anticipated growth.

 

***A few of our******officers own a large percentage of our votingstock, and two of them, together with another employee, are also significantshareholders and are related by blood or marriage. These factors may allow theofficers and directors as a group or the three related employees to greatlyinfluence the election of directors and the approval or disapproval ofsignificant corporate actions.***

 

Dr. SehatSutardja, our President and Chief Executive Officer, and Weili Dai, who servesas our Vice President of Sales for Communications and Consumer Business of MSI,are husband and wife, and Dr. Sehat Sutardja and Dr. Pantas Sutardja,our Vice President, Chief Technology Officer and Chief Research and DevelopmentOfficer, are brothers. Together, these three individuals held approximately19.0% of our outstanding common shares as of November 1, 2008. As a result, if theseindividuals acttogether, they maysignificantly influence the election of our directors and the approval ordisapproval of anysignificant corporate actions that require shareholder approval. This influence over ouraffairs might be adverse to the interests of other shareholders. For instance,the voting power of these individuals could have the effect of delaying or preventing anacquisition of us on terms that other shareholders may desire. Furthermore, wehave a classified board, which could also further delay or prevent anacquisition, under certain circumstances.

 

UnderBermuda law, all of our officers, in exercising their powers and dischargingtheir duties, must act honestly and in good faith with a view to our bestinterests and exercise the care, diligence and skill that a reasonably prudentperson would exercise in comparable circumstances. Majority shareholders do notowe fiduciary duties to minority shareholders. As a result, the minorityshareholders will not have a direct claim against the majority shareholders inthe event the majority shareholders take actions that damage the interests ofminority shareholders. Class actions and derivative actions are generallynot available to shareholders under the laws of Bermuda, except that Bermudacourts would be expected to follow English case law precedent, which wouldpermit a shareholder to bring an action in our name if the directors orofficers are alleged to be acting beyond our corporate power, committingillegal acts or violating our Memorandum of Association or Bye-laws. Inaddition, minority shareholders would be able to challenge a corporate actionthat allegedly constituted a fraud against them or required the approval of agreater percentage of our shareholders than actually approved it. The winningparty in such an action generally would be able to recover a portion ofattorneys’ 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.***

 

Asubstantial portion of our business is conducted outside of the United Statesand, as a result, we are subject to foreign business, political and economicrisks. All of our products are manufactured outside of the United States. Ourcurrent qualified integrated circuit foundries are located in the same regionwithin Taiwan, and our primary assembly and test subcontractors are located inthe Pacific Rim region. In addition, many of our customers are located outsideof the United States, primarily in Asia, which further exposes us to foreignrisks. Sales to customers located in Asia represented approximately 86% of ournet revenue for the nine months ended November 1, 2008, 84% of our net revenue infiscal 2008 and 89% of our net revenue in fiscal 2007.

 

55

----

Table ofContents

 

Weanticipate that our manufacturing, assembly, testing and sales outside of theUnited States will continue to account for a substantial portion of ouroperations and revenue in future periods. Accordingly, we are subject to risksassociated with international operations, including:

 

·                  difficulties in obtaining domestic and foreign export,import and other governmental approvals, permits and licenses;

 

·                  compliance with foreign laws, and laws and practices thatfavor local companies;

 

·                  difficulties in staffing and managing foreign operations;

 

·                  trade restrictions or higher tariffs;

 

·                  transportation delays;

 

·                  difficulties of managing distributors, especially because weexpect to continue to increase our sales through international distributors;

 

·                  withholding tax obligations on revenues that we may not beable to offset fully against our U.S. tax obligations, including the furtherrisk that foreign tax authorities may increase tax rates, which could result inincreased tax withholdings and penalties;

 

·                  less effective protection of intellectual property than is affordedto us in the United States or other developed countries;

 

·                  political and economic instability, including wars,terrorism, other hostilities and political unrest, boycotts, curtailment oftrade and other business restrictions; and

 

·                  inadequate local infrastructure.

