Welcome to the Agere Systems investor relations conference call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference call over now to your host, Sujal Shah, Director of Investor Relations at Agere Systems.

Good morning, and thank you for joining us. With me today are Rick Clemmer, President and Chief Executive Officer, and Peter Kelly, Executive Vice President and Chief Financial Officer. This morning they will discuss the highlights of Agere's results for the first quarter of fiscal year 2006, and then we will open up the call for your questions. Copies of our press release and other supporting financial data are available on our Website. Please note that we will be mentioning pro forma results on the call. Today's earnings release describes the differences between our pro forma and GAAP reporting. You can find reconciliations of our pro forma financial measures to corresponding GAAP amounts on our Website at www.agere.com/webcast. A replay of today's call will be available on the Company's Website. I also want to remind you that today's remarks will include forward-looking statements. Our actual results could differ materially from those suggested by the statements made today. Additional information about factors that could affect our future results is contained in our annual report on Form 10-K for the fiscal year ended September 30, 2005. Now I would like to turn the call over to Rick Clemmer.

Good morning and welcome. As you know, when I took on the role of CEO in late October, I said that my first order of business would be to examine the challenges and opportunities facing Agere with a sense of urgency and to address them with speed. In the last 90 days I've been actively engaged with our key customers, employees, and investors to better understand our strengths, and, more importantly, required areas of improvement. These meetings reinforced several important points which I think were clear to all of us. We have a very talented employee base with a strong systems capability, customers consider Agere a valued supplier and want to work with us, and we have a broad portfolio of intellectual property with excellent technology. However, it is apparent that the Company was not successful in driving profitable growth at competitive levels. So, in my first few weeks we focused on restructuring our leadership team, bringing in some external strengths and establishing a clear charge for newly-promoted internal talent. The previous management did a tremendous job with operational restructuring of Agere since it became a public company, but we needed a different team to take us forward. This new team will focus on expanding our customer base and improving our overall R&D effectiveness and time-to-market performance, while instilling an aggressive entrepreneurial culture. The top priority for our leadership team is to drive value per shareholders. 2006 will be a year of transition in which it will be difficult to demonstrate year-over-year revenue growth. However, I do believe we can show significant earnings growth. Though clearly we have near-term challenges, and in a moment I will take you through the steps of our turnaround plan, first let me discuss the near-term opportunities I see in our key businesses. Our storage business remains an area of significant opportunity. We had double-digit growth this past quarter and are seeing strength in our SoC business as well as in preamps. We see the announced merger of Seagate and Maxtor as a great opportunity to bring our leadership technology currently in production, again, currently in production, to this emerging company. We continue to be solidly positioned to provide critical technologies to their future generations of drive design. Specifically, we continue to ship our storage SoCs into the industry's only 160 gigabyte desktop drives, and Agere's market-leading perpendicular recording technology that has enabled the industry's first 160 gigabyte mobile drives. Our new storage management team, led by Rudi Stroh, is committed to making a significant difference in driving technology and value for our customers. In mobility, again we have a significant opportunity. Our relationship with Samsung continues to be very strong, and we meet with their senior leaders on a regular basis. Our 2.5G products are doing very well and we have a strong 3G roadmap, but historically we have failed to deliver consistent revenues and returns. While we have seen some initial success with key accounts outside of Samsung, we need to improve our program execution to further broaden our customer base. I've asked Denis Regimbal to lead the mobility group, and with his extensive marketing and engineering management experience, I am positive that he and his team can take advantage of the relationships that have been developed and grow our revenues and profitability in this important business. In both our enterprise and networking division and telecom divisions, there was an over-reliance on legacy products which is now masking the successes we have in our growth areas. We have an opportunity to bring together unique core competencies to enable quality of service and provide system-level solutions across public and enterprise networks. With this in mind, we are combining these businesses into a single entity managed by Samir Samhouri. Samir brings his entrepreneurial strength and leadership skills to this new assignment, and I have challenged him to review all our investments in this area so that we can drive a single synergistic strategy to establish Agere as a leader in the enterprise space and further strengthen our presence in the telecom market to drive profit and growth. Our new leadership team is very clear in its desire to aggressively deliver value to shareholders, and we understand your desire for urgency. Let me take a moment then to describe our plan, as well as the timeframe for when you can expect specific actions and performance results. We have put together a turnaround plan which is divided into three basic phases, first, stabilization; second, earnings growth; and finally, revenue growth. In the current stabilization phase we are focused on assessing and aligning the business. We have made swift changes in management and organization structure. We are also taking a hard look at specific product lines and organizations. Our basic philosophy is that investments need to drive profitable revenue growth, and if an investment is not performing, we will reallocate those investments to areas that can. In this phase we will also set the corporate-wide vision and strategy with a focus on investing to win. We will leverage the technology and leadership we have, but may also partner in areas that can improve our time-to-market performance or provide system-level solutions and grow share. As part of this process we will consider strategic options for product lines that do not align with our vision and core strengths. We expect to conclude the bulk of our stabilization phase by midyear. The key milestone in our next phase will be earnings growth. While, as I said earlier, fiscal 2006 will be a year of transition, with legacy products continuing to challenge overall topline growth performance, we are focused on driving growth in our earnings. By narrowing our investment areas and managing our expenses, we expect to deliver near-term improvements in our EPS performance and achieve consistent double-digit operating income margins. In our third phase, we will drive competitive levels of revenue growth with 15%-plus operating income margins. This final phase represents the successful completion of our turnaround plan, in which we attain revenue growth from our investment areas, gain market share and further drive shareholder value. We are taking the time to carefully evaluate and determine our next steps forward, and as I said on the last earnings call, we are keeping the door open to all options for increasing shareholder value. I will turn the call over to Peter to take you through our results and guidance for the March quarter.

