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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
(Amendment No. __)
Filed by the Registrant þ
Filed by a Party other than the Registrant o
Check appropriate box:
o   Preliminary Proxy Statement
o   Confidential, For Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
þ   Definitive Proxy Statement
o   Definitive Additional Materials
o   Soliciting Material under Rule 14a-12
AGERE SYSTEMS INC.
 
(Name of Registrant as Specified in Its Charter)
 
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of filing fee (Check the appropriate box):
þ   No fee required.
o   Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
    (1) Title of each class of securities to which transaction applies:
 
    (2) Aggregate number of securities to which transaction applies:
 
    (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined):
 
    (4) Proposed maximum aggregate value of transaction:
 
    (5) Total fee paid:
 
o   Fee paid previously with preliminary materials:
 
o   Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the form or schedule and the date of its filing.
 
    (1) Amount Previously Paid:
 
    (2) Form, Schedule or Registration Statement No.:
 
    (3) Filing Party:
 
    (4) Date Filed:
 
 


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MERGER PROPOSED — YOUR VOTE IS VERY IMPORTANT
 
(LSI LOGIC LOGO)
(AGERE SYSTEMS LOGO)
 
The boards of directors of each of LSI Logic Corporation and Agere Systems Inc. have approved the merger of Agere with a wholly owned subsidiary of LSI. If the proposed merger is completed, Agere stockholders will receive 2.16 shares of LSI common stock for each share of Agere common stock they own at the completion of the merger.
 
Based on the number of shares of LSI and Agere common stock outstanding on January 31, 2007, Agere stockholders are expected to hold approximately 48% of the fully diluted shares of LSI common stock following the completion of the merger. LSI stockholders will continue to own their existing shares, which will not be adjusted by the merger.
 
LSI common stock trades on the New York Stock Exchange under the symbol “LSI.” As of February 2, 2007, the last trading day before the date of this joint proxy statement/prospectus, the last reported sales price of LSI common stock at the end of regular trading hours, as reported on the New York Stock Exchange, was $9.28.
 
LSI and Agere cannot complete the merger unless LSI stockholders approve the issuance of shares of LSI common stock in the merger and Agere stockholders adopt the merger agreement. The obligations of LSI and Agere to complete the merger are also subject to the satisfaction or waiver of several other conditions to the merger. More information about LSI, Agere and the merger is contained in this joint proxy statement/prospectus. We encourage you to read carefully this joint proxy statement/prospectus before voting, including the section entitled “Risk Factors” beginning on page 14.
 
The LSI board of directors recommends that LSI stockholders vote “FOR” the proposal to approve the issuance of shares of LSI common stock in the merger. The Agere board of directors recommends that Agere stockholders vote “FOR” the proposal to adopt the merger agreement.
 
The proposals are being presented to the respective stockholders of each company at their special or annual meetings. The dates, times and places of the meetings are as follows:
 
     
For LSI stockholders: March 29, 2007 at 10:00 a.m., local time, at   For Agere stockholders: March 29, 2007 at 9:00 a.m., local time, at
1621 Barber Lane, Milpitas, California
  The Edward Nash Theater
Raritan Valley Community College
Route 28W and Lamington Road
North Branch, New Jersey 08876
 
Your vote is very important. Whether or not you plan to attend your respective company’s meeting, please take the time to vote by completing and returning the enclosed proxy card to your respective company or, if the option is available to you, by granting your proxy electronically over the Internet or by telephone. If your shares are held in “street name,” you must instruct your broker in order to vote.
 
     
Sincerely,
   
     
-S-Abhijit Y. Talwalkar
Abhijit Y. Talwalkar
President and Chief Executive Officer
LSI Logic Corporation
  -s- Richard L. Clemmer
Richard L. Clemmer
President and Chief Executive Officer
Agere Systems Inc.
 
None of the Securities and Exchange Commission, any state securities regulator or any regulatory authority has approved or disapproved of these transactions or the securities to be issued under this joint proxy statement/prospectus or determined if the disclosure in this joint proxy statement/prospectus is accurate or adequate. Any representation to the contrary is a criminal offense.
 
This joint proxy statement/prospectus is dated February 5, 2007, and is first being mailed to stockholders of
LSI and Agere on or about February 8, 2007.


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(LSI LOGIC LOGO)
LSI Logic Corporation
1621 Barber Lane
Milpitas, California 95035
(408) 433-8000
 
NOTICE OF SPECIAL MEETING OF LSI STOCKHOLDERS
 
To the Stockholders of LSI Logic Corporation:
 
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of LSI Logic Corporation, a Delaware corporation, will be held on March 29, 2007, at 10:00 a.m., local time, at 1621 Barber Lane, Milpitas, California to consider and vote upon a proposal to approve the issuance of shares of LSI Logic Corporation common stock in connection with a merger of Atlas Acquisition Corp. with and into Agere Systems Inc. contemplated by the Agreement and Plan of Merger among LSI, Atlas Acquisition Corp. and Agere.
 
Any action on the item of business described above may be considered at the special meeting at the time and on the date specified above or at any time and date to which the special meeting may be properly adjourned or postponed.
 
After careful consideration, the LSI board of directors unanimously determined that the merger agreement and the transactions contemplated by the merger agreement are advisable and in the best interests of the LSI stockholders and has unanimously approved the merger agreement. The LSI board of directors recommends that the LSI stockholders vote “FOR” the proposal to approve the issuance of shares of LSI common stock in connection with the merger.
 
You are entitled to vote only if you were a holder of LSI common stock at the close of business on February 2, 2007.
 
You are entitled to attend the special meeting only if you were an LSI stockholder or joint holder as of the close of business on February 2, 2007 or hold a valid proxy for the special meeting.
 
The special meeting will begin promptly at 10:00 a.m., local time. Check-in will begin at 9:30 a.m., local time, and you should allow ample time for the check-in procedures.
 
Your vote is very important. Whether or not you plan to attend the special meeting, we encourage you to read the joint proxy statement/prospectus and submit your proxy or voting instructions for the special meeting as soon as possible. You may submit your proxy or voting instructions for the special meeting by completing, signing, dating and returning the proxy card or voting instruction card in the pre-addressed envelope provided. For specific instructions on how to vote your shares, please refer to the section entitled “The Special Meeting of LSI Stockholders” beginning on page 27 of the joint proxy statement/prospectus.
 
By Order of the Board of Directors,
 
-S-ANDREW S. HUGHES
ANDREW S. HUGHES
Vice President, General Counsel and Corporate Secretary
 
February 5, 2007
Milpitas, California


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(AGERE SYSTEMS LOGO)
Agere Systems Inc.
1110 American Parkway NE
Allentown, Pennsylvania 18109
(610) 712-1000
 
NOTICE OF ANNUAL MEETING OF AGERE STOCKHOLDERS
 
Agere Systems Inc. will hold its Annual Meeting of Stockholders at the Edward Nash Theater at the Raritan Valley Community College, Route 28W and Lamington Road, North Branch, New Jersey 08876, on March 29, 2007, 9:00 a.m., local time. We are holding the meeting for the following purposes:
 
1. To consider and vote on the proposal to adopt the Agreement and Plan of Merger, dated as of December 3, 2006 (which we refer to as the merger agreement), by and among Agere, LSI Logic Corporation and Atlas Acquisition Corp.;
 
2. To elect three members of the Agere board of directors for terms described in the joint proxy statement/prospectus;
 
3. To re-approve the Agere Short Term Incentive Plan;
 
4. To ratify the Audit Committee’s selection of PricewaterhouseCoopers LLP as Agere’s independent registered public accounting firm for fiscal 2007; and
 
5. To transact such other business as may properly come before the meeting and any postponement or adjournment thereof.
 
The Agere board of directors has approved the merger agreement and the transactions contemplated by the merger agreement by unanimous vote of the directors present, and recommends that you vote “FOR” the proposal to adopt the merger agreement, which is described in detail in the joint proxy statement/prospectus.  The Agere board of directors also recommends that you vote “FOR” each of the director nominees of Agere listed in this joint proxy statement/prospectus, “FOR” the re-approval of Agere’s Short Term Incentive Plan and “FOR” the ratification of the selection of PricewaterhouseCoopers LLP as Agere’s independent registered public accounting firm for fiscal 2007.
 
Holders of record of Agere common stock at the close of business on February 2, 2007, are entitled to vote at the meeting. A list of stockholders eligible to vote at the Agere annual meeting will be available for inspection at the annual meeting and at the offices of Agere in Allentown, Pennsylvania during regular business hours for a period of no less than ten days prior to the annual meeting.
 
In addition to the joint proxy statement/prospectus, proxy card and voting instructions, Agere stockholders are receiving a copy of the Agere 2006 annual report on Form 10-K.
 
You can vote your shares by completing and returning a proxy card. Most stockholders can also vote over the Internet or by telephone. If Internet and telephone voting are available to you, you can find voting instructions in the materials accompanying the joint proxy statement/prospectus. You can revoke a proxy at any time prior to its exercise at the meeting by following the instructions in the enclosed joint proxy statement/prospectus.
 
By Order of the Board of Directors,
 
JEAN F. RANKIN
Executive Vice President, General
Counsel and Secretary
 
February 5, 2007
Allentown, Pennsylvania


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TABLE OF CONTENTS
 
         
   
Page
 
QUESTIONS AND ANSWERS ABOUT THE MERGER   v
  v
  vi
  vii
SUMMARY   1
  1
  1
  2
  2
  2
  2
  3
  3
  3
  3
  3
  4
  4
  4
  5
  5
  5
  5
  5
SUMMARY SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF LSI   6
LSI RECENT DEVELOPMENTS   7
SUMMARY SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF AGERE   8
AGERE RECENT DEVELOPMENTS   9
SELECTED UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL DATA   10
COMPARATIVE HISTORICAL AND PRO FORMA PER SHARE DATA   11
COMPARATIVE PER SHARE MARKET PRICE DATA   12
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION   13
RISK FACTORS   14
  14
  17
THE SPECIAL MEETING OF LSI STOCKHOLDERS   27
  27
  27
  27
  27
  27
  28
  28
  28


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Page
 
  28
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THE AGERE ANNUAL MEETING   30
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  34
  34
GOVERNANCE OF AGERE   35
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BENEFICIAL OWNERSHIP OF AGERE COMMON STOCK   39
  39
  40
PROPOSAL 1.  THE MERGER AGREEMENT AND THE MERGER   41
PROPOSAL 2.  ELECTION OF AGERE DIRECTORS   42
  42
  43
  43
PROPOSAL 3.  RE-APPROVAL OF THE AGERE SYSTEMS INC. SHORT TERM INCENTIVE PLAN   44
PROPOSAL 4.  RATIFICATION OF SELECTION OF PRICEWATERHOUSECOOPERS LLP AS AGERE’S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM   46
  46
EXECUTIVE COMPENSATION   48
OTHER ARRANGEMENTS WITH AGERE EXECUTIVES   52
  52
  53
REPORT OF THE AGERE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION   55
  55
  55
  56


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Page
 
  56
  59
REPORT OF THE AGERE AUDIT COMMITTEE   61
AGERE PERFORMANCE GRAPHS   62
THE MERGER   64
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  68
  69
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  81
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  90
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THE MERGER AGREEMENT   94
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Page
 
  113
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  134
   
   
   
   
 
This joint proxy statement/prospectus incorporates important business and financial information about LSI and Agere from documents that each company has filed with the Securities and Exchange Commission but that have not been included in or delivered with this joint proxy statement/prospectus. For a listing of documents incorporated by reference into this joint proxy statement/prospectus, please see the section entitled “Where You Can Find More Information” beginning on page 134 of this joint proxy statement/prospectus.
 
LSI will provide you with copies of this information relating to LSI, without charge, upon written or oral request to:
LSI Logic Corporation
1621 Barber Lane
Milpitas, California 95035
Attention: Investor Relations
Telephone Number: 1-800-433-8778
 
In addition, you may obtain copies of this information by making a request through LSI’s investor relations by sending an e-mail to investorrelations@lsi.com.
 
Agere will provide you with copies of this information relating to Agere, without charge, upon written or oral request to:
Agere Systems Inc.
1110 American Parkway NE
Allentown, Pennsylvania 18109
Attention: Investor Relations
Telephone Number: 1-800-372-2477
 
In addition, you may obtain copies of this information by making a request through Agere’s investor relations by sending an e-mail to investor@agere.com.
 
