10-K 1 agere_10k.htm ANNUAL REPORT

As filed with the Securities and Exchange Commission on December 1, 2006

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
________________

Form 10-K
________________

[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  For the fiscal year ended September 30, 2006
 
[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  For the transition period from____________to____________.

Commission File Number 001-16397

Agere Systems Inc.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of incorporation or organization)		 22-3746606
(I.R.S. Employer Identification No.)
 
1110 American Parkway N.E.
Allentown, Pennsylvania		 18109
(Address of principal executive offices) (Zip Code)
 
Registrant’s telephone number, including area code: 610-712-1000
 
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, $.01 par value		 Name of Each Exchange on Which Registered
New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None.

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [X] No [  ]

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [  ] No [X]

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

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act).

Large Accelerated Filer [X]                    Accelerated Filer [  ]                    Non-Accelerated Filer [  ]

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

     The aggregate market value of voting common equity held by non-affiliates of the registrant as of March 31, 2006 was approximately $2.5 billion, based on the reported last sale price on the New York Stock Exchange of such equity on such date.

     As of November 24, 2006, 167,675,327 shares of common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

     Certain information required by Part III of this report is incorporated by reference from the registrant’s proxy statement to be filed pursuant to Regulation 14A with respect to the registrant’s 2007 annual meeting of stockholders.

Agere Systems Inc.
Form 10-K
For the Year Ended September 30, 2006

PART I                
Item 1.  Business  1
Item 1A.  Risk Factors  9
Item 1B.  Unresolved Staff Comments  14
Item 2.  Properties  14
Item 3.  Legal Proceedings  14
Item 4.  Submission of Matters to a Vote of Security Holders  14
  Executive Officers of the Registrant  15
 
PART II     
Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases   
       of Equity Securities  16
Item 6.  Selected Financial Data  17
Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations  18
Item 7A.  Quantitative and Qualitative Disclosures About Market Risk  33
Item 8.  Financial Statements and Supplementary Data  35
Item 9.  Change in and Disagreements with Accountants on Accounting and Financial Disclosure  70
Item 9A.  Controls and Procedures  70
Item 9B.  Other Information  71
 
PART III     
Item 10.  Directors and Executive Officers of the Registrant  72
Item 11.  Executive Compensation  72
Item 12.  Security Ownership of Certain Beneficial Owners and Management and   
       Related Stockholder Matters  72
Item 13.  Certain Relationships and Related Transactions  72
Item 14.  Principal Accountant Fees and Services  72
 
PART IV     
Item 15.  Exhibits, Financial Statement Schedules  73

FORWARD-LOOKING STATEMENTS

     Certain statements in this Form 10-K are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. The words “estimate,” “plan,” “intend,” “expect,” “anticipate,” “believe” and similar expressions are intended to identify forward-looking statements. These forward-looking statements are found at various places throughout this report and in the documents incorporated herein by reference. Agere disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Although we believe that our expectations are based on reasonable assumptions, we can give no assurance that our goals will be achieved. Important factors that could cause our actual results to differ from estimates or projections contained in the forward-looking statements are described in Item 1A.

PART I

Item 1.    Business.

General

     We are a leading provider of integrated circuit solutions for a variety of computing and communications applications. Some of our solutions include related software and reference designs. Our solutions are used in products such as hard disk drives, mobile phones, high-speed communications systems and personal computers. We also license our intellectual property to others.

     Integrated circuits, or chips, are made using semiconductor wafers imprinted with a network of electronic components. They are designed to perform various functions such as processing electronic signals, controlling electronic system functions and processing and storing data. Reference designs are complete specifications for products that a customer can use to build an end product, including components, board layouts and software. By using one of our reference designs, a customer can reduce the amount of product design it must perform and the amount of time required to introduce a new product into the market.

     We have three operating segments: Storage, Mobility and Networking. We have two reportable segments for financial reporting purposes, Consumer and Networking. The Consumer segment includes the Storage and Mobility operating segments. You can find a description of each of our operating segments below. We also have an operations group that manages our manufacturing and supply chain activities. Prior to January 1, 2006, we had four operating segments: Storage, Mobility, Enterprise and Networking and Telecommunications. On January 1, 2006, we combined the Enterprise and Networking and Telecommunications groups into the Networking group, and moved our satellite digital radio business to the Mobility group. We have restated our segment financial information for periods prior to that date to conform to our new reporting structure.

     In fiscal 2006 and fiscal 2005, 17% of our revenue was generated in the United States and 83% was generated outside the United States. See “We conduct a significant amount of our sales activity and manufacturing efforts outside the United States, which subjects us to additional business risks and may adversely affect our results of operations” in Item 1A. See Item 8 for financial information about our reportable segments and geographic financial information.

     We have research and development and manufacturing activities in the United States, Australia, Austria, Canada, China, Germany, India, Ireland, Israel, Japan, Korea, Singapore, Spain, Taiwan, Thailand and the United Kingdom. We were incorporated in Delaware in 2000 as part of the plan of Lucent Technologies Inc. to spin off its microelectronics business to its stockholders. Lucent completed our spin-off in June 2002.

     We maintain an Internet website at http://www.agere.com. We make available free of charge on our website our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. Information on our website is not incorporated by reference into this report.

     In March 2006, our Chief Executive Officer submitted to the New York Stock Exchange an annual certification stating that he was not aware of any violations of the New York Stock Exchange’s corporate governance listing standards.

Consumer Segment

Storage

     We sell integrated circuits for hard disk drives, which are used to store data in personal computers, corporate network servers and consumer electronics products such as digital video recorders, digital media players, mobile phones and game consoles. A disk drive contains physical media, one or more “platters” that store data, a motor that spins the media, drive heads that read data from and write data to the media and electronics that process the data and control the disk drive.

     Our TrueStore® family of storage electronics includes read channels, pre-amplifiers, motor controllers, disk controllers and firmware, as well as systems-on-a-chip. These are the critical chips required to read, write and protect data.

     Read channels convert analog signals that are generated by reading the stored data on the hard disk into digital signals. Analog refers to a transmission technique employing a continuous signal that varies in amplitude, frequency or phase of the transmission. Digital refers to a method of transmitting, storing and processing data that uses distinct electronic or optical pulses to represent the binary digits 0 and 1. We also sell pre-amplifiers, or preamps, which are used to amplify the initial signal from the hard disk so the signal can be processed by the read channel. Together, these components are critical to determining the overall performance of a hard disk drive.