Thank you, Rick. This morning we recorded quarterly pro forma net income of $16 million, or $0.09 per share, at the high-end of the guidance range provided in October. Our revenues were $403 million, with Seagate, Maxtor and Samsung as 10% customers. Storage revenues of $173 million grew by $15 million over the previous quarter, driven by growth in SoCs and preamps. Mobility revenues of $73 million, as expected, decreased $19 million sequentially, as our key customer reprofiled their inventory. Enterprise and networking revenues increased $1 million sequentially to $102 million. Telecom revenues decreased $10 million sequentially to 55 million, driven by lower shipments of DSPs for wireless infrastructure, as well as a reduction in legacy product shipments. As Rick mentioned earlier, we have combined our telecom and E&N businesses, and beginning with our March quarter results, they will be combined into one operating segment. In the December quarter, our total revenue from licensing intellectual property was $32 million, and the breakdown of IP revenues in our operating segments was $11 million in storage, 9 million in mobility, 7 million in enterprise and networking, and 5 million in telecom. Our pro forma gross margin as a percent of sales was just over 48%. This number, although down sequentially, is within our guidance range, but it is lower than I would normally expect to report. About two-thirds of this sequential decrease was driven by product mix, with the balance driven by bonus accruals and volume. Our pro forma operating expenses, which are R&D and SG&A, excluding stock-based compensation expenses, were $174 million in the December quarter. Operating expenses normalized for bonus accruals were slightly below the levels of the previous quarter. Our pro forma operating profit was 5%, up $21 million. In the quarter, taxes were $4 million, interest expense was 7 million, and other income was 6 million. On a GAAP basis, we had a net loss of $19 million, or $0.11 per share better than our guidance range of a $0.13 to $0.19 loss. Turning now to the balance sheet. Inventory declined $5 million to 125 million, with inventory turns of 7. In this quarter, we made a conscious decision to raise the level of finished goods inventory we hold to further improve our service levels to our customers. This, along with the decisions made six months ago to increase our test capacity, have been instrumental in helping us fulfill the upside we've seen in the past quarter. The December inventory included $16 million of prebuilt inventory for the closure of the Orlando fab, and this is a reduction of 12 million versus last quarter. Receivables were $252 million, with DSOs on a 2 point calculation of average receivables at 56 days. Accounts Payable were $196 million. In the December quarter, our tax balance decreased by $49 million to 649 million. In connection with the stock repurchase program we announced in October, we purchased over 3.4 million shares for a total purchase price of approximately $41 million. We still believe that our stock is undervalued, and as we said last quarter, the Board has authorized us to purchase up to a total of $200 million of stock. Capital expenditures were $39 million. Although high for a single quarter, this level of CapEx is in line with what I had previously said. We had also indicated earlier that we expect to spend about $100 million per year on CapEx. However, we have revised our requirements for 2006, and we currently expect to spend around $125 million as we add additional capacity to take advantage of the growth at Seagate in our storage business. We also received $34 million in the form of a capital distribution from our joint venture with Chartered Semiconductor. Our total debt was $372 million, at the same level as the previous quarter. This amount represents our convertible notes due in 2009. Depreciation and amortization expense for the September quarter was $27 million, all of which is related to ongoing operations. Total restructuring expense, which we exclude from our pro forma results, were $31 million. About a third was related to previously announced activities, but the majority was related to severance activities undertaken in the quarter. In the first quarter of fiscal 2006, Agere adopted FAS 123R. Expense related to equity compensation was $10 million for the December quarter, of which 2 million is included in net restructuring and other charges. You should also note that our stock-based employee compensation expense will not be tax-affected due to recording of a full valuation allowance against U.S. net deferred tax assets. I would now like to turn to our guidance for the March quarter. Our total revenue is expected to be in the range of 390 to $410 million. We expect our storage revenues to be at similar levels for the first quarter. Enterprise and networking will decline approximately 15 to $20 million, driven mostly by reductions in our core logic ASIC shipments to Apple as they transition to an Intel-based architecture. We believe that our core logic business at Apple will ramp down quickly, and we do not expect any significant shipments of these devices to Apple beyond the March quarter. We expect a 5 to $10 million increase in the mobility business, driven by shipments of EDGE products. Similarly, we expect our telecom business to have a single-digit increase in the March quarter, driven by growth in DSPs and network processors. Total IP licensing revenues are expected to be approximately 30 to $35 million. Going forward, at the Agere level, we expect that declines in our Apple ASIC business will be offset by increased demand for our storage products. Turning to gross margin, we expect pro forma gross margins to be approximately 49 to 51%. Pro forma operating expenses are expected to be no higher than $175 million for the March quarter. And as we continue to better align our expenses to growth opportunities, we expect pro forma operating expenses to be less than $165 million in the fourth quarter of fiscal 2006. We expect to post pro forma net income in the range of $0.05 to $0.11 per share. Including stock compensation expenses and net restructuring and other charges, our GAAP results are expected to be a loss in the range of $0.06 to $0.12 per share. The net restructuring and other charges not included in pro forma are expected to be approximately 15 to $20 million, of which approximately 7 million is driven by the decommissioning of the Orlando plant. In addition, we also expect to have approximately $11 million of stock compensation expenses. Excluding any purchases of Agere stock in the quarter, we do expect our total cash balance to increase. We expect taxes to be approximately $8 million, interest expense should be about 6 million, and we expect other income to be about 4 million. We expect capital spending in the March quarter to be approximately 25 to $35 million, mostly in additional assembly and test capacity to support increased demand from our storage customers. Now let me turn the call back to Rick.