In order for you to receive timely delivery of the documents in advance of the LSI special meeting, LSI should receive your request no later than March 22, 2007.
 
In order for you to receive timely delivery of the documents in advance of the Agere annual meeting, Agere should receive your request no later than March 22, 2007.


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QUESTIONS AND ANSWERS ABOUT THE MERGER
 
General Questions and Answers
 
The following questions and answers briefly address some commonly asked questions about the LSI special meeting, the Agere annual meeting and the merger. They may not include all the information that is important to stockholders of LSI and Agere. Agere and LSI urge stockholders to read carefully this entire joint proxy statement/prospectus, including the annexes and the other documents referred to herein. Page references are included in this summary to direct you to more detailed discussions elsewhere in this joint proxy statement/prospectus.
 
Q: Why am I receiving this joint proxy statement/prospectus?
 
A: LSI and Agere have agreed to combine their businesses under the terms of a merger agreement that is described in this joint proxy statement/prospectus. A copy of the merger agreement is attached to this joint proxy statement/prospectus as Annex A.
 
In order to complete the merger, LSI stockholders must approve the issuance of shares of LSI common stock in connection with the merger and Agere stockholders must adopt the merger agreement. LSI will hold a special meeting of its stockholders and Agere will hold an annual meeting of its stockholders to obtain these approvals. Agere is also asking its stockholders to approve other matters in connection with its annual meeting that are described in this joint proxy statement/prospectus. This joint proxy statement/prospectus contains important information about the merger and the stockholder meetings of each of LSI and Agere, and you should read it carefully. For LSI stockholders, the enclosed voting materials for the LSI special meeting allow LSI stockholders to vote shares of LSI common stock without attending the LSI special meeting. For Agere stockholders, the enclosed voting materials for the Agere annual meeting allow Agere stockholders to vote shares of Agere common stock without attending the Agere annual meeting.
 
Stockholder votes are important. LSI and Agere encourage stockholders of each company to vote as soon as possible. For more specific information on how to vote, please see the questions and answers for each of the LSI and Agere stockholders below.
 
Q: Why are LSI and Agere proposing the merger? (see page 68)
 
A: After reviewing strategic alternatives to address the opportunities and challenges facing our companies, the boards of directors of both LSI and Agere reached the same conclusion — this merger represents the best strategic alternative for our respective companies.
 
Specifically, LSI and Agere believe the merger will provide certain strategic and financial benefits, including the following:
 
• An increase in product development capabilities;
 
• Greater depth of relationships with customers;
 
• An enhanced intellectual property portfolio; and
 
• A reduction in operating costs.
 
Q: When do LSI and Agere expect to complete the merger?
 
A: LSI and Agere currently plan to complete the merger shortly following the LSI and Agere stockholder meetings. However, neither LSI nor Agere can predict the exact timing of the completion of the merger because the merger is subject to governmental and regulatory review processes and other conditions.
 
Q: How do the boards of directors of LSI and Agere recommend that I vote? (see pages 27 and 41)
 
A: The LSI board of directors recommends that LSI stockholders vote “FOR” the proposal to approve the issuance of shares of LSI common stock in connection with the merger.
 
The Agere board of directors recommends that Agere stockholders vote “FOR” the proposal to adopt the merger agreement.
 
Q: What should I do now?
 
A: Please review this joint proxy statement/prospectus carefully and vote as soon as possible. Most LSI and Agere stockholders may vote over the Internet or by telephone. Stockholders may also vote by signing, dating and returning each proxy card and voting instruction card received.


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Q: What should I do if I receive more than one set of voting materials? (see page 27)
 
A: Please vote each proxy card and voting instruction card that you receive. You may receive more than one set of voting materials, including multiple copies of this joint proxy statement/prospectus and multiple proxy cards or voting instruction cards. For example, stockholders who hold shares in more than one brokerage account will receive a separate voting instruction card for each brokerage account in which shares are held. If shares are held in more than one name, stockholders will receive more than one proxy or voting instruction card. In addition, if you are a stockholder of both LSI and Agere, you may receive one or more proxy cards or voting instruction cards for LSI and one or more proxy cards or voting instruction cards for Agere. If you are a stockholder of both LSI and Agere, please note that a vote for the issuance of shares in connection with the merger for the LSI special meeting will not constitute a vote for the proposal to adopt the merger agreement for the Agere annual meeting, and vice versa. Therefore, please vote each proxy and voting instruction card you receive, whether from LSI or Agere.
 
Questions and Answers for LSI Stockholders
 
Q: When and where is the LSI special meeting? (see page 27)
 
A: The special meeting of LSI stockholders will be held at 10:00 a.m., local time, on March 29, 2007, at 1621 Barber Lane, Milpitas, California. Check-in will begin at 9:30 a.m., local time. Please allow ample time for the check-in procedures.
 
Q: How can I attend the LSI special meeting? (see page 27)
 
A: LSI stockholders or joint holders as of the close of business on February 2, 2007, and those who hold a valid proxy for the special meeting are entitled to attend the LSI special meeting. LSI stockholders should be prepared to present photo identification for admittance. In addition, names of record holders will be verified against the list of record holders on the record date prior to being admitted to the meeting. LSI stockholders who are not record holders but who hold shares through a broker or nominee (i.e., in street name), should provide proof of beneficial ownership on the record date, such as most recent account statement prior to February 2, 2007, or other similar evidence of ownership. If LSI stockholders do not provide photo identification or comply with the other procedures outlined above upon request, they will not be admitted to the LSI special meeting.
 
The LSI special meeting will begin promptly at 10:00 a.m. Check-in will begin at 9:30 a.m., local time, and you should allow ample time for the check-in procedures.
 
Q: What is the vote of LSI stockholders required to approve the issuance of shares of LSI common stock in connection with the merger? (see page 28)
 
A: The issuance of shares of LSI common stock in connection with the merger requires an affirmative vote of a majority of the votes cast at the LSI special meeting, provided that the total votes cast on the proposal represents over 50% of all shares of LSI common stock entitled to vote on the proposal.
 
Q: As an LSI stockholder, how can I vote? (see page 28)
 
A: Stockholders of record as of the record date may vote in person by attending the LSI special meeting, by completing and returning a proxy card or, if you hold your shares in street name, a voting instruction form. Most stockholders can also vote over the Internet or by telephone. If Internet and telephone voting are available, LSI stockholders can find voting instructions in the materials accompanying this joint proxy statement/prospectus.
 
The Internet and telephone voting facilities will close at 11:59 p.m., Eastern Time, on March 28, 2007. Please be aware that LSI stockholders who vote over the Internet may incur costs such as telephone and Internet access charges for which they will be responsible.
 
The method by which LSI stockholders vote will in no way limit the right to vote at the meeting if you later decide to attend in person. If shares are held in street name, LSI stockholders must obtain a proxy, executed in their favor, from their broker or other holder of record, to be able to vote at the meeting.
 
If shares are held through a broker, such shares may be voted even if holders of such shares do not vote or attend the special meeting. Broker “non-votes,” if any, will not be counted as votes cast on the proposal to issue shares of LSI common stock in connection with the merger.


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All shares entitled to vote and represented by properly completed proxies received prior to the LSI special meeting and not revoked will be voted at the meeting in accordance with your instructions. If a signed proxy card is returned without indicating how shares should be voted on a matter and the proxy is not revoked, the shares represented by such proxy will be voted as the LSI board of directors recommends and therefore “FOR” the issuance of shares in connection with the merger.
 
For a more detailed explanation of the voting procedures, please see the section entitled “Voting Procedures” beginning on page 28 of this joint proxy statement/prospectus.
 
Q: As an LSI stockholder, what happens if I do not vote? (see page 28)
 
A: Failure to vote or give voting instructions to your broker or nominee for the LSI special meeting could make it more difficult to meet the voting requirement that the total votes cast on the proposal represent over 50% of all shares of LSI common stock entitled to vote on the proposal. Therefore, LSI urges LSI stockholders to vote.
 
Q: As an LSI stockholder, may I change my vote after I have submitted a proxy card or voting instruction card? (see page 29)
 
A: Yes. LSI stockholders may revoke a previously granted proxy or voting instruction at any time prior to the special meeting by:
 
• signing and returning a later dated proxy or voting instruction card for the LSI special meeting; or
 
• attending the LSI special meeting and voting in person, as described in the section entitled “The Special Meeting of LSI Stockholders” beginning on page 27 of this joint proxy statement/prospectus.
 
Only the last submitted proxy or voting instruction card will be considered. Please submit a proxy or voting instruction card for the LSI special meeting as soon as possible.
 
Q: What do LSI stockholders need to do now?
 
A: Carefully read and consider the information contained in and incorporated by reference into this joint proxy statement/prospectus, including its annexes. In order for LSI shares to be represented at the special meeting, LSI stockholders can (1) vote through the Internet or by telephone by following the instructions included on their proxy card, (2) indicate on the enclosed proxy card how they would like to vote and return the proxy card in the accompanying pre-addressed postage paid envelope, or (3) attend the LSI special meeting in person.
 
Q: Who can answer questions?
 
A: LSI stockholders with questions about the merger or the other matters to be voted on at the LSI special meeting or who desire additional copies of this joint proxy statement/prospectus or additional proxy cards should contact:
Georgeson Inc.
17 State Street, 10th Floor
New York, NY 10004
Toll Free: (866) 783-6820
Banks and Brokerage Firms: (212) 440-9800
 
If you need additional copies of this joint proxy statement/prospectus or voting materials, contact Georgeson Inc. as described above or send an e-mail to investorrelations@lsi.com.
 
Questions and Answers for Agere Stockholders
 
Q: Why are Agere stockholders receiving this joint proxy statement/prospectus?
 
A: In order to complete the merger, Agere stockholders must adopt the merger agreement.
 
This joint proxy statement/prospectus contains important information about the proposed merger, the merger agreement and the Agere annual meeting, which should be read carefully. The enclosed voting materials allow Agere stockholders to vote shares without attending the Agere annual meeting. The vote of Agere stockholders is very important. Agere stockholders are encouraged to vote as soon as possible.
 
Q: What will Agere stockholders receive in the merger?
 
A: If the proposed merger is completed, at the effective time of the merger, Agere stockholders will be entitled to receive 2.16 shares of LSI common stock for each share of Agere common stock that they own. Agere


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stockholders will receive cash for any fractional shares they would otherwise receive in the merger. The amount of cash for fractional shares will be calculated by multiplying the fractional share interest to which each such stockholder would be entitled by the per share closing price of shares of LSI common stock on the trading day immediately preceding the closing date. Following the completion of the merger, former Agere stockholders are expected to own approximately 48% of the fully diluted shares of the combined company based on the number of shares of LSI and Agere outstanding as of January 31, 2007, excluding shares issuable on conversion of Agere’s outstanding convertible notes.
 
Q: What if I have Agere stock options?
 
A: Each outstanding option to purchase shares of Agere common stock, whether or not exercisable, will be converted into an option to acquire LSI common stock, on the same terms and conditions as were applicable to such Agere stock option prior to the effective time of the merger, except that the number of shares for which such option is or may become exercisable and the exercise price of the option will be adjusted to reflect the exchange ratio.
 
Q: What if I have Agere stock appreciation rights?
 
A: Each outstanding stock appreciation right relating to shares of Agere common stock, whether or not exercisable, will be converted into a stock appreciation right relating to shares of LSI common stock, on the same terms and conditions as were applicable to such Agere stock appreciation right prior to the effective time of the merger, except that the number of shares to which the stock appreciation right relates and the exercise price of the stock appreciation right will be adjusted to reflect the exchange ratio.
 
Q: What if I have Agere restricted stock units?
 
A: Each Agere outstanding restricted stock unit award will be converted into an award to receive shares of LSI common stock on the same terms and conditions that were applicable to such Agere restricted stock unit award prior to the effective time of the merger, except that the number of shares subject to the award will be adjusted to reflect the exchange ratio, and, for any restricted stock unit award which vests upon a specified date if performance based criteria are achieved, the performance based criteria shall be waived and the restricted stock unit award will vest in accordance with its terms and conditions on the specified date.
 