     Our disk controllers are used to control signal processing and communications functions within the disk drive. We also sell motor controllers, which are used to control functions related to the spinning of the physical storage media.

     A storage system-on-a-chip is an integrated circuit that combines the functionality of a read channel and a disk controller in a small, high-performance, low-power and cost-effective package.

     Consumers are increasingly in need of more storage to manage their digital content – digital music, photographs and video. As disk drives reach a capacity ceiling using current horizontal recording techniques, which record data in one layer on the surface of the media, new techniques and electronics are being developed to increase the capacity of hard disks. One method to increase storage capacities is to use perpendicular recording, which stores data in multiple layers on the media. Over the last two fiscal years, we have introduced a number of storage integrated circuits that support both horizontal and perpendicular recording, with what we believe to be attractive performance characteristics compared to competing solutions.

Mobility

     We sell integrated circuits for use in mobile phones and other wireless data and voice communications products. We offer integrated wireless solutions that include:

  • Digital baseband processors for speech compression and encoding and transmission of voice and data;

  • Conversion signal processors to convert signals between frequencies used in digital signal processors and frequencies used for radio transmission; and

  • Software that controls the communication process.

     Several different standards exist for mobile phones. The most prevalent standards are commonly referred to as second generation, or “2G”, standards. Carriers are deploying advancements to their 2G networks that provide customers with higher data rates, thereby enabling services like Internet surfing and e-mail. Some carriers are also beginning to deploy networks based on third generation, or “3G”, standards. These networks offer even higher data throughput, enabling revenue-generating applications, like streaming video, that require higher data rates than 2G networks can provide.

     Our mobile phone products support a number of protocols, including General Packet Radio Service, or GPRS, which operates on the second generation Global System for Mobile Communications, or GSM, standard. GPRS provides enhanced data transmission capabilities for GSM mobile phones. We also provide integrated

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circuits for an extension of GPRS called EDGE, that allows data transmission at three times the speed of GPRS solutions. GPRS and EDGE are often referred to as “2.5G” solutions because of the enhanced data rates they provide. Over time, we are seeking to add more features to our solutions and to bring advanced features to lower priced solutions. For example, in fiscal 2006, we introduced our TrueNTRYTM X125 EDGE-based solution that is designed to allow mobile phone manufacturers to produce entry level phones with high-quality music playback capabilities.

     We also offer products that support the wideband Code Division Multiple Access, or W-CDMA, standard. W-CDMA is a third generation, or “3G”, standard. Because it is costly for a carrier to replace its network infrastructure to support 3G service, we expect that many carriers will choose to replace their infrastructure only in high usage areas, and to retain 2.5G infrastructure in lower use areas. To address this, we are developing a 3G solution which is designed to support both W-CDMA and EDGE and to enable consumers to experience 3G data rates in a 3G service area, while providing 2.5G data rates outside of 3G coverage.

     In fiscal 2006, we began sampling our X455 HSDPA solution that supports the High-Speed Downlink Packet Access, or HSDPA, protocol. HSDPA is an extension of W-CDMA and supports download speeds up to 10 times faster than W-CDMA. Our X455 HSDPA solution is designed to allow mobile phone manufacturers to produce mass market HSDPA feature phones and Smartphones with attractive performance and price characteristics.

     We also sell custom-designed integrated circuits for use in satellite digital radio receivers. Traditional radios receive signals from ground-based transmitters, while satellite radios receive signals transmitted from satellites orbiting the Earth and from ground-based repeaters. Our integrated circuits process the signals received from satellites and ground-based repeaters.

Networking Segment

TrueONETM Solutions

     In fiscal 2006, we adopted a new strategy of providing complementary solutions that allow network service providers to deliver a variety of highly reliable communications services to homes, businesses and mobile users over Internet Protocol, or IP, networks. We call these solutions our TrueONE portfolio. IP networks are packet based. In an IP network, packets of data that are part of the same telephone conversation or video program can be routed over different paths. Traditional telephone networks are circuit-based where all data packets follow the same dedicated path or circuit. Historically, the dedicated paths in circuit-based networks have provided greater reliability than packet-based networks, although at the cost of flexibility.

     Our solutions are designed to allow IP networks to provide reliability similar to that of circuit-based networks and incorporate quality of service features that enable more critical data to receive priority over less critical data. For example, packets containing data about a television picture, where a delayed packet can mean a noticeable flaw in the picture, can be delivered before packets containing web-page data being downloaded to a personal computer, where a slight delay is less likely to be noticed.

     Our TrueONE portfolio includes solutions for carrier-managed gateways that would be used in residential, small office, home office and small-to-medium business applications. The portfolio also includes solutions for multi-service wireline and wireless access systems found in carrier networks. Multi-service systems can handle traffic such as data and video in addition to voice. Our TrueONE solutions include chips such as our network processors, gigabit Ethernet chips, digital signal processors and network-attached storage chips, as well as software and reference designs.

     Network Processors

     Network processors are typically used in switching and routing systems to classify, prioritize and forward packets as they move through a carrier’s network. We offer network processors with the ability to handle a range of data throughputs. For example, our PayloadPlus®APP300 family provides a lower cost solution intended for systems located between the customer’s premises and the carrier’s local central office, where data throughput demands are lower, but the need to prioritize the packets is still critical for all services to be delivered successfully. Our PayloadPlus APP600 is a higher throughput solution designed for use in systems that are closer to the core of a carrier’s IP network, where data throughput demands are higher.

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     Gigabit Ethernet Interfaces & Switches

     Our gigabit Ethernet solutions target networking devices in residential, business, enterprise and service provider networks. Our gigabit Ethernet solutions include physical-layer interfaces, which provide the electrical interface to Ethernet cables, and switching chips, which provide higher-layer switching and routing of Ethernet packets.

     Digital Signal Processors

     Digital signal processors, or DSPs, transform analog signals into digitally-encoded bitstreams and perform advanced algorithms on these bitstreams. Our DSPs perform audio, video and speech signal processing, compression and transcoding and can be used in applications including Voice-over-IP, or VoIP, telephones, residential and business gateways, and wireline and wireless access network equipment.

     Network-Attached Storage

     Our network attached storage chips can be used in both residential and small business applications. A network attached storage device is typically a hard disk drive or an array of hard disk drives that is connected directly to a network. In home applications, network attached storage chips could be used in a media server that streams multimedia content through a home network to end-user display devices such as televisions, computers and audio systems. In a business context, our network attached storage chips can be used in high capacity storage devices that are connected directly to a network. For either of these applications, the network attached storage device can provide multiple levels of backup capability known as Redundant Array of Independent Disks, or RAID, for any application requiring some level of storage resiliency.