Thanks, Peter. Let me now take a few minutes to review some of the significant news, products and design wins across our businesses. All indications from Samsung are that we will grow our share in 2006, driven by their launch of as many as 20 new EDGE handsets that use our technology. We also continue to support Samsung's plans for a family of high-volume mass-market GPRS phone designs, including the C-120 and C-156 models which are now shipping. We expect to begin shipping wedge products for data card applications this quarter, and Sony Ericsson plans to demonstrate a PC card based on our wedge technology at the upcoming 3GSM trade show in Barcelona. We have first silicon on our new HSDPA chipset. This dual node HSDPA/EDGE solution supports data rates of up to 3.6 megabits per second for high bandwidth applications. We will be sampling this chipset in software solutions to customers in the coming weeks. We recently shipped our 100 millionth GSM chipset, a remarkable milestone for the Company and a testament to our ability to deliver proven silicon and software for this space. I am confident that we can continue to win business and gain market share moving forward. In storage, the alliance between Agere and STMicroelectronics, formed to service Seagate, continues to provide leading-edge solutions enabling the industry's highest capacity 160 gigabyte per clatter desktop and mobile drives. Agere's SoCs offer the best-performing perpendicular recording support available. Our leading position in 3.5 inch drives has led to success in fixed consumer electronics devices as well, including digital video recorders. In addition, we continue to achieve a number of new design wins and engagements for the 2.5, 1.8 and 1 inch form factors. Earlier this month we announced that storage manufacturer Cornus is using our small form factor chipset in its new Dragon Series. These drives support up to 10 gigabytes, offering the most capacity available in a 1 inch solution, with a slim profile and durability needed for mobile phone storage. Finally, in our networking group, Agere recently showcased a number of technologies and customer wins at this month's Consumer Electronics Show. As just one example, Agere provided live demonstrations of our network attached storage chip, streaming four high-definition television signals simultaneously. This solution enables users to access multimedia and data content throughout a home or small office, and supports high-capacity storage capabilities across wired or wireless networks. In the recent design wins, Hawaii Technologies has selected our TrueAdvantage hardware and software platforms for use in its converged wireless infrastructure equipment. Agere is investing aggressively in new product development at advanced technology nodes. We have signed an agreement with foundry leader TSMC to co-develop IP and memory blocks that will enable us to significantly cut design cycles and share development costs for products at the 65 nanometer node. This is a collaboration at the design platform level that will put Agere and TSMC at the forefront of 65 nanometer development, as well as drive products with more competitive features. We expect to deliver 65 nanometer test chips later this year. I would like now to recap the key points of our discussion this morning. We expect revenues from the second quarter of fiscal 2006 to be in a range of 390 to $410 million. We now have a well integrated organization structure and a very aggressive leadership team in place. We will improve program execution and follow through on our current plan. The entire organization is committed to doing what it takes to deliver sustained profitable revenue growth and enhanced shareholder value. Fiscal 2006 will be a year of transition; however, you will see significant improvements in our EPS performance. Now let me turn the call back to Sujal.