Q: What are the material United States federal income tax consequences of the merger to Agere stockholders?
 
A: The transaction is intended to be a tax-free reorganization for United States federal income tax purposes. If the merger qualifies as a reorganization, Agere stockholders will not recognize any gain or loss, for federal income tax purposes, with respect to the shares of LSI common stock they receive in the merger. However, Agere’s stockholders will recognize gain or loss on any fractional shares of LSI common stock for which cash is received in lieu of a fractional share.
 
Q: Are Agere stockholders entitled to dissenters’ rights?
 
A: No. Under the Delaware General Corporation Law, holders of Agere common stock are not entitled to dissenters’ appraisal rights in connection with the merger.
 
Q: What matters will Agere stockholders vote on at the annual meeting?
 
A: Agere stockholders will vote on the following proposals:
 
• To adopt the merger agreement;
 
• To elect three directors to serve until the next annual meeting of stockholders and until their successors are elected and qualified or until the consummation of the merger;
 
• To re-approve the Agere Short Term Incentive Plan;
 
• To ratify the audit committee’s selection of PricewaterhouseCoopers LLP as Agere’s independent registered public accounting firm for fiscal 2007; and
 
• To transact such other business as may properly come before the annual meeting.
 
Q: How does the Agere board of directors recommend that Agere stockholders vote?
 
A: The Agere board of directors, by the unanimous vote of the directors present, has determined that the merger agreement and the transactions contemplated by the merger agreement are advisable and in the best interests of the Agere stockholders and recommends that Agere stockholders vote “FOR” the proposal to adopt the merger


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agreement. For a more complete description of the recommendation of the Agere board of directors, see “The Merger — Consideration of the Merger by the Agere Board of Directors — Recommendation of the Agere Board of Directors.”
 
The Agere board of directors also recommends that Agere stockholders vote “FOR” each of the director nominees listed under the heading “Election of Agere Directors,” “FOR” the re-approval of Agere’s Short Term Incentive Plan and “FOR” the ratification of the selection of PricewaterhouseCoopers LLP as Agere’s independent registered public accounting firm for fiscal 2007 at the annual meeting.
 
Q: When and where will the Agere annual meeting be held?
 
A: The annual meeting is scheduled to be held at the Edward Nash Theater at the Raritan Valley Community College, Route 28W and Lamington Road, North Branch, New Jersey 08876, on March 29, 2007, at 9:00 a.m., local time.
 
Q: What vote is needed to adopt the merger agreement and to approve the other matters at the annual meeting?
 
A: The proposal to adopt the merger agreement requires the affirmative vote of the holders of at least a majority of the shares of Agere common stock outstanding on the record date.
 
Re-approval of the Agere Short Term Incentive Plan and ratification of the selection of PricewaterhouseCoopers LLP as Agere’s independent registered public accounting firm for fiscal 2007 each requires the affirmative vote of the holders of a majority of the Agere common stock present in person or represented by proxy and entitled to vote at the annual meeting. Directors will be elected by a plurality of the votes cast.
 
Q: How do Agere stockholders vote?
 
A: If you were an Agere stockholder on the record date for the Agere annual meeting, you may vote at the meeting. Most stockholders can vote over the Internet or by telephone. If Internet and telephone voting are available to you, you can find voting instructions in the materials accompanying this joint proxy statement/prospectus. You can also vote by completing and returning a proxy card or, if you hold your shares in street name, a voting instruction form.
 
The Internet and telephone voting facilities will close at 11:59 p.m., Eastern Daylight Time, on March 28, 2007. Please be aware that Agere stockholders who vote over the Internet may incur costs such as telephone and Internet access charges for which they will be responsible. Voting instructions from participants in Agere’s 401(k) plan must be received by 11:59 p.m., Eastern Daylight Time, on March 26, 2007.
 
The method by which Agere stockholders vote will in no way limit their right to vote at the meeting if such stockholders later decide to attend in person. If shares are held in street name, Agere stockholders must obtain a proxy, executed in their favor, from a broker or other holder of record, to be able to vote at the meeting.
 
If shares are held through a broker, such shares may be voted even if the Agere stockholder does not vote or attend the annual meeting. Under the rules of the New York Stock Exchange, member brokers who do not receive instructions from beneficial owners will be allowed to vote on the election of directors, the proposal to re-approve the Short Term Incentive Plan and the proposal to ratify the audit committee’s selection of PricewaterhouseCoopers LLP as Agere’s independent registered public accounting firm for fiscal 2007. Broker “non-votes,” if any, will have the same effect as votes cast against the proposal to adopt the merger agreement.
 
If you hold shares through Agere’s 401(k) plan and do not vote, those shares will be voted in the same proportion as shares in the plan that are voted by plan participants.
 
All shares entitled to vote and represented by properly completed proxies received prior to the Agere annual meeting and not revoked will be voted at the meeting in accordance with stockholder instructions. If a signed proxy card is returned without indicating how shares should be voted on a matter and the proxy is not revoked, the shares represented by the proxy will be voted as the Agere board of directors recommends and therefore “FOR” the adoption of the merger agreement, “FOR” each of the director nominees listed under the heading “Election of Agere Directors,” “FOR” the re-approval of Agere’s Short Term Incentive Plan and “FOR” the ratification of the selection of PricewaterhouseCoopers LLP as Agere’s independent registered public accounting firm for fiscal 2007 at the annual meeting.


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Q: As an Agere stockholder, can I change my vote after I have delivered my proxy?
 
A: Yes. Agere stockholders may revoke a proxy (including an Internet or telephone vote) at any time before it is exercised by timely delivery of a properly executed, later-dated proxy or by voting in person at the meeting.
 
Q: What will happen if Agere stockholders abstain from voting or do not vote?
 
A: If an Agere stockholder abstains from voting or does not vote, it will have the same effect as a vote against the proposal to adopt the merger agreement. If a stockholder is present in person or by proxy and abstains from voting, it will have the same effect as a vote against (1) the proposal to re-approve the Agere Short Term Incentive Plan and (2) the proposal to ratify the selection of PricewaterhouseCoopers LLP as Agere’s independent registered public accounting firm for fiscal 2007. Abstentions will have no effect on the election of Agere directors. If an Agere stockholder returns a proxy and does not indicate how it should be voted, shares represented by such proxy will be voted as the Agere board of directors recommends on all matters for consideration at the Agere annual meeting.
 
Q: Should Agere stock certificates be sent in now?
 
A: No. If the merger is completed, Agere stockholders will receive written instructions for sending in any stock certificates they may have.
 
Q: What do Agere stockholders need to do now?
 
A: Carefully read and consider the information contained in and incorporated by reference in this joint proxy statement/prospectus, including its annexes. In order for shares to be represented at the Agere annual meeting, Agere stockholders can (1) vote over the Internet or by telephone by following the instructions included on the proxy card, (2) indicate on the enclosed proxy card how they would like to vote and return the proxy card in the accompanying pre-addressed postage paid envelope, or (3) attend the Agere annual meeting in person.
 
Q: As an Agere stockholder, who can answer my questions?
 
A: Agere stockholders with questions about the merger or the other matters to be voted on at the Agere annual meeting should contact The Proxy Advisory Group, LLC by phone at (212) 213-3832, or toll-free at 1-866-678-1770. Agere stockholders who desire additional copies of this joint proxy statement/prospectus or additional proxy cards should send written requests or inquiries to Agere Systems Inc., 1110 American Parkway NE, Room 10A-301C, Allentown, Pennsylvania 18109, Attention: Response Center, or call 1-800-372-2447.


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SUMMARY
 
The following is a summary of the information contained in this joint proxy statement/prospectus relating to the merger. This summary may not contain all of the information about the merger that is important to you. For a more complete description of the merger, LSI and Agere encourage you to read carefully this entire joint proxy statement/prospectus, including the attached annexes. In addition, LSI and Agere encourage you to read the information incorporated by reference into this joint proxy statement/prospectus, which includes important business and financial information about LSI and Agere. Stockholders of LSI and Agere may obtain the information incorporated by reference into this joint proxy statement/prospectus without charge by following the instructions in the section entitled “Where You Can Find More Information” beginning on page 134 of this joint proxy statement/prospectus.
 
The Merger and the Merger Agreement (see page 94)
 
LSI and Agere have agreed to combine their businesses under the terms of a merger agreement between the companies that is described in this joint proxy statement/prospectus. A copy of the merger agreement is attached to this joint proxy statement/prospectus as Annex A. Under the terms of the merger agreement, a newly-formed, wholly-owned subsidiary of LSI will merge with and into Agere and Agere will survive the merger as a wholly-owned subsidiary of LSI. Upon completion of the merger, holders of Agere common stock will be entitled to receive 2.16 shares of LSI common stock for each share of Agere common stock they then hold. LSI stockholders will continue to own their existing shares of LSI common stock after the merger.
 
Parties to the Merger
 
LSI Logic Corporation
1621 Barber Lane
Milpitas, California 95035
(408) 433-8000
 
LSI designs, develops, and markets complex, high-performance semiconductors and storage systems. In 2005, LSI’s operations were organized in four markets: communications, consumer products, storage components and storage systems. On March 6, 2006, LSI announced its plans to focus its business growth opportunities in the information storage and consumer markets.
 
LSI offers integrated circuit products, board-level products, and software for use in consumer applications, high-performance storage controllers, enterprise hard disk controllers, and systems for storage area networks. LSI’s integrated circuits are also used in a wide range of communication devices.
 
LSI operates in two segments — the semiconductor segment and the storage systems segment — in which LSI offers products and services for a variety of electronic systems applications. LSI’s products are marketed primarily to original equipment manufacturers that sell products to LSI’s target markets.
 
LSI was incorporated in California on November 6, 1980, and was reincorporated in Delaware on June 11, 1987. LSI’s principal offices are located at 1621 Barber Lane, Milpitas, California 95035, and LSI’s telephone number at that location is (408) 433-8000. LSI’s home page on the Internet is www.lsi.com.
 
Agere Systems Inc.
1110 American Parkway NE
Allentown, Pennsylvania 18109
(610) 712-1000
 
Agere is a leading provider of integrated circuit solutions for a variety of computing and communications applications. Some of Agere’s solutions include related software and reference designs. Agere’s solutions are used in products such as hard disk drives, mobile phones, high-speed communications systems and personal computers. Agere also licenses its intellectual property to others.


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Atlas Acquisition Corp.
1621 Barber Lane
Milpitas, California 95035
(408) 433-8000
 
Atlas Acquisition Corp. is a newly-formed, wholly-owned subsidiary of LSI. LSI formed Atlas Acquisition Corp. solely to effect the merger, and Atlas Acquisition Corp. has not conducted and will not conduct any business during any period of its existence.
 
Recommendation of the LSI Board of Directors (see page 69)
 
After careful consideration, the LSI board of directors unanimously determined that the merger agreement and the consummation of the transactions contemplated by the merger agreement are advisable and in the best interests of the LSI stockholders, and has unanimously approved the merger agreement. The LSI board of directors recommends that the LSI stockholders vote “FOR” the proposal to approve the issuance of shares of LSI common stock in connection with the merger.
 
Opinion of LSI Financial Advisor Regarding the Merger (see page 71)
 
On December 3, 2006, Morgan Stanley delivered its written opinion to the LSI board of directors that, as of that date and subject to the assumptions, considerations and limitations set forth in its opinion, the exchange ratio provided for in the merger agreement was fair, from a financial point of view, to LSI. Morgan Stanley provided its opinion for the information and assistance of the LSI board of directors in connection with the board’s consideration of the merger. The Morgan Stanley opinion is not a recommendation as to how any LSI stockholder should vote or take any other action with respect to the proposal to approve the issuance of shares of LSI common stock in connection with the merger.
 
The full text of the written opinion of Morgan Stanley, which sets forth assumptions made, matters considered and limitations on the review undertaken in connection with its opinion, is attached to this joint proxy statement/prospectus as Annex B. Stockholders of LSI are urged to read the opinion carefully and in its entirety. LSI stockholders should carefully consider the discussion of Morgan Stanley’s analysis in the section entitled “Opinion of LSI Financial Advisor” beginning on page 71 of this joint proxy statement/prospectus.
 