Other Telecommunications Products

     In addition to the TrueONE products described above, we also offer chips with supporting software that are designed for equipment used in metropolitan and wide area backbone telecommunications networks. That equipment can be used in both wireline and wireless networks. Our offerings for use in these areas include some of our TrueONE solutions as well as the products described below.

     Broadband Aggregation Devices. Broadband is a general term that refers to high-speed data transmission. Our broadband access integrated circuits, or mappers, support data transport between central offices and enterprise sites by aggregation and termination. Aggregation refers to the combining of many low-speed, or tributary, data signals from enterprises into higher speed, or trunk, data signals for transmission to a central office. Termination refers to the separation of trunk data signals into lower-speed, tributary data signals.

     Our products support data transport for T-carrier data transport in North America. T-carrier is a digital transmission service from a common carrier. We support similar services worldwide. These services are referred to as J-carrier in Japan and E-carrier in Europe. T-carrier services such as T1 and T3 lines are widely used to create point-to-point networks for use by enterprises. T1 and T3 lines refer to different levels of T-carrier service that transmit data at 1.544 megabits per second and 44.736 megabits per second, respectively. A megabit is a unit of measurement for data and is equal to approximately one million bits.

     SONET/SDH Network Devices. Synchronous optical networks, which are typically referred to as SONET, and synchronous digital hierarchy standard networks, or SDH, carry data, voice and video traffic through a network by combining lines carrying traffic at slower speeds with lines carrying traffic at higher speeds. This process is known as multiplexing, and involves directing traffic from the individual lines into designated time slots in the higher speed lines, and directing those lines into still higher speed lines. The SONET/SDH equipment that handles the directing of traffic into slower speed and faster speed lines is the add-drop multiplexer. Add-drop multiplexers handle the addition and removal of traffic from a SONET/SDH communication transmission. We offer single-chip integrated circuit solutions, or framers, for add-drop multiplexing of data and voice traffic. In addition, our framers are used in high-speed routers within optical networks. A router is an interface, or link, between two networks.

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     Wireless Infrastructure Devices. We sell integrated circuit solutions used in wireless infrastructure products, which are primarily cellular base stations and cellular base transceiver stations. Our solutions include digital signal processors for speech compression and encoding and transmission of voice and data and networking products that connect cellular equipment to a wired communications network. Some of these products are standard offerings that are sold to multiple customers and some are customized for a particular customer. The customized offerings may combine our intellectual property with intellectual property from our customer.

     Other Networking Products

     We also sell integrated circuits that are custom developed for our customers. These integrated circuits incorporate our intellectual property or combine our intellectual property with the intellectual property of our customers or other third parties to create a customized solution for these customers. For some customers, we design and manufacture the integrated circuit while the key intellectual property belongs solely to our customers.

     We believe that our systems-level knowledge and integrated circuit design methodologies allow us to turn our customers’ design concepts into a systems solution quickly and effectively. Our intellectual property gives our customers the flexibility to customize their products to meet their individual cost and performance objectives.

Client Access Products

     We sell high speed input/output products primarily to manufacturers of computers, peripheral equipment and communications equipment. Input/output refers to the transfer of data within and between computers; peripheral equipment, such as printers, scanners and digital cameras; and data networks. Our products support established connectivity and transmission standards known as Universal Serial Bus, or USB, and IEEE-1394.

     In addition, we sell integrated circuits and associated software for modem products, primarily to leading manufacturers of personal computers, modems and other electronic equipment. We also sell integrated circuits for use in computer printing and imaging applications.

Customers, Sales and Distribution

     Customers

     Our customers consist primarily of manufacturers of hard disk drives, mobile phones, communications equipment and computers. Our top ten end customers in fiscal 2006 were:

Amoi Mobile Co., Ltd  Nokia Corporation 
Apple Computer, Inc.  Nortel Networks Corporation 
Hewlett-Packard Company  Samsung Electronics Co., Ltd. 
Lucent Technologies Inc.  Seagate Technology, Inc. 
Maxtor Corporation  SIRIUS Satellite Radio Inc. 

     Our sales are concentrated in a limited number of customers. In fiscal 2006, our sales to Seagate, which exclude sales to Maxtor prior to its acquisition by Seagate, represented 24% of our total revenue and our sales to Samsung represented 18% of our total revenue. Our top 20 end customers in fiscal 2006, based on revenue, accounted for approximately 82% of our revenue and our top 10 end customers in fiscal 2006, based on revenue, accounted for approximately 73% of our revenue. These amounts include both product revenue and revenue from the licensing of intellectual property.

     Sales and Distribution

     As of September 30, 2006, we had approximately 600 employees who performed sales and marketing activities for our business units. We sell our products globally primarily through our direct sales force and through manufacturers’ representatives. We also sell our products through distributors, which sales in fiscal 2006 represented approximately six percent of our revenue.

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     We aim to have our customers incorporate our products into the end products they design and develop. Typically, manufacturers of computer and communications equipment conduct a competitive process to select suppliers for the parts that they will include in their end products. Our sales, marketing and technical personnel work with customers to demonstrate our products’ ability to satisfy any specific requirements. We call winning the competitive process a design win. We generally do not, however, enter into written agreements with our customers after achieving a design win. A customer could terminate its relationship with us or discontinue developing the product. Most of our revenue originates from sales that are the result of design wins.

     After we achieve a design win and negotiate the terms of the sale, we deliver our products to our end customers in a number of ways. Our end customers typically have us ship our products to their facilities directly. In some instances, however, our customer may use a contract manufacturer to manufacture and assemble its end product. When our product is being incorporated into an end product being manufactured by a contract manufacturer, we often ship our product directly to the contract manufacturer and receive payment from that contract manufacturer. To determine our sales to particular customers, however, we recognize this type of transaction as a sale to, and revenue from, the end customer. Sometimes a customer for whom we have achieved a design win will have us sell that product to a distributor or trading company from whom the customer then buys our product. We recognize these transactions as indirect sales.

Manufacturing

     As of September 30, 2006, we had joint venture wafer fabrication operations in Singapore and assembly and test operations in Singapore and Thailand. Our three assembly and test sites contained a total of approximately 600,000 square feet of space dedicated to manufacturing. As of September 30, 2006, we had approximately 2,500 employees in manufacturing and other functions involved in delivering products to customers.