 

Moreover,the international nature of our business subjects us to risk associated withthe fluctuation of the U.S. dollar versus foreign currencies. Decreases in thevalue of the U.S. dollar versus currencies in jurisdictions where we have largefixed costs will increase the cost of such operations, which could harm ourresults of operations. For example, we have large fixed costs in Israel, whichbecome relatively greater if the U.S. dollar declines in value versus theIsraeli shekel. On January 27, 2007, the U.S. dollar - Israeli shekelexchange ratio was 4.25, but on November 1, 2008, this exchange ratio hadfallen to 3.77. On the other hand, because substantially all of our sales todate have been denominated in U.S. dollars, increases in the value of the U.S.dollar will increase the price of our products so that they become relativelymore expensive to customers in the local currency of a particular country,potentially leading to a reduction in sales and profitability for us in thatcountry. A portion of our international revenue may be denominated in foreigncurrencies in the future, which will subject us to risks associated withfluctuations in exchange rates for those foreign currencies.

 

***The average selling prices of products in ourmarkets have historically decreased rapidly and will likely do so in thefuture, which could harm our revenues and profit margin.***

 

The productswe develop and sell are used for high volume applications. As a result, theprices of those products have historically decreased rapidly. We may not beable to maintain or improve the gross margins and our gross profits andfinancial results will suffer if we are unable to offset any reductions in ouraverage selling prices by increasing our efficiency through increasing salesvolumes, reducing our costs, or developing new or enhanced products on a timelybasis with higher selling prices or profit margin.

 

Additionally,because we do not operate our own manufacturing, assembly or testingfacilities, we may not be able to reduce our costs as rapidly as companies thatoperate their own facilities, and our costs may even increase, which could alsoreduce our margins. In the past, we have reduced the average selling prices ofour products in anticipation of future competitive pricing pressures, newproduct introductions by us or our competitors and other factors. We expectthat we will have to do so again in the future.

 

56

----

Table ofContents

 

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

 

The salescycle for many of our products is long and requires us to invest significantresources with each potential customer without any assurance of sales to thatcustomer. Our sales cycle typically begins with an extended evaluation and testperiod, also known as qualification, during which our products undergo rigorousreliability testing by our customers.

 

Qualificationis typically followed by an extended development period by our customers and anadditional three to nine month period before a customer commences volumeproduction of equipment incorporating our products. This lengthy sales cyclecreates the risk that our customers will decide to cancel or change productplans for products incorporating our integrated circuits. During our salescycle, our engineers assist customers in implementing our products into thecustomers’ products. We incur significant research and development, selling andmarketing, general and administrative expenses as part of this process, andthis process may never generate related revenues. We derive revenue from thisprocess only if our design is selected. Once a customer selects a particularintegrated circuit for use in its storage product, the customer generally usessolely that integrated circuit for a full generation of its product. Therefore,if we do not achieve a design win for a product, we will be unable to sell ourintegrated circuit to a customer until that customer develops a new product ora new generation of its product. Even if we achieve a design win with acustomer, the customer may not ultimately ship products incorporating ourproducts or may cancel orders after we have achieved a sale. In addition, wewill have to begin the qualification process again when a customer develops anew generation of a product for which we were the successful supplierfor the prior generation.

 

Our typicalcustomer contract does not obligate the customer to any minimum purchasecommitment. We may build inventory in anticipation of receiving customerorders, but if such customer demand does not develop as we anticipate, it maybecome necessary for us to write-off such inventory. Also, during the finalproduction of a mature product, our customers typically exhaust their existinginventory of our integrated circuits. Consequently, orders for our products maydecline in those circumstances, even if our products are incorporated into bothour customers’ mature and replacement products. A delay in a customer’stransition to commercial production of a replacement product may cause thecustomer to lose sales, which would delay our ability to recover the lost salesfrom the discontinued mature product. In addition, customers may defer ordersin anticipation 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 futuresuccess will depend on our ability to anticipate and adapt to changes intechnology and industry standards and our customers’ changing demands. We sellproducts in markets that are characterized by rapid technological change,evolving industry 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 enhance existingproducts for the markets we serve and to introduce and promote those productssuccessfully.