Recommendation of the Agere Board of Directors (see page 81)
 
After careful consideration, the Agere board of directors by unanimous vote of the directors present determined that the merger is advisable and in the best interests of Agere and its stockholders, and approved the merger agreement. The Agere board of directors recommends that the Agere stockholders vote “FOR” the proposal to adopt the merger agreement. The Agere board of directors also recommends that Agere stockholders vote “FOR” each of the director nominees of Agere listed under the heading “Election of Agere Directors,” “FOR” the re-approval of Agere’s Short Term Incentive Plan and “FOR” the ratification of the selection of PricewaterhouseCoopers LLP as Agere’s independent registered public accounting firm for fiscal 2007.
 
Opinion of Agere Financial Advisor Regarding the Merger (see page 84)
 
On December 3, 2006, Goldman, Sachs & Co. rendered its oral opinion, subsequently confirmed by delivery of its written opinion, dated December 3, 2006, to Agere’s board of directors that, as of the date of its opinion and based upon and subject to the factors and assumptions set forth in the opinion, the exchange ratio of 2.16 shares of LSI common stock to be received for each share of Agere common stock pursuant to the merger agreement was fair from a financial point of view to the holders of shares of Agere common stock.
 
The full text of the written opinion of Goldman Sachs, dated December 3, 2006, which sets forth the assumptions made, procedures followed, matters considered and limitations on the review undertaken in connection with the opinion, is attached as Annex C to this joint proxy statement/prospectus. Goldman Sachs provided its opinion for the information and assistance of Agere’s board of directors in connection with its consideration of the merger. Goldman Sachs’ opinion is not a recommendation as to how any holder of Agere common stock should vote with respect to the merger. Pursuant to an engagement letter between Agere and Goldman Sachs, Agere has agreed to pay Goldman Sachs a transaction fee of approximately $28 million, substantially all of which is payable upon consummation of the merger.


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Some Agere Directors and Executive Officers Have Interests in the Merger (see page 90)
 
Certain members of the Agere board of directors and certain of Agere’s executive officers have interests in the transactions contemplated by the merger agreement that may be different than, or in addition to, the interests of Agere stockholders generally. These interests include, among other things, the following:
 
  •  Executive officers whose employment is terminated under certain circumstances after the merger will be entitled to severance benefits payable by Agere;
 
  •  Certain executive officers hold stock options which will become exercisable and restricted stock units which will vest if their employment is terminated under certain circumstances on or after adoption of the merger agreement by Agere stockholders (or, if later, on receipt of necessary governmental agency consent);
 
  •  Three directors from Agere’s current board of directors will be designated by Agere to serve on the board of directors of the combined company after the effective time of the merger;
 
  •  Certain of Agere’s current executive officers will be offered continued employment with the combined company after the effective time of the merger;
 
  •  Certain directors hold stock options which will become exercisable upon adoption of the merger agreement by Agere stockholders (or, if later, upon receipt of necessary governmental agency consent); and
 
  •  Directors and officers will be indemnified by the combined company with respect to acts or omissions by them in their capacities as such prior to the effective time of the merger.
 
The Agere board of directors was aware of these interests and considered them, among other matters, in making its recommendation. See “The Merger — Consideration of the Merger by the Agere Board of Directors.”
 
Share Ownership of Directors and Executive Officers of LSI (see page 28)
 
At the close of business on the record date for the LSI special meeting, directors and executive officers of LSI beneficially owned and were entitled to vote approximately 1.8% of the shares of LSI common stock outstanding on that date.
 
Share Ownership of Directors and Executive Officers of Agere (see page 40)
 
At the close of business on the record date for the Agere annual meeting, directors and executive officers of Agere beneficially owned and were entitled to vote less than 1% of the shares of Agere common stock outstanding on that date.
 
Directors and Certain Officers of LSI Following the Merger (see page 93)
 
Effective upon closing of the merger, LSI’s board of directors will continue to consist of nine members, six of whom will be designated by LSI and three of whom shall be designated by Agere. Abhijit Talwalkar will serve as President and Chief Executive Officer and Bryon Look will serve as Chief Financial Officer following the merger. Although the exact composition of the combined company’s executive management team following the merger was not finalized as of the date of this joint proxy statement/prospectus, it is expected that Phil Brace, Phil Bullinger, Jon Gibson, Andy Micallef, Umesh Padval, Jean Rankin, Denis Regimbal, Jeff Richardson and Rudy Stroh will serve as part of the combined company’s post-merger executive management team.
 
What is Needed to Complete the Merger (see page 106)
 
Several conditions must be satisfied or waived before LSI and Agere complete the merger, including those summarized below:
 
  •  adoption of the merger agreement by Agere stockholders;
 
  •  approval by LSI stockholders of the issuance of shares of LSI common stock in the merger;
 
  •  no order of any court preventing the completion of the merger shall be in effect;
 
  •  receipt of antitrust approvals from the United States and any other foreign antitrust regulators, except for foreign approvals, which, if not obtained, would not have a material adverse effect on LSI, Agere and their subsidiaries, taken as a whole;
 
  •  receipt of opinions by LSI and Agere from their respective tax counsel that the merger will qualify as a “reorganization” under the Internal Revenue Code;


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  •  accuracy of each party’s respective representations and warranties in the merger agreement, except as would not have a material adverse effect;
 
  •  material compliance by each party with its covenants in the merger agreement; and
 
  •  absence of a material adverse effect on LSI or Agere, respectively, from December 3, 2006 to the completion of the merger.
 
LSI and Agere Are Prohibited from Soliciting Other Offers (see page 99)
 
The merger agreement contains detailed provisions that prohibit LSI and Agere, and their officers, directors, affiliates, advisors and representatives from taking any action to solicit or engage in discussions or negotiations with any person or group with respect to an acquisition proposal as defined in the merger agreement, including:
 
  •  an acquisition which would result in the person or group acquiring more than 15% of a party’s total outstanding securities;
 
  •  an acquisition which would result in the person or group acquiring more than 50% of any class of equity securities of a party’s subsidiaries that generate or constitute 15% or more of the net revenues, net income or assets of such party;
 
  •  a sale or disposition by a party of assets that generate or constitute 15% or more of the net revenues, net income or assets of such party;
 
  •  a merger or other business combination involving a party or subsidiaries that generate or constitute 15% or more of the net revenues, net income or net assets of such party;
 
  •  any liquidation, dissolution, recapitalization or reorganization involving a party or subsidiaries that generate or constitute 15% or more of the net revenues, net income or net assets of such party; or
 
  •  any combination of the transactions described above.
 
The merger agreement does not, however, prohibit either party from considering a bona fide acquisition proposal from a third party if specified conditions are met.
 
LSI and Agere May Terminate the Merger Agreement Under Specified Circumstances (see page 108)
 
Under circumstances specified in the merger agreement, either LSI or Agere may terminate the merger agreement. These circumstances generally include if:
 
  •  the merger is not completed by May 15, 2007 (which date will be extended to August 31, 2007 if the merger has not been completed as a result of a failure to obtain required antitrust approvals and all other conditions to closing have been satisfied or waived on or prior to such time);
 
  •  a final, non-appealable order of a court or any governmental authority has the effect of permanently prohibiting completion of the merger;
 
  •  the required approval of the stockholders of LSI of the issuance of shares of LSI common stock in the merger has not been obtained at LSI’s duly held special meeting;
 
  •  the required approval of the stockholders of Agere to adopt the merger agreement has not been obtained at Agere’s duly held annual meeting;
 
  •  the board of directors of the other party takes any of the actions in opposition to the merger described as a “triggering event” in the merger agreement;
 
  •  the other party breaches its representations, warranties or covenants in the merger agreement such that its conditions to completion of the merger regarding representations, warranties or covenants would not be satisfied; or
 
  •  the other party consents to termination.
 
LSI or Agere May Pay a Termination Fee Under Specified Circumstances (see page 109)
 
If the merger agreement is terminated, either LSI or Agere, in specified circumstances, may be required to pay a termination fee of $120 million to the other party.


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The Merger is Intended to Qualify as a Reorganization for United States Federal Income Tax Purposes (see page 110)
 
The merger has been structured to qualify as a reorganization for United States federal income tax purposes, and LSI and Agere have each received the opinion of their respective counsel, attached as exhibits 8.1 and 8.2 to the LSI registration statement on Form S-4 of which this joint proxy statement/prospectus forms a part, regarding such qualification. Assuming the merger so qualifies, Agere stockholders generally will not recognize gain or loss for United States federal income tax purposes as a result of receiving LSI common stock in exchange for their Agere common stock pursuant to the merger, except with respect to cash received instead of fractional shares of LSI common stock. Stockholders of Agere should carefully read the discussion setting forth such tax opinions in the section entitled “Material United States Federal Income Tax Consequences of the Merger” beginning on page 110 of this joint proxy statement/prospectus. Further, stockholders of Agere are encouraged to consult with a tax advisor because tax matters can be complicated, and the tax consequences of the merger will depend upon the specific situation of each stockholder.
 
Accounting Treatment of the Merger (see page 112)
 
LSI will account for the merger under the purchase method of accounting for business combinations.
 
LSI and Agere Have Not Yet Obtained All Required Regulatory Approvals to Complete the Merger (see page 112)
 
The merger is subject to certain antitrust laws. LSI and Agere have made filings under applicable antitrust laws with the United States Department of Justice and the United States Federal Trade Commission, and the applicable waiting period associated with such filings has expired. LSI and Agere are also required to make, and have made, antitrust filings with antitrust regulators in China and Germany. Under the merger agreement, LSI and Agere are not obligated to complete the merger until the applicable approvals have been received from such foreign antitrust regulators where the failure to obtain such foreign approvals would result in a material adverse effect on LSI, Agere and their subsidiaries, taken as a whole.
 
LSI Will List Shares of LSI Common Stock on the New York Stock Exchange (see page 112)
 
LSI will use all reasonable efforts to cause the shares of LSI common stock to be issued in connection with the merger to be authorized for listing on the New York Stock Exchange before the completion of the merger, subject to official notice of issuance.
 
No Appraisal Rights (see page 113)
 
Neither LSI stockholders nor Agere stockholders are entitled to dissenters’ rights of appraisal for their shares under the Delaware General Corporation Law in connection with the merger.


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SUMMARY SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF LSI
 
The following table sets forth summary selected historical consolidated financial data with respect to LSI as of the dates and for the periods indicated. The historical consolidated statement of operations data presented below for the nine months ended October 1, 2006 and the historical consolidated balance sheet data as of October 1, 2006 have been derived from LSI’s unaudited historical consolidated financial statements which are incorporated by reference into this joint proxy statement/prospectus. The historical consolidated statement of operations data presented below for the fiscal years ended December 31, 2005, 2004, and 2003, and the historical consolidated balance sheet data as of December 31, 2005 and December 31, 2004 have been derived from LSI’s audited historical consolidated financial statements, which are incorporated by reference into this joint proxy statement/prospectus. The historical consolidated statement of operations data presented below for the fiscal years ended December 31, 2002 and 2001 and the historical consolidated balance sheet data as of December 31, 2003, 2002 and 2001 have been derived from LSI’s audited historical consolidated financial statements, which are not incorporated by reference into this joint proxy statement/prospectus.
 
Stockholders of LSI and Agere should read the following summary selected historical consolidated financial data together with the consolidated financial statements and accompanying notes contained in LSI’s Annual Report on Form 10-K for its fiscal year ended December 31, 2005 as filed with the Securities and Exchange Commission, as well as the sections of LSI’s Annual Report on Form 10-K, entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” all of which are incorporated by reference into this joint proxy statement/prospectus. The following summary selected historical consolidated financial data may not be indicative of LSI’s future performance.
 