     We have a joint venture, called Silicon Manufacturing Partners, with Chartered Semiconductor Manufacturing Ltd., that operates a 54,000 square foot wafer fabrication facility in Singapore. We are entitled to 51% of the managed wafer capacity of the facility. The joint venture agreement may be terminated by either party upon two years’ written notice. The agreement may also be terminated for material breach, bankruptcy or insolvency of either party.

     Because of the high cost of implementing new manufacturing processes, we use foundry partners, rather than internal manufacturing capabilities, to produce integrated circuits using newer processes. Our primary foundry partners are Chartered Semiconductor Manufacturing, Ltd. and Taiwan Semiconductor Manufacturing Corporation. We believe that our internal assembly and test operations provide us with a competitive advantage and intend to continue operating those facilities as long as we believe doing so is to our advantage.

Competition

     We sell products designed for communications, consumer electronics and computer equipment manufacturers. Our customers’ products are sold in various market segments, many of which are intensely competitive and characterized by:

  • Rapid technological change;

  • Evolving standards;

  • Short product life cycles; and

  • Price erosion.

     There are many competitors for our products. We expect the intensity of competition in the market segments we serve to continue to increase in the future as existing competitors enhance and expand their product offerings and as our customers attempt to limit the number of suppliers from which they buy. Increased competition may result in price reductions, reduced revenues and loss of market share. We cannot assure you that we will be able to compete successfully against existing or future competitors. Some of our customers and companies with which we have strategic relationships also are, or may be in the future, competitors of ours.

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     Our primary competitors are listed in the table below.

Storage   Mobility   Networking  
Infineon Technologies AG  Broadcom Corp.  Applied Micro Circuits Corp. 
Marvell Technology Group Ltd.  Freescale Semiconductor, Inc.  Broadcom Corp. 
STMicroelectronics N.V.  NXP Semiconductors  Conexant Systems 
Texas Instruments Incorporated  QUALCOMM Inc.  Marvell Technology Group Ltd. 
  Telefonaktiebolaget LM Ericsson  PMC-Sierra, Inc. 
  Texas Instruments Incorporated  Silicon Laboratories Inc. 
    Vitesse Semiconductor Corporation 

     Our competitive position varies depending on the market and product areas within these markets. For example, we are one of the top three suppliers, based on revenue, in a number of our product areas, including integrated circuits for hard disks, integrated circuits for analog modems, digital signal processors for wireless infrastructure and SONET/SDH integrated circuits. Although we are not one of the three largest overall suppliers of baseband integrated circuits for mobile phones, we are a leading suppler to two mobile phone customers for the types of baseband integrated circuits we supply. Our competitive position is not as strong in the gigabit Ethernet product area. While improving our position in many of the product areas where our position is less well-established is an objective of ours, we cannot assure you that we will be able to accomplish this goal. Further, because we expect to face increasing competitive pressures from both current and future competitors in the product areas we serve, we may not be able to maintain our position in the product areas in which we are currently a leader.

     We believe competition in our industry is based on the following factors:

  • Performance and reliability;

  • Price;

  • Compatibility of products with other products and communications standards used in communications networks;

  • Product size;

  • Ability to offer integrated solutions;

  • Time to market;

  • Breadth of product line;

  • Customer support;

  • Logistics and planning systems; and

  • Quality of manufacturing processes.

     While we believe we are competitive on the basis of all the factors listed above, we believe some of our competitors compete more favorably on the basis of price and on delivering products to market more quickly. However, we feel we are particularly strong in offering integrated solutions, our broad product lines, our customer support and our logistics and planning systems. In addition, existing suppliers tend to have an advantage when competing for designs, which can make it difficult for us to win designs at new customers, even if we compete favorably on the factors identified above.

Research and Development

     As of September 30, 2006, our product development team consisted of approximately 1,900 employees and contractors. Our research and development expenditures were $445 million, $462 million and $496 million for fiscal 2006, 2005 and 2004, respectively. We anticipate that we will continue to make significant research and development expenditures to maintain our competitive position with a continuing flow of innovative products and technology.

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Patents, Trademarks And Other Intellectual Property

     We own or have rights to a number of patents, trademarks, copyrights, trade secrets and other intellectual property directly related to and important to our business. As of September 30, 2006, we had approximately 5,850 U.S. patents and patent applications and their corresponding foreign patents and patent applications. These patents include patents related to the following technologies:

  • Integrated circuit and optoelectronic manufacturing processes;

  • Modems, digital signal processors, wireless communications, network processors and communication protocols; and

  • Optoelectronic products including lasers, optical modulators, optical receivers and optical amplifiers.

     The patents described above include patents of all ages ranging from pending applications, which will have a duration of 20 years from their filing dates, through patents soon to expire.

     We indemnify our customers for some of the costs and damages of patent infringement in circumstances where our product is the primary factor creating the customer’s infringement exposure. We generally exclude coverage where infringement arises out of the combination of our products with products of others.

     We protect our products and processes by asserting our intellectual property rights where appropriate and prudent. We also obtain licenses to patents, copyrights and other intellectual property rights used in connection with our business when practicable and appropriate.

Government Regulation

     Many of our customers’ end products that include our products are subject to extensive telecommunications-based regulation by the United States and foreign laws and international treaties. We must design and manufacture our products to ensure that our customers are able to satisfy a variety of regulatory requirements and protocols established to, among other things, avoid interference among users of radio frequencies and to permit interconnection of equipment.

     Each country has different regulations and a different regulatory process. In order for our customers’ products to be used in some jurisdictions, regulatory approval and, in some cases, specific country compliance testing may be required. The delays inherent in this regulatory approval process may force our customers to reschedule, postpone or cancel the incorporation of our products into their products, which may result in significant reductions in our sales. The failure to comply with current or future regulations or changes in the interpretation of existing regulations in a particular country could result in the suspension or cessation of sales in that country by us or our customers. It also may require us to incur substantial costs to modify our products to aid our customers in complying with the regulations of that country. Changes in our regulatory environment that generally result from our expansion into new areas or changes in current regulations could increase the cost of manufacturing our products because we must continually modify our products to respond to these changes.

     In addition, domestic and international authorities continue to regulate the allocation and auction of the radio frequency spectrum. These regulations have a direct impact on us because many of our customers’ licensed products can be marketed only if permitted by suitable frequency allocations, auctions and regulations. The implementation of these regulations may delay our end-users in deploying their systems, which could, in turn, lead to delays in orders of our products by our customers and end users.