 

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

 

We believeone of our key competitive advantages results from our collection ofproprietary technologies that we have developed since our inception. If we failto protect these intellectual property rights, competitors could sell productsbased on technology that we have developed that could harm our competitiveposition and decrease our revenues. We believe that the protection of ourintellectual property rights is and will continue to be important to thesuccess of our business. We rely on a combination of patent, copyright,trademark and trade secret laws, as well as nondisclosure agreements and othermethods, 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. andforeign patents andhave a number of pending U.S. and foreign patent applications. However, a patent may not be issued asa result of any applications or, if issued, claims allowed may not besufficiently broad to protect our technology. In addition, it is possible thatexisting or future patents 

 

57

----

Table ofContents

 

may be challenged, invalidated or circumvented. Despite ourefforts, unauthorized parties may attempt to copy or otherwise obtain and useour products 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 protect our technology, our competitors may beable 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.***

 

Litigationinvolving patents and other intellectual property is widespread in thehigh-technology industry and is particularly prevalent in the integratedcircuit industry, where a number of companies and other entities aggressivelybring numerous infringement claims to assert their patent portfolios. From timeto time our subsidiaries and customers receive, and may continue to receive inthe future, notices that allege claims of infringement, misappropriation ormisuse of the intellectual property rights of third parties. For example, inrecent years, multiple claims have been made against our subsidiaries and ourcustomers related to standards-based technologies such as wireless local areanetworking. In addition, we have certain patent licenses with third partiesthat are up for renewal in calendar year 2009, and if we cannot successfullyrenew these licenses, our subsidiaries and customers could face claims ofinfringement. These claims could result in litigation and/or claims forindemnification, which, in turn, could subject us to significant liability fordamages, attorneys fees and costs. Any potential intellectual propertylitigation also could force us to do one or more of the following:

 

·                  stop selling, offering for sale, making, having made orexporting products or using technology that contains the allegedly infringingintellectual property;

 

·                  limit or restrict the type of work that employees involvedin such litigation may perform for us;

 

·                  pay substantial damages and/or license fees and/or royaltiesto the party claiming infringement that could adversely impact our liquidity oroperating results;

 

·                  attempt to obtain or renew licenses to the relevantintellectual property, which licenses may not be available on reasonable termsor at all; and

 

·                  attempt to redesign those products that contain theallegedly infringing intellectual property.

 

For example,three of our subsidiaries filed an action in Texas against Australia’sCommonwealth Scientific and Industrial Research Organisation (“CSIRO”) seekinga declaratory judgment that CSIRO’s patent is invalid and unenforceable andthat our subsidiary does not infringe the CSIRO patent.  Furthermore, oneof our subsidiaries is a named defendant in a patent infringement lawsuit, alsoin Texas, filed by Wi-Lan, a Canadian company, which likewise alleges that itsasserted patents are infringed.  We believe that our subsidiaries do notinfringe any of the asserted Fujitsu, CSIRO or Wi-Lan patents, and we willvigorously defend ourselves in these matters.

 

We and/orour subsidiaries are also parties to other claims and litigation proceedingsarising in the normal course of business. The impact on us as a result of suchclaims and litigation cannot currently be ascertained. Any litigation,regardless of the outcome, is time-consuming and expensive to resolve and candivert management time and attention. There can be no assurance that thesematters will be resolved 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 ourcontracts require our subsidiaries to indemnify customers under certaincircumstances for various costs and damages of intellectual propertyinfringement. This practice may subject our subsidiaries to significantindemnification claims by our customers or others for the payment of legalexpenses and damages should a court find infringement. In the past, oursubsidiaries have received notice from customers informing them that they havereceived allegations from certain patent holders that the inclusion of ourchipsets into our customer’s products requires the payment of patent licensefees. We cannot assure you that such claims will not be pursued or that theseclaims, if pursued, would not harm our business.  For example, customershave requested our subsidiaries to indemnify them in connection with a patentinfringement lawsuits filed in Texas by CSIRO. Similarly, certain customershave asked one of our subsidiaries to indemnify them in connection with patentinfringement lawsuits filed in Texas by Wi-Lan.