                                                 
    Nine Months                                
    Ended Oct. 1,     Year Ended December 31,  
    2006(1)     2005     2004     2003(2)     2002(3)     2001(4)  
    (In thousands, except per share amounts)  
 
Consolidated Statement of Operations Data:
                                               
Revenues
  $ 1,458,497     $ 1,919,250     $ 1,700,164     $ 1,693,070     $ 1,816,938     $ 1,784,923  
Gross profit
  $ 628,230     $ 832,436     $ 735,608     $ 677,205     $ 648,716     $ 413,927  
Net income/(loss)
  $ 110,625     $ (5,623 )   $ (463,531 )   $ (308,547 )   $ (292,440 )   $ (991,955 )
Net income/(loss) per share:
                                               
Basic
  $ 0.28     $ (0.01 )   $ (1.21 )   $ (0.82 )   $ (0.79 )   $ (2.84 )
Diluted
  $ 0.27     $ (0.01 )   $ (1.21 )   $ (0.82 )   $ (0.79 )   $ (2.84 )
Shares used in computing per share amounts:
                                               
Basic
    397,408       390,135       384,070       377,781       370,529       349,280  
Diluted
    403,779       390,135       384,070       377,781       370,529       349,280  


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    At October 1,     At December 31,  
    2006     2005     2004     2003     2002     2001  
    (In thousands)  
 
Consolidated Balance Sheet Data:
                                               
Total assets
  $ 2,978,910     $ 2,796,066     $ 2,874,001     $ 3,447,901     $ 4,012,736     $ 4,525,077  
Total current liabilities
  $ 742,228     $ 742,769     $ 396,280     $ 391,251     $ 390,679     $ 509,985  
Long-term debt
  $ 350,000     $ 350,000     $ 781,846     $ 865,606     $ 1,241,217     $ 1,335,806  
Total stockholders’ equity
  $ 1,803,978     $ 1,627,950     $ 1,618,046     $ 2,042,450     $ 2,300,355     $ 2,479,885  
 
 
(1)  On January 1, 2006, LSI adopted SFAS 123-R “Share-Based Payments” using the modified prospective transition method. During the nine months ended October 1, 2006, LSI completed the sale of the Gresham, Oregon semiconductor manufacturing facility to ON Semiconductor for approximately $105.0 million in cash.
 
(2)  On January 1, 2003, LSI adopted SFAS No. 146, “Accounting for Exit or Disposal Activities.” SFAS No. 146 has been applied to restructuring activities initiated after December 31, 2002 and changes the timing of when restructuring charges are recorded to the date when the liabilities are incurred.
 
(3)  During 2002, LSI recorded $46 million in additional excess inventory and related charges and $67 million in charges for restructuring of operations and other items, net. LSI adopted SFAS No. 142 “Goodwill and Other Intangible Assets” on January 1, 2002, as a result of which goodwill is no longer amortized.
 
(4)  During 2001, LSI recorded $211 million in additional excess inventory and related charges, a $97 million in-process research and development charge associated with the acquisitions of C-Cube and AMI, which were effective on May 11, 2001 and August 31, 2001, respectively. In addition, LSI recorded charges of $220 million for restructuring of operations and other items, net.
 
LSI RECENT DEVELOPMENTS
 
On January 24, 2007, LSI issued an earnings release reporting its unaudited financial results for the fourth quarter ended December 31, 2006, a copy of which was furnished to the SEC on Form 8-K on January 24, 2007. LSI reported unaudited fourth quarter 2006 revenues of $524 million, a 3% increase year-over-year compared to the $506 million reported in the fourth quarter of 2005, and up 6% sequentially compared to the $493 million reported in the third quarter of 2006. LSI recorded full year 2006 unaudited revenues of $1.98 billion, a 3% increase compared to $1.92 billion in 2005. Fourth quarter 2006 unaudited net income was $59 million or 14 cents per diluted share. The fourth quarter 2006 results compared to fourth quarter 2005 net income of $38 million or nine cents per diluted share. Fourth quarter 2006 results compare to third quarter 2006 net income of $44 million or 11 cents per diluted share.
 
Cash and short-term investments totaled $1.01 billion at the end of the fourth quarter of 2006, with $272 million in repayment of convertible notes completed during the quarter.


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SUMMARY SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF AGERE
 
The following table sets forth selected financial information for Agere. 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 Agere’s audited financial statements, which are incorporated by reference into this joint proxy statement/prospectus. 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 Agere’s audited financial statements, which are not incorporated by reference into this joint proxy statement/prospectus.
 
The historical selected financial information may not be indicative of Agere’s 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 of Agere’s Annual Report on Form 10-K for its fiscal year ended September 30, 2006, all of which are incorporated by reference into this joint proxy statement/prospectus.
 
                                         
    Year Ended September 30,  
    2006(1)     2005(2)     2004(2)     2003     2002  
    (In millions, except per share amounts)  
 
Statement of operations information:
                                       
Revenues
  $ 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 )   $ (371 )   $ (803 )
Basic and diluted income (loss) per share:(3)
                                       
Income (loss) from continuing operations
  $ 0.10     $ (0.04 )   $ (0.52 )   $ (2.23 )   $ (4.90 )
Weighted average shares outstanding — basic (in thousands)
    174,525       177,775       171,248       166,699       163,720  
Weighted average shares outstanding — diluted (in thousands)
    175,432       177,775       171,248       166,699       163,720  
                     
                                         
                                         
    At September 30,  
    2006(1)     2005(2)     2004(2)     2003     2002  
    (In millions)  
 
Balance sheet information:
                                       
Total assets
  $ 1,497     $ 1,881     $ 2,272     $ 2,388     $ 2,864  
Short-term debt
  $     $     $ 147     $ 195     $ 197  
Long-term debt
  $ 362     $ 372     $ 420     $ 451     $ 486  
 
 
(1) During fiscal 2006 Agere recorded a tax benefit of $24 million as a result of a $66 million reduction in its pension benefit obligations. This benefit was offset by a $24 million tax charge recorded against the minimum pension liability adjustment reflected in other comprehensive loss. Also, the decrease in Agere’s total assets reflects the repurchase of 17,681,198 shares of Agere common stock for $255 million of cash. On October 1, 2005, Agere adopted SFAS 123-R “Share-Based Payments” using the modified prospective transition method.
 
(2) During fiscal 2005 and fiscal 2004 Agere recorded reversals of tax and interest contingencies of $120 million and $86 million, respectively, resulting from settlements of certain prior year tax audits. The settlements relate to Agere’s tax sharing agreement with Lucent Technologies Inc. and cover periods Agere operated as either a division of AT&T Corp. or Lucent. In fiscal 2005, Agere also recorded a reversal of $22 million for tax and interest contingencies related to non-U.S. income tax.
 
(3) On May 27, 2005, Agere reclassified its 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 weighted average number of common shares outstanding and income (loss) per share from continuing operations on a historical basis were adjusted to give retroactive effect to Agere’s reverse stock split. Basic income (loss) per common share is calculated by dividing income (loss) from continuing operations by the weighted average number of common shares outstanding during


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the period. Diluted income (loss) per common share is calculated by dividing income (loss) from continuing operations by the adjusted outstanding shares for all dilutive potential common shares outstanding.
 
AGERE RECENT DEVELOPMENTS
 
Financial Results for First Quarter
 
On January 25, 2007, Agere Systems issued a news release announcing its financial results for the quarter ended December 31, 2006. For the quarter ending December 31, 2006, Agere reported revenue of $372 million and diluted earnings per share of $0.09, compared to revenue of $403 million and a diluted loss per share of $(0.11) for the quarter ending December 31, 2005.
 
Pending Litigation
 
On December 6, 2006, Sony Ericsson Mobile Communications USA Inc. filed a lawsuit in Wake County Superior Court in North Carolina, alleging unfair and deceptive trade practices, fraud and negligent misrepresentation in connection with Agere’s engagement with Sony Ericsson to develop a wireless data card for personal computers. While Agere has not completed its review of the matter, based on the information currently available, Agere intends to contest this matter vigorously.


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SELECTED UNAUDITED PRO FORMA
COMBINED CONDENSED CONSOLIDATED FINANCIAL DATA
 
The selected unaudited pro forma combined condensed consolidated financial data for the year ended December 31, 2005 and the nine months ended October 1, 2006 gives effect to the merger and is based on estimates and assumptions which are preliminary. The selected unaudited pro forma combined condensed statement of operations data gives effect to the merger as if it had occurred on January 1, 2005. The selected unaudited pro forma combined condensed balance sheet date gives effect to the merger as if it had occurred on October 1, 2006. This data is presented for informational purposes only and is not intended to represent or be indicative of the consolidated results of operations or financial condition of LSI that would have been reported had the merger been completed as of either such date, and should not be taken as representative of future consolidated results of operations or financial condition of LSI.
 
This selected unaudited pro forma combined condensed consolidated financial data should be read in conjunction with the summary selected historical consolidated financial data and the unaudited pro forma combined condensed consolidated financial statements and accompanying notes contained elsewhere in this joint proxy statement/prospectus and the separate historical consolidated financial statements and accompanying notes of LSI and Agere incorporated by reference into this joint proxy statement/prospectus. See the section entitled “Where You Can Find More Information” beginning on page 134 of this joint proxy statement/prospectus.
 
                 
    Nine months ended
  Year ended
    October 1, 2006   December 31, 2005
    (In thousands, except
    per share amounts)
 
Statement of Operations Data:
               
Revenues
  $ 2,640,049     $ 3,595,613  
Gross profit
    1,204,945       1,414,824  
Income/(loss) from continuing operations
    20,222       (270,137 )
Income/(loss) from continuing operations per share:
               
Basic
  $ 0.03     $ (0.36 )
Diluted
  $ 0.03     $ (0.36 )
Shares used in computing per share amounts:
               
Basic
    760,594       753,321  
Diluted
    777,752       753,321  
 
         
    At
    October 1, 2006
    (In thousands)
 
Balance Sheet Data:
Total assets
  $ 7,909,087  
Total current liabilities
  $ 1,157,232  
Long-term obligations
  $ 1,687,450  
Total stockholders’ equity
  $ 5,064,171  


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COMPARATIVE HISTORICAL AND PRO FORMA PER SHARE DATA
 
The following table presents comparative historical per share data regarding the income/(loss) from continuing operations and book value of each of LSI and Agere and unaudited combined pro forma per share data after giving effect to the merger as a purchase of Agere by LSI assuming the merger had been completed on January 1, 2005. The following data assumes 2.16 shares of LSI common stock will be issued in exchange for each share of Agere common stock in connection with the merger and the assumption of Agere options and other equity based awards based upon the same exchange ratio. This data has been derived from and should be read in conjunction with the summary selected historical consolidated financial data and unaudited pro forma combined condensed consolidated financial statements contained elsewhere in this joint proxy statement/prospectus, and the separate historical consolidated financial statements of LSI and Agere and accompanying notes incorporated by reference into this joint proxy statement/prospectus. The unaudited pro forma per share data is presented for informational purposes only and is not intended to represent or be indicative of the consolidated results of operations or financial condition of LSI that would have been reported had the merger been completed as of the date presented, and should not be taken as representative of future consolidated results of operations or financial condition of LSI.
 
                                 
                Pro Forma
    Historical
  Historical
  Pro Forma
  Equivalent of One
    LSI   Agere(2)   Combined   Agere Share(1)
 
Income/(loss) from continuing operations per share-diluted:
                               
Year ended December 31, 2005
  $ (0.01 )   $ (0.04 )   $ (0.36 )   $ (0.78 )
Nine months ended October 1, 2006
  $ 0.27     $ 0.02     $ 0.03     $ 0.06  
Book value per share:
                               
October 1, 2006
  $ 4.51     $ 1.82     $ 6.67     $ 14.41  
Outstanding shares (in millions)
                               
December 31, 2005
    394       182       787          
October 1, 2006
    400       166       759          
 
 
(1)  The Pro Forma Equivalent of One Agere Share amounts were calculated by multiplying the exchange ratio in the merger of 2.16 and the pro forma combined diluted income/(loss) from continuing operations and book value per share, respectively.
 
(2)  The historical Agere income/(loss) from continuing operations per share diluted data is for the year ended September 30, 2005 and nine months ended June 30, 2006. The book value per share is as of September 30, 2006 and the outstanding shares are as of September 30, 2005 and September 30, 2006.


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COMPARATIVE PER SHARE MARKET PRICE DATA
 
LSI common stock trades on the New York Stock Exchange under the symbol “LSI.” Agere common stock trades on the New York Stock Exchange under the symbol “AGR.”
 
The following table shows the high and low sales prices per share of LSI common stock and Agere common stock, each as reported on the New York Stock Exchange composite transactions tape on (1) December 1, 2006, the last full trading day preceding public announcement that LSI and Agere had entered into the merger agreement, and (2) February 2, 2007, the last full trading day for which high and low sales prices were available as of the date of this joint proxy statement/prospectus.
 