Employees

     As of September 30, 2006, we had approximately 5,100 full-time employees and approximately 100 contractors. Of our full-time employees, 26 were U.S. union-represented employees covered by collective bargaining agreements.

     We believe that we generally have good relationships with our employees.

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Backlog

     Our backlog, which represents the aggregate of the sales price of orders received from customers for delivery within six months, but not yet recognized as revenue, was approximately $307 million and $311 million on September 30, 2006 and September 30, 2005, respectively. The majority of these orders are fulfilled within three months. All orders, however, are subject to possible rescheduling by customers. Our customers often change their orders two or three times between initial order and delivery. Our customers’ frequent changes usually relate to quantities or delivery dates, but sometimes relate to the specifications of the products we are shipping. Although we believe that the orders included in the backlog are firm, generally orders may be cancelled by the customer without penalty. We also may elect to permit cancellation of orders without penalty where we believe it is in our interest to do so. For these reasons, we believe that our backlog at any given date may not be a reliable indicator of future revenues.

Environmental, Health and Safety Matters

     We are subject to a wide range of laws and regulations relating to protection of the environment and employee health and safety. Our manufacturing, research and development and administrative facilities undergo regular internal audits relating to environmental, health and safety requirements. Our manufacturing and larger research and development facilities also are regularly audited and certified by Lloyd’s Register Quality Assurance, an independent and accredited third party registrar, as conforming to the internationally recognized ISO 14001 standard relating to environmental management and to OHSAS 18001, the international occupational health and safety management system specification. We believe that our facilities are in substantial compliance with applicable environmental, health and safety requirements.

Item 1A.    Risk Factors

     Set forth below are some of the risks and uncertainties that, if they were to occur, could materially adversely affect our business or that could cause our actual results to differ materially from the results contemplated by the forward-looking statements contained in this report and other public statements we make.

Because our sales are concentrated on a limited number of key customers, our revenue may materially decline if one or more of our key customers do not continue to purchase our existing and new products in significant quantities.

     Our customer base is highly concentrated. In fiscal 2006, our sales to our two top customers, Seagate and Samsung, amounted to 24% of our revenue and 18% of our revenue, respectively, and our top 10 end customers accounted for approximately 73% of our revenue. If any one of our key customers were to decide to purchase significantly less from us or to terminate its relationship with us, our revenue may materially decline. Because we have a long product design and development cycle for most of our products, we may be unable to replace these customers quickly or at all. We could lose our key customers or significant sales to our key customers because of factors beyond our control, such as a significant disruption in our customers’ businesses generally or in a specific product line.

If we fail to keep pace with technological advances in our industry or if we pursue technologies that do not become commercially accepted, customers may not buy our products and our results of operations may be adversely affected.

     The demand for our products can change quickly and in ways we may not anticipate because our industry is generally characterized by:

  • rapid, and sometimes disruptive, technological developments;

  • evolving industry standards;

  • changes in customer requirements;

  • limited ability to accurately forecast future customer orders;

  • frequent new product introductions and enhancements; and

  • short product life cycles with declining prices over the life cycle of the product.

9

     If we fail to make sufficient investments in research and development programs in order to develop new and enhanced products and solutions, or if we focus on technologies that do not become widely adopted, new technologies could render our current and planned products obsolete, resulting in the need to change the focus of our research and development and product strategies and disrupting our business significantly.

The integrated circuit industry is intensely competitive, and our failure to compete effectively could result in reduced revenue.

     The market for integrated circuits is intensely competitive and subject to rapid and disruptive technological change. We expect the intensity of competition to continue to increase as existing competitors enhance and expand their product offerings and as new participants enter the market. Increased competition may result in price reductions, reduced gross margins and loss of market share. We may not be able to compete successfully against existing or future competitors, which may result in reduced revenue.

     The size and number of our competitors vary across our product areas, as do the resources we have allocated to the segments we target. Therefore, many of our competitors have greater financial, personnel, production capacity and other resources than we have in a particular market segment or overall. Competitors with greater financial resources may be able to offer lower prices, additional products or services or other incentives that we cannot match or offer. These competitors may be in a stronger position to respond quickly to new technologies and may be able to undertake more extensive marketing campaigns. They also may adopt more aggressive pricing policies and make more attractive offers to potential customers, employees and strategic partners. These competitors may also make strategic acquisitions or establish cooperative relationships among themselves or with third parties to increase their ability to gain market share.

     Further, competitors may be selling commercial quantities of products that we are sampling to our customers, that are still in the initial stages of development or that we may develop in the future. By being able to offer these products in commercial quantities before we do, our competitors can establish significant market share, acquire design wins in customer equipment programs and create a market position that we may be unable to overcome once we have completed development and testing of our product.

Our revenue and operating results may fluctuate because we derive most of our revenue from semiconductor devices and the integrated circuits industry is highly cyclical, and because of other characteristics of our business, and these fluctuations may cause our stock price to fall.

     We expect to derive most of our revenue from the sale of integrated circuits. Because the integrated circuits industry is highly cyclical, we may experience declines in our revenue that are primarily related to industry conditions and not our products. This industry has experienced significant downturns, often in connection with, or in anticipation of, excess manufacturing capacity worldwide, maturing product cycles and declines in general economic conditions.

     We focus primarily on winning competitive selection processes to develop products for use in our customers’ equipment. These selection processes can be lengthy. After winning a product design for a customer, that customer may not begin volume production of their equipment for a period of up to two years, if at all. Due to this lengthy design and development cycle, we may experience delays from the time we begin incurring expenses until the time we generate revenue from our products. We have no assurances that our customers will ultimately market and sell their equipment or that such efforts by our customers will be successful. Thus, we may never generate any revenue from our products after incurring significant design and development expenditures.

     If we are not selected by a customer to provide the next generation of a product we already supply, we may experience significantly lower revenue later, as compared to prior periods with more revenue from earlier design wins. In addition, sales of our products for specific customer projects often begin and end abruptly, so revenue may increase rapidly and later decrease just as quickly. The relative timing of the beginning and end of our sales and design processes can make our revenues less predictable.

     Fluctuations in our revenue or operating results could cause our stock price to decline, even if our results meet expectations. Further, stock prices in our industry have recently been highly volatile for reasons that sometimes are unrelated to the performance of the companies in the industry. These broad fluctuations could adversely affect our stock price.

10

If we do not achieve adequate manufacturing utilization, yields or volumes or sufficient product reliability, our gross margins will be reduced.