Thank you, Rick. At this point we will begin the Q&A portion of the call. Kelly, will you please give the instructions for the Q&A session?

Operator Instructions Our first question comes from Charlie Glavin with Needham & Company.

I think the delay was that they hadn't opened everything up, so you couldn't cheat any longer while you guys were talking to get into the queue, not that any of us did do that. Rick, I guess a good theme for you guys is probably still waters run deep. As much as you can peel back the layers, mobility is, as you guys rightly addressed, has been an area of somewhat disappointment. Samsung certainly, in Suwan and Gumi design centers, seem to be well addressed. But can you give some idea of where investors can finally see some progress outside of the Sony Ericsson and the Samsung side? Even without mentioning names, where can we see the teams start to engage with other Tier Ones, or if need be, Tier Twos, and what sort of timeframe? Thanks.

While I think it's important in the mobility business, I guess I would not phrase it as disappointment. Our financial results have left something to be desired, but clearly, I think, the position we have at Samsung is extremely significant, and one that has taken the team a significant amount of effort to develop. And that is without question extremely strong and continues to strengthen. So I think that's the first thing I would like to be sure that we know. On Sony Ericsson, relative to the data cards, we're encouraged about the progress, we're encouraged about the opportunity there, and we think that it really gives us the opportunity to demonstrate the technology and the capability as we move forward. The relationship we have with Amoi in China has been very significant, has created a significant near-term opportunity for us. And the mobility market in China is a little different since it goes through the retail space, but they've taken a very strong position. And we played a significant role in that technology front. We've talked about before that we're working with Chimei; they have a large number of engineers working on our platform with a specific product. But as far as talking about any specific product that's going to come out of those, I think it's premature to say. I think the bottom line is that we're well positioned, we feel like that we're gaining strength, and we are very confident in getting to a position of model profitability in the future associated with our mobility business.

I guess, Rick, one thing that's been hanging over the wireless area, even though the wedge product has been well received, is the potential threat from other competitors, be it Philips, Broadcom, or other. You have had great success with STMicro in terms of joint venture in the storage side. Do you see a need to either partner up, or how do you, I won't say, but how do you contend against other competitors right now? And maybe to the point, who else would you see as a likely second source within Samsung since they have a high preference for second sources?