The table also includes the equivalent high and low sales prices per share of Agere common stock on those dates. These equivalent high and low sales prices per share reflect the fluctuating value of LSI common stock that Agere stockholders would receive in exchange for each share of Agere common stock if the merger were completed on either of these dates, applying the exchange ratio of 2.16 shares of LSI common stock for each share of Agere common stock.
 
                                                 
                Equivalent Price
 
    LSI Common Stock     Agere Common Stock     per Share  
    High     Low     High     Low     High     Low  
 
December 1, 2006
  $ 10.70     $ 10.37     $ 17.96     $ 17.40     $ 23.11     $ 22.40  
February 2, 2007
  $ 9.51     $ 9.27     $ 20.39     $ 19.87     $ 20.54     $ 20.02  
 
The above table shows only historical comparisons. These comparisons may not provide meaningful information to LSI stockholders in determining whether to approve the issuance of shares of LSI common stock in connection with the merger or to Agere stockholders in determining whether to adopt the merger agreement. LSI and Agere stockholders are urged to obtain current market quotations for LSI and Agere common stock and to review carefully the other information contained in this joint proxy statement/prospectus or incorporated by reference into this joint proxy statement/prospectus in considering whether to approve the issuance of shares of LSI common stock in the merger in the case of LSI stockholders, and whether to adopt the merger agreement in the case of Agere stockholders. See the section entitled “Where You Can Find More Information” beginning on page 134 of this joint proxy statement/prospectus.


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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
 
This joint proxy statement/prospectus and the documents incorporated by reference into this joint proxy statement/prospectus contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that involve risks and uncertainties, as well as assumptions, that, if they never materialize or prove incorrect, could cause the results of LSI and its consolidated subsidiaries, on the one hand, or Agere and its consolidated subsidiaries, on the other hand, to differ materially from those expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including statements about future financial and operating results; benefits of the transaction to customers, stockholders and employees; potential synergies and cost savings resulting from the transaction; the ability of the combined company to drive growth and expand customer and partner relationships and other statements regarding the proposed transaction, and any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing.
 
The following factors, among others, could cause actual results to differ materially from those described in the forward-looking statements: failure of LSI stockholders to approve the issuance of shares of LSI common stock in the merger or the failure of Agere stockholders to adopt the merger agreement; the challenges and costs of closing, integrating, restructuring and achieving anticipated synergies; the ability to retain key employees; and other economic, business, competitive, and/or regulatory factors affecting the businesses of LSI and Agere generally, including other risks that are described in the section entitled “Risk Factors,” which follows on the next page, and in the documents that are incorporated by reference into this joint proxy statement/prospectus.
 
If any of these risks or uncertainties materializes or any of these assumptions proves incorrect, results of LSI, Agere and the combined company could differ materially from the expectations in these statements. LSI and Agere are not under any obligation (and expressly disclaim any such obligation) to update their respective forward-looking statements, except as required by law.


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RISK FACTORS
 
In addition to the other information included or incorporated by reference in this joint proxy statement/prospectus, including the matters addressed under “Cautionary Statement Regarding Forward-Looking Information,” LSI stockholders should carefully consider the following risks before deciding whether to vote for approval of the issuance of the shares of LSI common stock in the merger and Agere stockholders should carefully consider the following risks before deciding whether to vote for adoption of the merger agreement. In addition, stockholders of LSI and Agere should read and consider the risks associated with each of the businesses of LSI and Agere because these risks will relate to the combined company. Certain of these risks can be found in LSI’s annual report on Form 10-K for the fiscal year ended December 31, 2005, and in LSI’s quarterly report on Form 10-Q for the period ended October 1, 2006, each of which is incorporated by reference into this joint proxy statement/prospectus, and in Agere’s annual report on Form 10-K for the fiscal year ended September 30, 2006, which is incorporated by reference into this joint proxy statement/prospectus. You should also consider the other information in this joint proxy statement/prospectus and the other documents incorporated by reference into this joint proxy statement/prospectus. See “Where You Can Find More Information.”
 
Risk Factors Relating to the Merger
 
Agere stockholders will receive a fixed ratio of 2.16 shares of LSI common stock for each share of Agere common stock regardless of any changes in market value of Agere common stock or LSI common stock before the completion of the merger.
 
Upon completion of the merger, each share of Agere common stock will be converted into the right to receive 2.16 shares of LSI common stock. There will be no adjustment to the exchange ratio (except for adjustments to reflect the effect of any stock split or other recapitalization of LSI common stock or Agere common stock), and the parties do not have a right to terminate the merger agreement based upon changes in the market price of either LSI common stock or Agere common stock. Accordingly, the dollar value of LSI common stock that Agere stockholders will receive upon completion of the merger will depend upon the market value of LSI common stock at the time of completion of the merger, which may be different from, and lower than, the closing price of LSI common stock on the last full trading day preceding public announcement that LSI and Agere entered into the merger agreement, the last full trading day prior to the date of this joint proxy statement/prospectus or the date of the stockholder meetings. Moreover, completion of the merger may occur some time after the requisite stockholder approvals have been obtained. The market values of LSI common stock and Agere common stock have varied since LSI and Agere entered into the merger agreement and will continue to vary in the future due to changes in the business, operations or prospects of LSI and Agere, market assessments of the merger, regulatory considerations, market and economic considerations, and other factors both within and beyond the control of LSI and Agere.
 
The issuance of shares of LSI common stock to Agere stockholders in the merger will substantially reduce the percentage interests of LSI stockholders.
 
If the merger is completed, LSI and Agere expect that (i) approximately 365.8 million shares of LSI common stock would be issued to Agere stockholders, (ii) upon exercise of assumed equity awards, up to approximately 59.7 million shares will be issued to holders of assumed options and restricted stock units and (iii) an additional 23.6 million shares will be issuable upon conversion of Agere’s outstanding convertible notes. Based on the number of shares of LSI and Agere common stock outstanding on January 31, 2007, Agere stockholders before the merger will own, in the aggregate, approximately 48% of the fully diluted shares of LSI common stock immediately after the merger, excluding shares issuable upon conversion of Agere’s outstanding convertible notes. The issuance of shares of LSI common stock to Agere stockholders in the merger and to holders of assumed options and restricted stock units will cause a significant reduction in the relative percentage interest of current LSI stockholders in earnings, voting, liquidation value and book and market value.


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The merger is subject to the receipt of consents and approvals from government entities that may impose conditions that could have an adverse effect on LSI or Agere or could cause abandonment of the merger.
 
Completion of the merger is conditioned upon the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, which has now expired, and also the making of certain filings with and notices to, and the receipt of consents, orders and approvals from, various local, state, federal and foreign governmental entities. Certain of these consents, orders and approvals will involve the relevant governmental entity’s consideration of the effect of the merger on competition in various jurisdictions.
 
The reviewing authorities may not permit the merger at all or may impose restrictions or conditions on the merger that may seriously harm the combined company if the merger is completed. These conditions could include a complete or partial license, divestiture, spin-off or the holding separate of assets or businesses. Either LSI or Agere may refuse to complete the merger if restrictions or conditions are required by governmental authorities that would materially adversely impact the combined company’s results of operations or the benefits anticipated to be derived by the combined company. Any delay in the completion of the merger could diminish the anticipated benefits of the merger or result in additional transaction costs, loss of revenue or other effects associated with uncertainty about the transaction.
 
LSI and Agere also may agree to restrictions or conditions imposed by antitrust authorities in order to obtain regulatory approval, and these restrictions or conditions could harm the combined company’s operations. No additional stockholder approvals are expected to be required for any decision by LSI or Agere, after the annual meeting of Agere stockholders and the special meeting of LSI stockholders, to agree to any terms and conditions necessary to resolve any regulatory objections to the merger.
 
In addition, during or after the statutory waiting periods, and even after completion of the merger, governmental authorities could seek to block or challenge the merger as they deem necessary or desirable in the public interest. In addition, in some jurisdictions, a competitor, customer or other third party could initiate a private action under the antitrust laws challenging or seeking to enjoin the merger, before or after it is completed. LSI, Agere or the combined company may not prevail, or may incur significant costs, in defending or settling any action under antitrust laws. See “The Merger Agreement — Conditions to Obligations to Complete the Merger” and “The Merger Agreement — Regulatory Filings and Approvals Required to Complete the Merger.”
 
Any delay in completing the merger may significantly reduce the benefits expected to be obtained from the merger.
 
In addition to the required regulatory clearances and approvals, the merger is subject to a number of other conditions beyond the control of LSI and Agere that may prevent, delay or otherwise materially adversely affect its completion. See “The Merger Agreement — Conditions to Obligations to Complete the Merger.” LSI and Agere cannot predict whether and when these other conditions will be satisfied. Further, the requirements for obtaining the required clearances and approvals could delay the completion of the merger for a significant period of time or prevent it from occurring. Any delay in completing the merger may significantly reduce the synergies and other benefits that LSI and Agere expect to achieve if they successfully complete the merger within the expected timeframe and integrate their respective businesses.
 
Customer uncertainties related to the merger could adversely affect the businesses, revenues and gross margins of LSI, Agere and the combined company.
 
In response to the announcement of the merger or due to ongoing uncertainty about the merger, customers of LSI or Agere may delay or defer purchasing decisions or elect to switch to other suppliers. In particular, prospective customers could be reluctant to purchase the products and services of LSI, Agere or the combined company due to uncertainty about the direction of the combined company’s offerings and willingness to support existing products. To the extent that the merger creates uncertainty among those persons and organizations contemplating purchases such that one large customer, or a significant group of smaller customers, delays, defers or changes purchases in connection with the planned merger, the revenues of LSI, Agere or the combined company would be adversely affected. Customer assurances may be made by LSI and Agere to address their customers’ uncertainty about the direction of the combined company’s product and related support offerings, which may result in additional


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obligations of LSI, Agere or the combined company. In addition, the announcement of the merger may cause prospective licensees of Agere’s intellectual property to delay or defer licensing decisions resulting in a decline in Agere’s licensing revenues which could have a significant impact on the profitability of Agere and the combined company. Quarterly revenues and net earnings of LSI, Agere or the combined company could be substantially below expectations of market analysts and a decline in the companies’ respective stock prices could result.
 
Certain directors and executive officers of LSI and Agere have interests in the merger that may be different from, or in addition to, the interests of LSI stockholders and Agere stockholders.
 
Executive officers of LSI and Agere negotiated the terms of the merger agreement under the direction of the boards of directors of LSI and Agere, respectively. The board of directors of LSI approved the merger agreement and unanimously recommended that LSI stockholders vote in favor of the issuance of shares of LSI common stock in the merger, and the board of directors of Agere by unanimous vote of the directors present approved the merger agreement and recommended that Agere stockholders vote in favor of the of the adoption of the merger agreement. These directors and executive officers may have interests in the merger that are different from, or in addition to or may be deemed to conflict with, yours. These interests include the continued employment of certain executive officers of LSI and Agere by the combined company, the continued positions of certain directors of LSI and Agere as directors of the combined company and the indemnification of former LSI and Agere directors and officers by the combined company. With respect to Agere directors and executive officers, these interests also include the treatment in the merger of employment agreements, severance policies, restricted stock units, stock options and other rights held by these directors and executive officers. LSI stockholders should be aware of these interests when they consider the LSI board of directors’ recommendation that LSI stockholders vote in favor of the proposal to issue shares of LSI common stock in the merger, and Agere stockholders should be aware of these interests when they consider the Agere board of directors’ recommendation that they vote in favor of the proposal to adopt the merger agreement. For a discussion of the interests of directors and executive officers in the merger, see “The Merger — Interests of the Directors and Executive Officers of Agere in the Merger.”
 
Provisions of the merger agreement may deter alternative business combinations and could negatively impact the stock prices of LSI and Agere if the merger agreement is terminated in certain circumstances.
 