     Because the manufacturing costs at our owned assembly and test facilities and at our joint venture wafer fabrication facility are relatively fixed, efficient utilization of manufacturing facilities and manufacturing yields are critical to our results of operations. If we do not experience adequate utilization of our manufacturing facilities, our results of operations may be adversely affected. In addition, from time to time, we may have to pay to reserve capacity at third-party manufacturers. If this is the case and we overestimate demand for our products, we may have to pay for capacity that we do not use, and our results of operations may be adversely affected.

     The manufacture of our products involves highly complex and precise processes, requiring production in highly controlled and clean environments. Changes in our manufacturing processes or those of our suppliers or contractors, or the inadvertent use of defective or contaminated materials, could significantly reduce our manufacturing yields and product reliability. Lower than expected manufacturing yields could delay product shipments, harm our relationship with a customer and adversely affect our results of operations.

Because we are subject to order and shipment uncertainties, any significant cancellations or deferrals could cause our revenue to decline or fluctuate.

     We generally sell products pursuant to purchase orders that customers may cancel or defer on short notice without incurring a significant penalty. Cancellations or deferrals could cause us to hold excess inventory, which could adversely affect our results of operations. If a customer cancels or defers product shipments or refuses to accept shipped products, we may incur unanticipated reductions or delays in our revenue. If a customer does not pay for our products in a timely manner, we could incur significant charges against our income, which could materially and adversely affect our results of operations.

A joint venture and third parties manufacture all of our wafers for us. If these suppliers are unable to fill our orders on a timely and reliable basis, our revenue may be adversely affected.

     The integrated circuit manufacturing industry has a history of developing new manufacturing processes. We believe that the costs associated with implementing new processes, including acquiring the necessary equipment and building appropriate facilities, are increasing with each generation of manufacturing processes. We have not wanted to make the significant financial investments necessary for new processes and rely on contract manufacturers to fabricate products using processes that we do not have at our joint venture manufacturer. To the extent we rely on joint ventures and third-party manufacturing relationships, we face the following risks:

  • that they may be unwilling to devote adequate capacity to produce our products;

  • that they may not be able to develop manufacturing methods appropriate for our products;

  • that manufacturing costs will be higher than planned;

  • that reliability of our products will decline;

  • that they may not be able to maintain continuing relationships with our suppliers; and

  • that we may have reduced control over delivery schedules and costs of our products.

     If any of these risks were to be realized, we could experience an interruption in supply or an increase in costs, which could adversely affect our results of operations.

     In the event of an increase in demand, failure to increase our manufacturing volumes or obtain capabilities from third parties may result in our not being able to meet customer demand for our products, which could hurt our relationships with our customers and result in our recording lower revenues than would be the case if we had greater manufacturing capacity.

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Because many of our current and planned products are highly complex, they may contain defects or errors that are detected only after deployment in commercial applications, and if this occurs, it could harm our reputation and result in reduced revenues or increased expenses.

     Our products are highly complex and may contain undetected defects, errors or failures. These products can only be fully tested when deployed in commercial applications and other equipment. Consequently, our customers may discover errors after the products have been deployed. The occurrence of any defects, errors or failures could result in:

  • cancellation of orders;

  • product returns, repairs or replacements;

  • diversion of our resources;

  • legal actions by our customers or our customers’ end users;

  • increased insurance costs; and

  • other losses to us or to our customers or end users.

     Any of these occurrences could also result in the loss of or delay in market acceptance of our products and loss of sales, which would harm our business and adversely affect our results of operations. We have from time to time experienced defects in our products and expect to experience defects in the future. Because the trend in our industry is moving toward even more complex products in the future, this risk will intensify over time and may result in increased expenses.

We are expanding, and may seek in the future to expand, into new areas, and if we are not successful, our results of operations may be adversely affected.

     We are currently developing products in new areas, including advanced mobile phone technologies, high-speed networking and consumer electronics. We may seek to expand into additional areas in the future. We may expand through internal development efforts, through acquisitions of companies or technologies, or a combination of these methods.

     Our efforts may not result in sales that are sufficient for us to recoup our investment, and we may experience higher costs than we anticipated. For example, we may not be able to manufacture our products at a competitive cost, may need to rely on new suppliers or may find that the development efforts are more costly or time consuming than we had anticipated. Our products may support protocols that are not widely adopted. Where we choose to develop capabilities by acquiring another company, we may not be able to integrate the other company successfully into our operations, which may mean that we have difficulty retaining employees from the acquired company or integrating its technology into our products. We may have difficulties entering markets where competitors have strong market positions.

A widespread outbreak of an illness or other health issue could negatively affect our manufacturing, assembly and test, design or other operations, making it more difficult and expensive to meet our obligations to our customers, and could result in reduced demand from our customers.

     A widespread outbreak of an illness such as avian influenza, or bird flu, or severe acute respiratory syndrome, or SARS, could adversely affect our operations as well as demand from our customers. A number of countries in the Asia/Pacific region have experienced outbreaks of bird flu and/or SARS. As a result of such an outbreak, businesses can be shut down temporarily and individuals can become ill or quarantined. We have assembly and test and back-office operations as well as our joint venture wafer fabrication facility in Singapore, assembly and test and back-office operations in Thailand and design operations in China, countries where outbreaks of bird flu and/or SARS have occurred. If our operations are curtailed because of health issues, we may need to seek alternate sources of supply for manufacturing or other services and alternate sources can be more expensive. Alternate sources may not be available or may result in delays in shipments to our customers, each of which would affect our results of operations. In addition, a curtailment of our design operations could result in delays in the development of new products. If our customers’ businesses are affected by health issues, they might delay or reduce purchases from us, which could adversely affect our results of operations.

12

We may be subject to intellectual property litigation and infringement claims, which could cause us to incur significant expenses or prevent us from selling our products. If we are unable to protect our intellectual property rights, our business and prospects may be harmed.

     Like other companies in the semiconductor industry, we are frequently involved in disputes regarding patent and other intellectual property rights. From time to time, we receive notices from third parties of potential infringement and receive claims of potential infringement when we attempt to license our intellectual property to others. Defending these claims could be costly and time consuming and would divert the attention of management and key personnel from other business issues. The complexity of the technology involved and the uncertainty of intellectual property litigation increase these risks. Claims of intellectual property infringement also might require us to enter into costly royalty or license agreements. However, we may be unable to obtain royalty or license agreements on terms acceptable to us or at all. In addition, third parties may attempt to appropriate the confidential information and proprietary technologies and processes used in our business, which we may be unable to prevent and which would harm our business and prospects.