 

58

----

Table ofContents

 

***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 areorganized under the laws of Bermuda. As a result, it may not be possible forour shareholders to effect service of process within the United States upon us,or to enforce against us in United States courts judgments based on the civilliability provisions of the securities laws of the United States. Most of ourexecutive officers and directors are residents of the United States. However,there is significant doubt as to whether the courts of Bermuda would recognizeor enforce judgments of United States courts obtained against us or ourdirectors or officers based on the civil liability provisions of the securitieslaws of the United States or any state or hear actions brought in Bermudaagainst us or those persons based on those laws. The United States and Bermudado not currently 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 ofactual fraud or dishonesty.

 

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

 

Undercurrent Bermuda law, we are not subject to tax on our income and capital gains.We have obtained from the Minister of Finance of Bermuda under the ExemptUndertakings Tax Protection Act 1966, as amended, an undertaking that, in theevent that Bermuda enacts any legislation imposing tax computed on income andcapital 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 EconomicDevelopment Board of Singapore granted Pioneer Status to our wholly-ownedsubsidiary in Singapore in July 1999. Initially, this tax exemption was toexpire after 10 years,but the Economic Development Board in June 2006 agreed to extend the termto 15 years.As a result, 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 governmenthas granted Approved Enterprise Status to two of our wholly-owned subsidiariesin Israel, 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 fiscal2007, our Switzerland subsidiary received from both the Swiss FederalDepartment of Economy and the Vaud Cantonal Tax Administration a ten-year taxholiday on a designand research 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 affect our financial condition and results of operations.

 

59

----

Table ofContents

 

***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-lawscontain change in corporate control provisions, which include:

 

·                  authorizing the issuance of preferred stock withoutshareholder approval;

 

·                  providing for a classified board of directors withstaggered, three-year terms; and

 

·                  requiring a vote of two-thirds of the outstanding shares toapprove any change of corporate control.

 

Thesechanges in corporate control provisions could make it more difficult for a thirdparty to acquireus, even if doing so would be a benefit to our shareholders.

 

**Item 2. *Unregistered Sales of Equity Securities and Use ofProceeds***

 

None.

 

**Item 3. *Defaults Upon Senior Securities***

 

None.

 

**Item 4. *Submissionof Matters to a Vote of SecurityHolders***

 

None.

 

**Item 5. *OtherInformation***

 

None.

 

**Item 6. *Exhibits***

 

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

 
| 10.1  |   | Form of  Indemnification Agreement between the Company and its Directors and Executive  Officers, is incorporated herein by reference to Exhibit 10.1 of our  Current Report on Form 8-K as filed with the SEC on October 10,  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.                                                                            |

 

----

*                 In accordancewith Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 33-8238and 34-47986, Final Rule: Management’s Reports on Internal Control OverFinancial Reporting and Certification of Disclosure in Exchange Act PeriodicReports, the certifications furnished in Exhibits 32.1 and 32.2 hereto aredeemed to accompany this Form 10-Q and will not be deemed “filed” forpurposes of Section 18 of the Exchange Act. Such certifications will notbe deemed to be incorporated by reference into any filings under the SecuritiesAct or the Exchange Act, except to the extent that the registrant specificallyincorporates it by reference.

 

60

----

Table ofContents

 

**SIGNATURES**

 

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

 

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

 

61

----

Table ofContents

 

**EXHIBIT INDEX**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                          |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                     |
| 10.1                |       | Form of  Indemnification Agreement between the Company and its Directors and Executive  Officers, is incorporated herein by reference to Exhibit 10.1 of our  Current Report on Form 8-K as filed with the SEC on October 10,  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.                                                                             |
|                |       |                                                                                                                                                                                                                                                     |

 

----

*                 Inaccordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 33-8238and 34-47986, Final Rule: Management’s Reports on Internal Control OverFinancial Reporting and Certification of Disclosure in Exchange Act PeriodicReports, the certifications furnished in Exhibits 32.1 and 32.2 hereto aredeemed to accompany this Form 10-Q and will not be deemed “filed” forpurposes of Section 18 of the Exchange Act. Such certifications will notbe deemed to be incorporated by reference into any filings under the SecuritiesAct or the Exchange Act, except to the extent that the registrant specificallyincorporates it by reference.

 

62

----