The merger agreement prohibits LSI and Agere from soliciting, initiating, encouraging or facilitating certain alternative acquisition proposals with any third party, subject to exceptions set forth in the merger agreement. The merger agreement also provides for the payment by LSI or Agere of a termination fee of $120 million if the merger agreement is terminated in certain circumstances in connection with a competing third-party acquisition proposal for one of the companies. See “The Merger Agreement — LSI and Agere Are Prohibited from Soliciting Other Offers” and “The Merger Agreement — Termination; Fees and Expenses.” These provisions limit LSI’s and Agere’s ability to pursue offers from third parties that could result in greater value to the LSI stockholders or the Agere stockholders, as the case may be. The obligation to pay the termination fee also may discourage a third party from pursuing an alternative acquisition proposal. If the merger is terminated and LSI or Agere determine to seek another business combination, neither LSI nor Agere can assure its stockholders that they will be able to negotiate a transaction with another company on terms comparable to the terms of the merger, or that they will avoid incurrence of any fees associated with the termination of the merger agreement.
 
In the event the merger is terminated by LSI or Agere in circumstances that obligate either party to pay the termination fee to the other party, including where either party terminates the merger agreement because the other party’s board of directors withdraws its support of the merger, LSI’s and/or Agere’s stock prices may decline.
 
If the proposed merger is not completed, LSI and Agere will have incurred substantial costs that may adversely affect LSI’s and Agere’s financial results and operations and the market price of LSI and Agere common stock.
 
If the merger is not completed, the price of LSI common stock and Agere common stock may decline to the extent that the current market prices of LSI common stock and Agere common stock reflect a market assumption that the merger will be completed. In addition, LSI and Agere have incurred and will incur substantial costs in connection with the proposed merger. These costs are primarily associated with the fees of attorneys, accountants


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and LSI’s and Agere’s financial advisors. In addition, LSI and Agere have each diverted significant management resources in an effort to complete the merger and are each subject to restrictions contained in the merger agreement on the conduct of its business. If the merger is not completed, LSI and Agere will have incurred significant costs, including the diversion of management resources, for which each will have received little or no benefit. Also, if the merger is not completed under certain circumstances specified in the merger agreement, LSI or Agere may be required to pay a termination fee of $120 million. See “The Merger Agreement — Termination; Fees and Expenses.”
 
In addition, if the merger is not completed, LSI and Agere may experience negative reactions from the financial markets and LSI’s and Agere’s suppliers, customers and employees. Each of these factors may adversely affect the trading price of LSI and/or Agere common stock and LSI’s and/or Agere’s financial results and operations.
 
Risk Factors Relating to the Combined Company Following the Merger
 
The combined company may fail to realize the benefits expected from the merger, which could adversely affect the value of LSI’s common stock.
 
The merger involves the integration of LSI and Agere, two companies that have previously operated independently. LSI and Agere entered into the merger agreement with the expectation that, among other things, the merger would enable the combined company to consolidate support functions, leverage its research and development, patents and services across a larger base, and integrate its workforce to create opportunities to achieve cost savings and to become a stronger and more competitive company. Although LSI and Agere expect significant benefits to result from the merger, there can be no assurance that the combined company will actually realize these or any other anticipated benefits of the merger.
 
The value of LSI’s common stock following completion of the merger may be affected by the ability of the combined company to achieve the benefits expected to result from the merger. LSI and Agere currently operate in 20 countries, with a combined workforce of approximately 9,100 employees. Achieving the benefits of the merger will depend in part upon meeting the challenges inherent in the successful combination and integration of global business enterprises of the size and scope of LSI and Agere. The challenges involved in this integration include the following:
 
  •  Demonstrating to customers of LSI and Agere that the merger will not result in adverse changes to the ability of the combined company to address the needs of customers or the loss of attention or business focus;
 
  •  Coordinating and integrating independent research and development teams across technologies and product platforms to enhance product development while reducing costs;
 
  •  Combining product offerings;
 
  •  Consolidating and integrating corporate, information technology, finance, and administrative infrastructures;
 
  •  Coordinating sales and marketing efforts to effectively position the capabilities of the combined company and the direction of product development; and
 
  •  Minimizing the diversion of management attention from important business objectives.
 
If the combined company does not successfully manage these issues and the other challenges inherent in integrating businesses of the size and complexity of LSI and Agere, then the combined company may not achieve the anticipated benefits of the merger and the revenues, expenses, operating results and financial condition of the combined company could be materially adversely effected. For example, goodwill and other intangible assets could be determined to be impaired which could adversely impact the company’s financial results. The successful integration of the LSI and Agere businesses is likely to require significant management attention both before and after the completion of the merger, and may divert the attention of management from business and operational issues of LSI, Agere and the combined company.


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Uncertainties associated with the merger may cause a loss of employees and may otherwise materially adversely affect the businesses of LSI and Agere, and the future business and operations of the combined company.
 
The combined company’s success after the merger will depend in part upon the ability of the combined company to retain key employees of LSI and Agere. In some of the fields in which LSI and Agere operate, there are only a limited number of people in the job market who possess the requisite skills. Each of LSI and Agere has experienced difficulty in hiring and retaining sufficient numbers of qualified engineers in parts of their respective businesses. Current and prospective employees of LSI and Agere may experience uncertainty about their post-merger roles with the combined company following the merger. This may materially adversely affect the ability of each of LSI and Agere to attract and retain key management, sales, marketing, technical and other personnel. In addition, key employees may depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with the combined company following the merger. The loss of services of any key personnel or the inability to hire new personnel with the requisite skills could restrict the ability of LSI, Agere and the combined company to develop new products or enhance existing products in a timely matter, to sell products to customers or to manage the business of LSI, Agere and the combined company effectively.
 
The industries in which LSI and Agere operate are highly cyclical, and operating results of the combined company may fluctuate.
 
LSI and Agere operate in the highly cyclical semiconductor device and storage systems industries. These industries are characterized by wide fluctuations in product supply and demand. In the past, the semiconductor 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. Even if demand for the products of LSI or Agere remains constant after the completion of the merger, the availability of additional excess production capacity in the semiconductor industry may create competitive pressures that can degrade pricing levels and reduce revenues of the combined company.
 
General economic weakness and geopolitical factors may harm the combined company’s operating results and financial condition.
 
The results of operations of the combined company will be dependent to a large extent upon the global economy. Geopolitical factors such as terrorist activities, armed conflict or global health conditions that adversely affect the global economy may adversely affect the operating results and financial condition of the combined company.
 
The combined company will be dependent upon a limited number of customers.
 
A limited number of customers will account for a substantial portion of the combined company’s revenues. For LSI’s most recent fiscal year ended December 31, 2005, International Business Machines Corporation and Seagate Technology represented approximately 16% and 11%, respectively, of LSI’s consolidated revenues. For Agere’s most recent fiscal year ended September 30, 2006, Seagate Technology, Inc. and Samsung Electronics Co., Ltd. represented approximately 24% and 18%, respectively, of Agere’s revenues. If any of the key customers of LSI or Agere were to decide to significantly reduce or cancel its existing business, the operating results and the financial condition of the combined company could be adversely affected. Because many of the products of the combined company will have long product design and development cycles, it may be difficult for the combined company to replace key customers who reduce or cancel existing business. In addition, the combined company may not win new product designs from major existing customers, major customers may make significant changes in scheduled deliveries, or there may be declines in the prices of products sold to these customers, and the business of the combined company may be adversely affected if any of these events were to occur.


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The combined company will depend to a large extent upon independent foundry subcontractors to manufacture its semiconductor products; accordingly, any failure to secure and maintain sufficient foundry capacity could materially and adversely affect the combined company’s business.
 
Since selling its Gresham, Oregon semiconductor manufacturing facility in May 2006, LSI has relied entirely on independent foundry subcontractors to manufacture its semiconductor products. Agere owns an interest in a joint venture that operates a semiconductor wafer manufacturing facility, but also relies on independent foundry subcontractors to manufacture a significant portion of its semiconductor products. Because the combined company will rely on joint ventures and third party manufacturing relationships, the combined company will face the following risks:
 
  •  a manufacturer may be unwilling to devote adequate capacity to production of products for the combined company, or may be unable to produce such products;
 
  •  a manufacturer may not be able to develop manufacturing methods appropriate for the products of the combined company;
 
  •  manufacturing costs may be higher than planned;
 
  •  product reliability may decline;
 
  •  a manufacturer may not be able to maintain continuing relationships with suppliers to the combined company; and
 
  •  the combined company may have reduced control over delivery schedules, quality, manufacturing yields and costs of products.
 
If any of these risks were to be realized, the combined company could experience an interruption in supply or an increase in costs, which could adversely affect results of operations.
 
The ability of an independent foundry subcontractor to provide the combined company with semiconductor devices is limited by its available capacity and existing obligations. Availability of foundry capacity has in the recent past been reduced from time to time due to strong demand. Although each of LSI and Agere have entered into contractual commitments to supply specified levels of products to certain of their respective customers, neither LSI nor Agere have long-term volume purchase agreements or significant guaranteed level of production capacity with any of their third-party foundry suppliers. Foundry capacity may not be available when needed at reasonable prices. Each of LSI and Agere places orders on the basis of its customers’ purchase orders or its forecast of customer demand, and the foundries can allocate capacity to the production of other companies’ products and reduce deliveries to LSI and Agere on short notice. It is possible that other foundry customers that are larger and better financed than the combined company, or that have long-term agreements with the foundry suppliers, may induce foundries to reallocate capacity to them. This reallocation could impair the ability of the combined company to secure the supply of components that they need. Also, the foundry suppliers to LSI and Agere migrate capacity to newer, state-of-the-art manufacturing processes on a regular basis, which may create capacity shortages for products designed to be manufactured on older processes. In addition, the occurrence of a public health emergency or natural disaster could further affect the production capabilities of the combined company’s manufacturers by resulting in quarantines or closures. If any of the foundry suppliers to the combined company experiences a shortage in capacity, suffers any damage to its facilities due to earthquakes or other natural disasters, experiences power outages, encounters financial difficulties or experiences any other disruption of foundry capacity, the combined company may need to qualify an alternative foundry supplier, which may require several months. As a result of all of these factors and risks, neither LSI nor Agere can provide any assurances that any foundries will be able to produce integrated circuits with acceptable manufacturing yields, or that foundries will be able to deliver enough semiconductor devices to the combined company on a timely basis, or at reasonable prices.
 
The combined company will operate in intensely competitive markets.
 
Each of LSI and Agere derive significant revenue from the sale of integrated circuits, and LSI also operates in the storage systems segment. These industry segments are intensely competitive and competition is expected to increase as existing competitors enhance their product offerings and as new participants enter the market. The


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competitors of LSI and Agere include many large domestic and foreign companies that have substantially greater financial, technical and management resources than LSI or Agere. Several major diversified electronics companies offer custom solutions and/or other standard products that are competitive with the products of LSI and Agere. Other competitors are specialized, rapidly growing companies that sell products into the same markets that LSI or Agere target or that the combined company will target. Some of the customers of LSI, Agere or the combined company may also design and manufacture products that will compete with the products of the combined company. Neither LSI nor Agere can provide any assurances that the price and performance of their products will be superior relative to the products of their competitors.
 
Increased competition may negatively affect the pricing, margins and revenues of the combined company. For example, competitors with greater financial resources may be able to offer lower prices than the combined company, or they may offer additional products, services or other incentives that the combined company may not be able to match. Competitors may be in a stronger position than the combined company to respond quickly to new technologies and may be able to undertake more extensive marketing campaigns. They may also make strategic acquisitions or establish cooperative relationships among themselves or with third parties to increase their ability to gain market share. In addition, competitors may sell commercial quantities of products before the combined company does so, establishing market share and creating a market position that the combined company may not be able to overcome once it introduces similar products in commercial quantities.
 
The combined company’s target markets are characterized by rapid technological change.
 
The industry segments in which each of LSI and Agere currently operate, and in which the combined company will operate, are characterized by rapid technological change, changes in customer requirements, limited ability to accurately forecast future customer orders, frequent new product introductions and enhancements, short product cycles and evolving industry standards. LSI and Agere believe that the combined company’s future success will depend, in part, upon its ability to improve on existing technologies and to develop and implement new ones, as well as upon its ability to adopt and implement emerging industry standards in a timely manner and to adapt products and processes to technological changes. If the combined company is not able to successfully implement new process technologies or to achieve volume production of new products at acceptable yields, the operating results and financial condition of the combined company may be adversely affected. In addition, if the combined company fails to make sufficient investments in research and development programs in order to develop new and enhanced products and technologies, or if it focuses on technologies that do not become widely adopted, new technologies could render the current and planned products of LSI, Agere and the combined company obsolete, resulting in the need to change the focus of the combined company’s research and development and product strategies and disrupting its business significantly.
 