We have relatively high gross margin on the revenue we derive from the licensing of our intellectual property, and a decline in this revenue would have a greater impact on our net income than a decline in revenue from the sale of our integrated circuits products.

     The revenue we generate from the licensing of our intellectual property has a higher gross margin compared to the revenue we generate from the sale of integrated circuits. Although we derive less than 10% of our total revenue from the licensing of intellectual property, a decline in this licensing revenue would have a greater impact on our profitability than a similar decline in revenues from the sale of our integrated circuit products. Our licensing revenue tends to come from a limited number of transactions and the failure to complete one or more transactions in a quarter could have a material adverse impact on our revenue and profitability.

If our customers do not qualify our products or manufacturing lines or the manufacturing lines of our third-party suppliers for volume shipments, our results of operations may be adversely affected.

     Some customers will not purchase any of our products, other than limited numbers of evaluation units, until they qualify the manufacturing line for the product. We may not always be able to satisfy the qualifications. Delays in qualification may cause a customer to discontinue use of our products and result in a significant loss of revenue.

We conduct a significant amount of our sales activity and manufacturing efforts outside the United States, which subjects us to additional business risks and may adversely affect our results of operations.

     In fiscal 2006, we derived approximately 83% of our revenue from sales of our products shipped to locations outside the United States. We also manufacture a significant portion of our products outside the United States and are dependent on non-U.S. suppliers for many of our parts. We intend to continue to pursue growth opportunities in both sales and manufacturing outside the United States. Operations outside the United States are subject to a number of risks and potential costs, which could adversely affect our revenue and results of operations, including:

  • unexpected changes in regulatory requirements;

  • inadequate protection of intellectual property in some countries outside of the United States;

  • currency exchange rate fluctuations;

  • international trade disputes;

  • political and economic instability; and

  • disruptions in international air transport systems.

13

If we fail to attract, hire and retain qualified personnel, we may not be able to develop, market or sell our products or successfully manage our business.

     In some of our fields of operation, there are only a limited number of people in the job market who possess the requisite skills. In the past we have experienced difficulty in identifying and hiring sufficient numbers of qualified engineers in parts of our business as well as in retaining employees. The loss of the services of any key personnel or our inability to hire new personnel with the requisite skills could restrict our ability to develop new products or enhance existing products in a timely manner, to sell products to our customers or to manage our business effectively.

The development and evolution of markets for our integrated circuits are dependent on factors over which we have no control. For example, if our customers adopt new or competing industry standards with which our products are not compatible or fail to adopt standards with which our products are compatible, our existing products would become less desirable to our customers and our sales would suffer.

     The emergence of markets for our integrated circuits is affected by a variety of factors beyond our control. In particular, our products are designed to conform to current specific industry standards. Our customers may not adopt or continue to follow these standards, which would make our products less desirable to our customers and reduce our sales. Also, competing standards may emerge that are preferred by our customers, which could also reduce our sales and require us to make significant expenditures to develop new products. To the extent that we are not able to effectively and expeditiously adapt to new standards, our business will suffer.

Class action litigation due to stock price volatility or other factors could cause us to incur substantial costs and divert our management’s attention and resources.

     In the past, securities class action litigation often has been brought against a company following periods of volatility in the market price of its securities. Companies in the integrated circuit industry and other technology industries are particularly vulnerable to this kind of litigation due to the high volatility of their stock prices. Accordingly, we may in the future be the target of securities litigation. Any securities litigation could result in substantial costs and could divert the attention and resources of our management.

Item 1B.    Unresolved Staff Comments

     Not applicable.

Item 2.    Properties

     As of September 30, 2006, we operated a total of three manufacturing facilities in Singapore and Thailand. We also operated an additional 40 facilities, including research and development facilities and design centers. We had facilities in a total of 17 countries. We also have a 51% interest in our Silicon Manufacturing Partners joint venture located in Singapore. That venture has a facility that is predominantly used as a manufacturing site.

     Our facilities have an aggregate floor space of approximately 4.2 million square feet, of which approximately 2.8 million square feet, including our assembly and test facility in Thailand and our headquarters in Allentown, Pennsylvania, is owned and approximately 1.4 million square feet, including our assembly and test facilities in Singapore, is leased. Our lease terms range from monthly leases to nine years. We believe that all of our facilities and equipment are in good condition and are well maintained and able to operate at present levels. We are currently not utilizing approximately 2.2 million of our 4.2 million square feet of space due to our previous facility consolidation efforts.

Item 3.    Legal Proceedings

     Not applicable.

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

     During the fourth quarter of fiscal 2006, no matter was submitted to a vote of our security holders.

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Executive Officers of the Registrant

     Our executive officers are as follows:

      Name             Age           Position  
Richard L. Clemmer    54   President and Chief Executive Officer 
Peter Kelly  49 Executive Vice President and Chief Financial Officer 
Denis P. Regimbal  45 Executive Vice President and General Manager, Mobility Division 
Samir F. Samhouri  34 Executive Vice President and General Manager, Networking Division 
Ruediger Stroh  44 Executive Vice President and General Manager, Storage Division 

     Richard L. Clemmer has been our President and Chief Executive Officer since October 2005. Mr. Clemmer has also been a member of our Board of Directors since October 2002. Mr. Clemmer has over 30 years of experience in the technology industry, where he has held a variety of executive, financial and management positions. Between June 2004 and October 2005, he was an active partner at Shelter Capital Partners, a private investment fund. Between 2003 and October 2005, he was Chairman and President of Venture Capital Technology LLC, which was focused on investing in and consulting for technology companies, primarily involved as Chairman of uNav Microelectronics, an emerging global positioning systems chipset company. Between May 2001 and January 2003, he was on the Board and served as an executive at PurchasePro.com, Inc., a provider of electronic procurement and strategic sourcing solutions. Between 1996 and May 2001, Mr. Clemmer was Executive Vice President, Finance and Chief Financial Officer of Quantum Corp., which was a provider of hard disk drives and other storage solutions. Prior to Quantum, Mr. Clemmer served at Texas Instruments Incorporated for over 20 years, including between 1988 and 1996 as Senior Vice President and Chief Financial Officer of Texas Instruments’ Semiconductor Group. Mr. Clemmer is a director of i2 Technologies, Inc.