I don't think we would talk about who the second sources are specifically, but the bottom line is our relationship with Samsung just continues to strengthen. I think the fact is that Sony Ericsson has evaluated the different sources of technology, and we continue to move forward and make good progress with them as we announced relative to the demonstration that will take place at the show in Barcelona. So I think that from an overall technology viewpoint, we feel like that we're well positioned and certainly get that feedback from our customers that we're well positioned. As we move forward over a matter of years, and you get to more of an integrated solution, it's not out of the question that we won't partner with some people to bring a broader technology front to our customers. But as of today, that's not something that our customers are pushing for. They're perfectly happy integrating those solutions with the advantages we bring on the base band and moving forward with a total solution on their own. But clearly, as you look at the future, and there's more and more functionality integrated, then certainly we'll have to decide whether we bring that technology in, we develop that technology, or we partner with people. And clearly, that's one of the things that Denis is working on his roadmap.

Could we have the next question please?

The next question comes from Seogju Lee with Goldman Sachs.

Two questions. One, first was a housekeeping, and second I had a question on storage. On the housekeeping, this quarter there was a discontinued operations line in the income statement; just if you could give some details around that. And then the second question on storage. In terms of the expectation for the March quarter, as well as for '06, for March you're expecting it to be roughly flattish, just what sort of offsets the normal seasonality there with units from the industry expected to be down. And then, in terms of the growth expected in 2006, just what the puts and takes are there. You mentioned strength with the Seagate, but just how you think about the opportunities at Maxtor as well would be very helpful.

First of all, along the discontinued operations, it was a credit, and it relates to a tax credit from, relating to our opto business from a couple of years ago. And then in terms of guidance, you know we're not really going to go into the full year. But in the second quarter, we are seeing some strength in the storage business. We spoke about Seagate. I think if you listened to there call, you see they were very, very bullish. And we feel very comfortable about the storage business at the moment.

Let me just add a little color on the storage business. This is a very significant opportunity for us. As we've talked about, we're actually increasing our CapEx this year so that we will put capacity in place to be able to support Seagate towards the end of this year, and certainly going into next year. So as Seagate talked about on their call, significant opportunities for improvement. And clearly, we think that we are extremely well positioned to take advantage of that. The fact is that as we've said time and time again, the technology alliance that we've put in place with ST has put Seagate in a place where they have 160 gigabyte platter technology capability well in advance of any of the other competitors, measured in quarters, which is unheard of in the disk drive industry. So that's a very significant factor. It's being driven by the technology that we put in place, and we think we will continue to be well positioned to take advantage of that moving forward. And as Seagate was as bullish as they were on their call, we continue to be very optimistic about the overall HDD industry, and specifically our relationship with Seagate. In the case of Maxtor, they're going through a transition as they evaluate or get through the government regulatory approvals associated, and their shareholder approval associated with their merger with Seagate. We continue to be well positioned in their desktop platform that they're shipping today, and it continues to be a significant volume for us and we continue to support them as a very significant customer moving forward, but clearly have opportunities on a broad array of customer base. But again, the relationship that we established with ST to service Seagate has really differentiated us from the rest of the marketplace, and we think will continue, and all indications are from the customers will continue to differentiate us moving forward.

To follow up, Rick, in terms of the optimism about Seagate in the second half of the year, would that be the combined Seagate?

I think that Seagate, as you heard from their earnings call, were very optimistic about their projections on growth, specifically in the consumer platform as well as the notebook platform, with a reasonable basis on the desktop really as it applies to consumer applications on a stand-alone basis. And the combined entity just presents that much more opportunity going forward. And the other area that I didn't talk about that I should talk about is in preamps. You know, we had gotten behind in preamps over the last few years. We have significantly strengthened our technology position in preamps. We are engaged in platforms across basically all of the major HDD suppliers in all levels of platforms, from the enterprise all the way through the mobile space, and represents a significant opportunity of growth for us as we move forward.

Could we have the next question, please?

The next question comes from Ross Seymore with Deutsche Bank.

Rick, if I could get just a little more information on the restructuring, and how you plan to go from phase one to two and three. On the operating margin goal that you're talking about, once we get into phase two, is that dependent on revenue growth within certain segments? Is it going to be delivered more by gross margin leverage or OpEx cuts? That sort of granularity would be very helpful.