     In September 2002, while Mr. Clemmer was Chairman, Chief Executive Officer and Chief Financial Officer of PurchasePro, having been asked to take over from prior management, PurchasePro filed a voluntary petition under Chapter 11 of the United States Bankruptcy Code in connection with an agreement to sell substantially all of its assets.

     Peter Kelly has been our Chief Financial Officer since August 2005. Prior to that, he had been Executive Vice President, Operations Group, since October 2001 and Vice President of Operations for Integrated Circuits from September 2000 to October 2001. Mr. Kelly joined the business in 2000 from Fujitsu-ICL Systems Inc., a joint venture of ICL and Fujitsu that provided computer systems and services to retailers and banks, where he was Executive Vice President and Chief Operating Officer. Mr. Kelly had been with Fujitsu-ICL for six years. Mr. Kelly is a director of Plexus Corp.

     Denis P. Regimbal has been the head of our Mobility group since December 2005. Prior to that, he was the head of our Telecommunications group from August 2004 to December 2005, Vice President and General Manager of the Media Connectivity Division from July 2003 to July 2004, Vice President of Strategy for the Client Systems Group from March 2003 to July 2003, Vice President of sales and applications for Europe, Middle East and Africa from September 2001 to March 2003 and General Manager of the Wireless Infrastructure Division from 1999 to September 2001. Prior to joining the business in 1988, Mr. Regimbal held several management positions with Analog Devices, Inc. and Intel Corporation.

     Samir F. Samhouri has been the head of our Networking business since December 2005. Previously, Mr. Samhouri was the head of our Enterprise and Networking business from September 2005 to December 2005, the head of our Ethernet Division from December 2004 to September 2005, Vice President of marketing, applications and product line management for the Telecommunications Division from January 2002 to December 2004 and General Manager for network communications intellectual property from 2000 to January 2002.

     Ruediger Stroh has been the head of our Storage group since November 2005. Since August 2004, he has been a director, and from August 2004 until November 2005, he was Chief Executive Officer, of Intematix Inc., a nano and thin film materials design and manufacturing company. From November 2003 to November 2005, he was an active principal of RST Partners, a technology consulting firm. From February 2003 through November 2003, he was President and Chief Executive Officer and a director of Trebia Networks Inc., a storage area networking chipset company. From April 2001 to January 2003, Mr. Stroh was President and Chief Executive Officer of Systemonic AG, a wireless local area networking chipset company. Prior to that, he held a number of management positions at Infineon Technologies Corporation, including General Manager and Senior Vice President of the Storage Business Unit as well as the Consumer and DataComm Business Unit.

     Officers are not elected for a fixed term of office but hold office until their successors have been elected.

15

PART II

Item 5.     Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

     Price Range of Common Stock

     On May 27, 2005, we reclassified our Class A common stock and Class B common stock into a new, single class of common stock and effected a 1-for-10 reverse stock split. The new class of common stock trades under the symbol “AGR” on the New York Stock Exchange. The high and low sale prices for our common stock for each quarter during our last two full fiscal years are set forth below, as reported in the consolidated transaction reporting system and as adjusted to give retroactive effect to our 1-for-10 reverse stock split:

Fiscal 2005    High             Low 
Quarter Ended December 31, 2004     
   Class A common stock  $ 15.40 $ 10.70
   Class B common stock  $ 14.90 $ 10.40
Quarter ended March 31, 2005     
   Class A common stock  $ 16.90 $ 12.60
   Class B common stock  $ 16.90 $ 12.50
Quarter ended June 30, 2005     
   Class A common stock (April 1, 2005 through May 27, 2005)  $ 14.60 $ 11.00
   Class B common stock (April 1, 2005 through May 27, 2005)  $ 14.30 $ 11.00
   Common stock (May 31, 2005 through June 30, 2005)  $ 13.65 $ 10.85
Quarter ended September 30, 2005 – Common stock  $ 12.98 $ 9.63
 
Fiscal 2006      
Quarter Ended December 31, 2005 – Common stock  $ 13.70 $ 8.81
Quarter Ended March 31, 2006 – Common stock  $ 15.42 $ 12.13
Quarter Ended June 30, 2006 – Common stock  $ 17.18 $ 13.23
Quarter Ended September 30, 2006 – Common stock  $ 16.88 $ 11.94

     As of November 1, 2006, there were approximately 1.6 million record and beneficial holders of our common stock.

     Dividend Policy

     We have never declared or paid and we do not anticipate paying any dividends on our common stock in the foreseeable future. Any future dividend payments would be at the discretion of our Board of Directors.

     Issuer Purchases of Equity Securities

     The following table contains information about our purchases of our common stock during the quarter ended September 30, 2006.

      Total Number  
      of Shares  
      (or Units) Maximum Number (or
      Purchased as Approximate Dollar
    Average Part of Publicly Value) of Shares or
  Total Number of Price Paid Announced Units That May Yet Be
  Shares (or Units) per Share Plans or Purchased Under the
 Period        Purchased       (or Unit)       Programs       Plans or Programs
July 1, 2006 to July 31, 2006    200,500     $14.62     200,500   $197,067,769
August 1, 2006 to August 31, 2006  2,148,800 $14.98 2,148,800 $164,881,337
September 1, 2006 to September 30, 2006      1,298,400     $15.28     1,298,400     $145,035,616
   Total  3,647,700 $15.07 3,647,700 $145,035,616

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     In July 2006, our Board of Directors authorized the repurchase of up to $200 million of our common stock. The repurchases identified in the table were all pursuant to this authorization. This authorization is in addition to the $200 million of repurchases the Board authorized in October 2005. We previously repurchased $200 million of common stock under that authorization.

     See Item 12 for information about our equity compensation plans.

Item 6.    Selected Financial Data

     The following table sets forth selected financial information for our company. The financial information for the years ended September 30, 2006, 2005, and 2004, and as of September 30, 2006 and 2005, has been derived from our audited financial statements included elsewhere in this report. The financial information for the years ended September 30, 2003 and 2002 and as of September 30, 2004, 2003 and 2002 has been derived from our audited financial statements not included in this report. The historical selected financial information may not be indicative of our future performance and should be read in conjunction with the information contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 and the consolidated financial statements and the related notes in Item 8.

  Year Ended September 30,
2006 (1)       2005 (2)       2004 (2)       2003       2002
 (Dollars in millions except per share amounts)
Statement of operations information: 
Revenue  $ 1,570 $ 1,676  $ 1,912  $ 1,839  $ 1,923 
Gross profit  762   664    866    579    494 
Income (loss) from continuing operations  17   (8)   (90)