We are operating at performance levels that are close to what we consider to be very reasonable gross margin levels, at 48 versus we'd said 50 plus or minus a point or two. So we see some improvements in gross margins, but it's not the most significant factor associated with it. And we are not counting on a significant amount of revenue growth to be able to drive the bottom-line earnings associated with the total outlook. So what we're doing is we will continue to focus on aligning our resources and aligning our expenses and investments in conjunction with the vision that we have and the opportunities that we have. But clearly, as we move out in time, we talked about specifically seeing the decline that we've, are seeing from Apple associated with their transition to the Intel-based platform. But fortunately for us, the opportunity for upside at Seagate that they talked about on their call that have driven us to be able to maintain the overall outlook that we talked about for Q2.

You talked about, I guess you have to of refresh my memory. Was it less than 165 million in OpEx by the fiscal fourth quarter, or was at 160?

I think what we talked about on the last call was….

We said 165 on the last call, and on this call we said less than 165.

Could we have the next question please?

The next question comes from Bill Lewis with JP Morgan.

Rick, just a clarification on your comment about kind of not being able to grow revenue this year. Were you talking about this fiscal year, I assume, or the calendar year? And I guess related to that, it sounds like mobility will grow. Should we think about all the other businesses declining a little bit?

I think what we don't talk about projections beyond specific projections beyond the next quarter. So I think it's important to be sure that you understand that what we're talking about is more of a general basis. The opportunities that we see in storage are clearly significant. The opportunities in mobility are significant. And then we have to go through the transition on our combination of our telecom in businesses. But basically we don't give any guidance beyond the next quarter, but we feel very good about the position of our current businesses.

And also, on your stabilization plan, you said to be wrapped up mid-this year. Was that mid this calendar year or fiscal year?

Mid this calendar year.

The next question comes from Lee Cooperman with Omega Advisors.

Following the tradition here, everybody seems to have more than one question, so I'll give you my three questions and then you can go from there. How do we judge the management in terms of looking over the next two or three years? What is your view of normalized earnings on your existing revenue base? How long does it take you to get to that normalized earnings level? Secondly, you made a comment we're going to keep the door open for all options to create value. This seems like a fairly passive statement as opposed to a proactive statement. And I'm wondering, Rick, whether you've been on board long enough now to have a view of the Company's ability to compete effectively in four lines of business, and whether also you have a view as to, say, acceptable value-creating opportunities that are likely to come through the door. In other words, you say you're open for all options to create value that come through the door. Do you have views of what would make sense and whether we should proactively seek them? And finally, the rationale for the stock repurchase program and a timetable for completion. I understand you made a comment basically that the stock was undervalued. That's an opinion, of course. But is that opinion such that you'd like to complete this $200 million in the present fiscal year, or are you going to stretch this out? If you could give us help on those three questions, I'd appreciate it.

On the normalized basis, I'm not sure if we talk about, and how we measure management I think was the question you had. So clearly, as we get through what we've said is when we grow at a rate faster than our competition with greater than 15% operating income, and we'll obviously be fine-tuning as we get there, then we will believe that we've been through the process and we think that it would be fair for shareholders to evaluate where we are, and our share price should reflect that overall performance. So that's really I guess the key metric. And the key measure as you look out over the next couple of years is you ask about that specifically. Relative to proactive, I think what we've said is that we are open to any way that creates significant shareholder value. We are very focused on driving shareholder value, but we believe the best alternative for our shareholders and the best near-term focus is for us to focus on improving our performance. And we're going through each one of our businesses looking at our investment areas, seeing what we can afford to do and what we can't afford to do, where we have a differentiated position that drives significant value for our customers, which ultimately drives value for our shareholders. And as far as the four businesses, we actually just took the initiative to combine the Telecom business with our E&N business, which we believe gives us some competitive advantages from a technology viewpoint, where we can bring a quality of service performance to the enterprise basis that puts us in a unique position to deliver a more significant value for some of our customers. So we believe that the real test for us on the near-term basis is to drive performance and the results of the Company. But at the same token, we are clearly focused on how we maximize shareholder value, and won't take anything off the table. And relative to the share repurchase, I'm going to let Peter talk about that.

On the share repurchase, I guess we're not going to give a sort of, the kind of forecast on what we think the optimal price for the stock is. We will continue to buy while we think the stock is undervalued. And that's as far as I'm going to go on that.

Could we have the next question?

The next question comes from Srini Pajjuri with Merrill Lynch.

Just a couple of questions. First, a clarification on the gross margins. Peter, it looks like your consumer and enterprise gross margins declined by almost 300 basis points in the current quarter, I mean last quarter. I'm just wondering what's driving that. Is it mostly pricing related, or if it's any product mix related? And also, as we look into the Q1, you're forecasting growth in gross margins. If you could help us understand what's driving that growth. That's all. That would be great.

Our overall margins declined by about 3 points, and 2 points of that was from mix. And it's really in a couple of places. It's our telecom product line is down about $10 million in revenue, and also we had a relatively weak mix in our mobility business. You add on top of that probably half a point for the differences in bonuses, half a point for volume, and that gets you down to three points. But then if you go forward, how are we comfortable at 50%? I am comfortable in that range. If you add, just over a point of mix. Telecom picks up again. Mobility has a richer mix with more EDGE products in the coming quarter. So that takes you up to about 49.5. Had a point to yield, we've been ramping some products and we can see at least half a point of yield, which gets us to 50. And then If you look at volume, we've said 390 to 410. With our fixed manufacturing cost, that's about three-quarters of a point. Add in one or two things that maybe, I think a number of 50 plus or minus a point is a very reasonable forecast.

Just moving on to the telecom segment, I guess every time we had a decline in the segment, we tend to blame it on the legacy products. I'm just wondering how much more legacy do we have left in telecom, and how will that impact, if that business eventually goes away, how will that impact the gross margins?

The telecom business, we have pockets of new designs that are very significant for us moving forward. But overall, we have strength from a profit contribution associated with the legacy business. And a lot of that has to do with our customers and their end markets. And what's happening in those end markets, which as we all know bounces around quite a bit on a quarter-to-quarter basis, based on what they're doing that decline that we saw is, Peter talked about comes back somewhat in the Q2 timeframe. I guess we're encouraged about our position overall in telecom. We clearly have a transition to work our way through relative to the significant, to some of the products that are bringing significant profitability from a legacy viewpoint. But overall, the profit contribution associated with the telecom business, the ability to rank some of those core competence we have in the telecom space to the enterprise space, as well with the merging of the organization, we think puts us in a unique position. And we're very encouraged about the opportunity of that space.

I would add to that you have the likes of the DSP infrastructure products drop off, and we are seeing 20, depends on the year, 20 or $30 million a year, not just there but across the telecom product base. Where on the other hand, what we are seeing now, we are seeing real growth in network processors. Mappers are starting to pick up. So it's not a business that I think will decline dramatically, but at the same time I don't think right now I see a lot of growth there. Who knows after Samir works with the E&N business, I think we do have lots of technology, which may give us an opportunity to leverage that technology much better in the future as we go forward.

Could we have the next question?

The next question comes from the line of Arnab Chanda with Lehman Brothers.

I have a question about your storage business. Historically it seemed like your Maxtor relationship from the 160 gigabyte drives would go away. Has that changed at all, or can you assume growth in storage if you lose that business? And I have a follow-up please.

The transition and when Maxtor actually implements their 160 gig per platter drive, and that will take, if and when they do that, that will take place over a period of time where there will be a transition in volume. And with the potential of the merger being completed out later this year, you'd really have to go ask Maxtor about the specifics associated with that. But we continue to be the volume supplier on the Maxtor platform today, and will be until they begin to ship that 160 gigabyte per platter drive. And I guess the other thing that we should point out is that we actually have the preamp in that 160 gigabit platter drive as it ramps. But as far as the specifics on transition and the timing of that, you really need to go back in and ask Maxtor.

Thanks, Rich. One question about the mobility business. Do you need to have, what kind of customer diversification do you need to get your goals? Do you need one tier one or a couple of tier twos, and what timeframe could we see that being achieved? Or is it just an ASP expansion that would get you there?

I think our mobility business, you clearly would like to be in a position to drive volume. There's a number of ways you can drive volume. You can drive volume through increased participation with your current customer base, increased platforms with your current customer base. Clearly, as we've transitioned to the 3G node of technology out in future years, it will be at a higher price point then the 2.5G will be at that time. So I think all of that is what Denis is in the midst of really working his way through. We're very aligned about the opportunity to move forward and generate a significant revenue, such that we can get to model profitability and feel very comfortable about that. But as far as the specifics of how many tier one customers it takes and how you drive the volume, that's really detailed level that we're working through at the current time. But I guess the real fundamental is that we feel very comfortable with the opportunity moving forward, and we think that the relationship we have with Samsung puts us in a unique position to be able to drive that.

Our next question comes from the line of Allan Mishan with CIBC.

I have a question about that $165 million OpEx target. Does that assume that during the stabilization phase for the next five months or so that you do go ahead and identify areas where you don't need to invest, that you make some cuts to get to that 165, or if you during that time decide to either cut back on a couple of areas or realign some R&D investments, does that number go lower? Just kind of looking to how those two things are possibly related.

I think it's important to recognize we said below 165 million for the Q4 timeframe. Clearly, even today we're looking at areas where we're making our investments; we're aligning; we're being sure that we have the areas that we think we have a unique position where we can drive through to win focused in investing significantly enough to be able to win. And on areas that we don't think we have a unique or differentiated position, we're clearly aligning those expenses appropriately and going through. So we are doing that on a real-time basis, ongoing basis, as we are here today. That's been a significant element of going through the details of the businesses over the last 90 days and continues to be, as we said, as we go through this period of stabilization. But we feel very comfortable that we can prioritize our investments such that we can be in a position to reduce the overall OpEx level.

Great. If I can get some color on the preamp business right now. Can you tell us what it did sequentially, maybe let us know what customers are driving that, what wins you have to look forward to? I know you mentioned the Maxtor one. And do you think you can get anywhere near the levels that we saw in that business for you in, say, '02 timeframe?

I think I mentioned last time that we were expecting it to grow pretty substantially. I'm not going to give you the absolute number of dollars, but it did grow from the past quarter by 25%. And it's very broad-based, and we are in all the customers we'd like to be in actually.

I think it's important to just add to that, we are in a confirmed position across virtually all the platforms and all the major customers that we're focused on. And it's a significant opportunity for us. We clearly had that period of time, the transition where we had a lull in our technology, and had lost significant market share. And we are in a position where we can regain that and move forward with the strength that we believe that we should have in that specific space.

The next question comes from the line of Su Ping Li, Tenor Capital Management.

I was just wondering, you mentioned in the stabilization that you might seek some strategic alternatives for some product lines. I'm just wondering if you can provide some details on that.

No, we can't provide any details at all. I think what, we've said it before; nothing is off the table. We're very focused on how we drive shareholder value, but we believe that the best way to do that in the near-term is by improving our overall performance in the individual businesses, and focusing our investments in the areas where we think we have a differentiated market position. Clearly, that's where our activity and efforts are. We're very focused on that. And we are driving that, and very confident about the opportunity as we move forward.

I believe we have one more question. Could we have the last question, please?

The next is from the line of Jeremy Bunting with Thomas Weisel Partners.

This is Jenny Hsu calling in for Jeremy. Just one quick question. Did you state which quarter you would potentially achieve the 15% operating margins?

We didn't talk about which quarter that would be. We talked about the outlook for the next quarter, and we said that as we completed the overall turnaround plan, where we were growing our revenue at a basis greater, equal to or greater than competition, we would be at greater than 15% operating margins. But that is out in time.

Just one quick question on the telecom, aligning that with your networking enterprise business. I was wondering if you could give me one or two examples about how this realignment may potentially open new doors of customers, given that you have some managed storage solutions that are access and Gigabit Ethernet. If you could just help me think about new marketing or potential new revenue opportunities there.

It's really not about bringing the products themselves, it's more about bringing the capabilities. So in the telecom space, because of the carrier requirements, we have some unique capability we have developed on the software and silicon front, relative to quality of service. And as we look at the opportunities in the enterprise space to bring some of those quality of service advantages, we think we are uniquely positioned and have a unique platform to be able to do that. So it's not about the products themselves as much as it is in the technology. And frankly, as you look at the carrier class technology moving forward, there will be a transition in technology as well. And clearly there's more similarities between the E&N business and the telecom business moving forward than there has been on a historic basis.

I'd like to thank all of you for joining us this morning. If you have any additional questions, please call investor relations at Agere Systems. Thank you, and have a nice day.

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