In addition, the emergence of markets for integrated circuits may be affected by factors beyond the control of LSI, Agere or the combined company. In particular, products are designed to conform to current specific industry standards. Customers of LSI, Agere or the combined company may not adopt or continue to follow these standards, which would make the combined company’s products less desirable to customers, and could negatively affect sales. Also, competing standards may emerge that are preferred by customers of LSI, Agere or the combined company, which could reduce sales and require the combined company to make significant expenditures to develop new products. To the extent that the combined company is not able to effectively and expeditiously adapt to new standards, the business of the combined company may be negatively affected.
 
Order or shipment cancellations or deferrals could cause the combined company’s revenue to decline or fluctuate.
 
Each of LSI and Agere sell, and the combined company is expected to sell, a significant amount of products pursuant to purchase orders that customers may cancel or defer on short notice without incurring a significant penalty. Cancellations or deferrals could cause the combined company to hold excess inventory, which could adversely affect its results of operations. If a customer cancels or defers product shipments or refuses to accept shipped products, the combined company may incur unanticipated reductions or delays in revenue. If a customer does not pay for products in a timely manner, the combined company could incur significant charges against income, which could materially and adversely affect its results of operations.


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The combined company will design and develop highly complex products that will require significant investments.
 
The products of Agere and LSI are, and the products of the combined company will be, highly complex and significant time and expense are expected to be associated with the design, development and manufacture of the products of the combined company. The combined company is expected to incur substantial research and development costs to confirm the technical feasibility and commercial viability of products, which in the end may not be successful.
 
The combined company’s products may contain defects.
 
The products of LSI, Agere and the combined company may contain undetected defects, errors or failures. These products can only be fully tested when deployed in commercial applications and other equipment. Consequently, 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 resources of the combined company;
 
  •  legal actions by customers or customers’ end users;
 
  •  increased insurance costs; and
 
  •  other losses to the combined company or to customers or end users.
 
Any of these occurrences could also result in the loss of or delay in market acceptance of products and loss of sales, which could negatively affect the business and results of operations of the combined company. As the combined company’s products become even more complex in the future, this risk may intensify over time and may result in increased expenses.
 
The manufacturing facilities of the combined company will have high fixed costs and will involve highly complex and precise processes.
 
Agere owns assembly and test facilities and has a joint venture fabrication facility and LSI has a storage systems manufacturing facility. Operations at these facilities may be disrupted for reasons beyond the control of LSI, Agere or the combined company, including work stoppages, supply shortages, fire, earthquake, tornado, floods or other natural disasters, any of which could have a material adverse effect on the results of operations or financial position of the combined company. In addition, if the combined company does not experience adequate utilization of, or adequate yields at, its manufacturing facilities, its results of operations may be adversely affected. The manufacture of LSI’s and Agere’s products involves highly complex and precise processes, requiring production in a clean and tightly controlled environment. In addition, the manufacture of integrated circuits is a highly complex and technologically demanding process. Although each of LSI and Agere work closely with its foundry suppliers to minimize the likelihood of reduced manufacturing yields, such foundries have, from time to time, experienced lower than anticipated manufacturing yields. This often occurs during the production of new products or the installation and start-up of new process technologies. Poor yields from the foundry suppliers to the combined company could result in product shortages or delays in product shipments, which could seriously harm relationships with customers and materially and adversely affect the business and results of operations of the combined company.
 
Failure of the combined company to qualify products or its suppliers’ manufacturing lines may adversely affect results of operations.
 
Some customers will not purchase any products, other than limited numbers of evaluation units, until they qualify the manufacturing line for the product. The combined company may not always be able to satisfy the qualification requirements of these customers. Delays in qualification may cause a customer to discontinue use of non-qualified products and result in a significant loss of revenue.


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The combined company will depend to a certain extent upon third-party subcontractors to assemble, obtain packaging materials for and test certain products.
 
Third-party subcontractors located in Asia assemble, obtain packaging materials for and test certain products of LSI. Although Agere owns and operates its own semiconductor assembly and test facilities, the combined company will continue to depend upon third-party subcontractors to assemble and test some of the combined company’s semiconductor products or to perform other services for the combined company. To the extent that the combined company does rely upon third-party subcontractors to perform these functions, it will not be able to control directly product delivery schedules and quality assurance. This lack of control may result in product shortages or quality assurance problems that could delay shipments of products or increase manufacturing, assembly, testing or other costs. In addition, if these third-party subcontractors are unable to obtain sufficient packaging materials for products in a timely manner, the combined company may experience product shortages or delays in product shipments, which could materially and adversely affect customer relationships and results of operations. If any of these subcontractors experiences capacity constraints or financial difficulties, suffers any damage to its facilities, experiences power outages or any other disruption of assembly or testing capacity, the combined company may not be able to obtain alternative assembly and testing services in a timely manner. Due to the amount of time that it usually takes to qualify assemblers and testers, the combined company could experience significant delays in product shipments if it is required to find alternative assemblers or testers for such components.
 
A widespread outbreak of an illness or other health issue could negatively affect the combined company’s manufacturing, assembly and test, design or other operations.
 
A widespread outbreak of an illness such as avian influenza, or bird flu, or severe acute respiratory syndrome, or SARS, could adversely affect the combined company’s operations as well as demand from 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. The combined company will have operations in Singapore, Thailand and China, countries where outbreaks of bird flu and/or SARS have occurred. If operations are curtailed because of health issues, the combined company 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 customers which would affect results of operations. In addition, a curtailment of design operations could result in delays in the development of new products. If customers’ businesses are affected by health issues, they might delay or reduce purchases, which could adversely affect results of operations.
 
The combined company will procure parts and raw materials from a limited number of domestic and foreign sources.
 
LSI does not maintain an extensive inventory of parts and materials for manufacturing storage systems at its Wichita, Kansas facility. LSI purchases, and expects that the combined company will continue to purchase, a portion of its requirements for parts and raw materials from a limited number of sources, primarily from suppliers in Japan and their U.S. subsidiaries, and obtain other material inputs on a local basis. If the combined company has difficulty in obtaining parts or materials in the future from their existing suppliers, alternative suppliers may not be available, or suppliers may not provide parts and materials in a timely manner or on favorable terms. As a result, the combined company may be adversely affected by delays in product shipments. If the combined company cannot obtain adequate materials for manufacture of its products, or if such materials are not available at reasonable prices, there could be a material adverse impact on operating results and financial condition.
 
If the combined company’s new product development and expansion efforts are not successful, results of operations may be adversely affected.
 
Each of LSI and Agere is currently developing, and LSI expects that the combined company will continue to develop, products in new areas and the combined company may seek to expand into additional areas in the future. The efforts of the combined company to develop products and expand into new areas may not result in sales that are sufficient to recoup its investment, and it may experience higher costs than anticipated. For example, the combined company may not be able to manufacture products at a competitive cost, may need to rely on new suppliers or may


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find that the development efforts are more costly or time consuming than anticipated. Development of new products often requires long-term forecasting of market trends, development and implementation of new or changing technologies and a substantial capital commitment. There can be no assurance that the products that the combined company selects for investment of its financial and engineering resources will be developed or acquired in a timely manner or will enjoy market acceptance. In addition, the combined company’s products may support protocols that are not widely adopted and it may have difficulties entering markets where competitors have strong market positions.
 
The combined company may engage in acquisitions and alliances giving rise to financial and technological risks.
 
The combined company may explore strategic acquisitions that build upon or expand its library of intellectual property, human capital and engineering talent, and increase its ability to fully address the needs of its customers. For example, in November 2006, LSI acquired StoreAge Networking Technologies Ltd., a privately held software company based in Nesher, Israel, for approximately $50 million in cash. Mergers and acquisitions of high-technology companies bear inherent risks. No assurance can be given that previous acquisitions of LSI or Agere or future acquisitions by the combined company will be successful and will not materially adversely affect the combined company’s business, operating results or financial condition. Failure to manage growth effectively or to integrate acquisitions could adversely affect the combined company’s operating results and financial condition.
 
In addition, the combined company may make investments in companies, products and technologies through strategic alliances and otherwise. Investment activities often involve risks, including the need for timely access to needed capital for investments and to invest in companies and technologies that will contribute to the growth of the combined company’s business.
 
The semiconductor industry is prone to intellectual property litigation.
 
As is typical in the semiconductor industry, each of LSI and Agere is frequently involved in disputes regarding patent and other intellectual property rights. Each of LSI and Agere has in the past received, and the combined company may in the future receive, communications from third parties asserting that certain of its products, processes or technologies infringe upon their patent rights, copyrights, trademark rights or other intellectual property rights, and the combined company may also receive claims of potential infringement if it attempts to license intellectual property to others. Defending these claims may be costly and time consuming, and may divert the attention of management and key personnel from other business issues. Claims of intellectual property infringement also might require the combined company to enter into costly royalty or license agreements. The combined company may be unable to obtain royalty or license agreements on acceptable terms. Resolution of whether any of the products or intellectual property of the combined company has infringed on valid rights held by others could have a material adverse effect on results of operations or financial position and may require material changes in production processes and products.
 
The combined company may not be able to adequately protect or enforce its intellectual property rights, which could harm its competitive position.
 
The combined company’s success and future revenue growth will depend, in part, on its ability to protect its intellectual property. The combined company will primarily rely on patent, copyright, trademark and trade secret laws, as well as nondisclosure agreements and other methods, to protect its proprietary technologies and processes. It is possible that competitors or other unauthorized third parties may obtain, copy, use or disclose proprietary technologies and processes, despite efforts by the combined company to protect its proprietary technologies and processes. While the combined company will hold a significant number of patents, there can be no assurances that any additional patents will be issued. Even if new patents are issued, the claims allowed may not be sufficiently broad to protect the combined company’s technology. In addition, any of LSI or Agere’s existing patents, and any future patents issued to the combined company, may be challenged, invalidated or circumvented. As such, any rights granted under these patents may not provide the combined company with meaningful protection. LSI and Agere may not have, and in the future the combined company may not have, foreign patents or pending applications corresponding to its U.S. patents and applications. Even if foreign patents are granted, effective enforcement in


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foreign countries may not be available. If the combined company’s patents do not adequately protect its technology, competitors may be able to offer products similar to the combined company’s products. The combined company’s competitors may also be able to develop similar technology independently or design around its patents. Some or all of LSI’s and Agere’s patents have in the past been licensed and likely will in the future be licensed to certain of the combined company’s competitors through cross-license agreements.
 
A decline in the revenue that the combined company expects to derive from the licensing of its intellectual property could have a significant impact on net income.
 
Agere generates significant revenue from, and the combined company expects to generate significant revenue from, the licensing of its intellectual property. The revenue generated from the licensing of Agere’s intellectual property has a high gross margin compared to the revenue generated from the sale of other products currently sold by Agere, and a decline in this licensing revenue could have a significant impact on the profitability of the combined company. The combined company’s licensing revenue is expected 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 revenue and profitability.
 
The combined company will conduct a significant amount of activity outside of the United States, and will be exposed to legal, business, political and economic risks associated with its international operations.
 
Each of LSI and Agere derive, and it is expected that the combined company will derive, a substantial portion of its revenue from sales of products shipped to locations outside of the United States. In addition, each of LSI and Agere manufacture, and the combined company will manufacture, a significant portion of its products outside of the United States and will be dependent on non-U.S. suppliers for many parts and services. The combined company may also pursue growth opportunities in sales, design and manufacturing outside of the United States. Operations outside of the United States are subject to a number of risks and potential costs that could adversely affect revenue and results of operations, including:
 
  •  political, social and economic instability;
 
  •  fluctuations in currency exchange rates;
 
  •  exposure to different legal standards, particularly with respect to intellectual property;
 
  •  natural disasters and public health emergencies;
 
  •  nationalization of business and blocking of cash flows;
 
  •  trade and travel restrictions;
 
  •  imposition of governmental controls and restrictions;
 
  •  burdens of complying with a variety of foreign laws;
 
  •  import and export license requirements and restrictions;
 
  •  unexpected changes in regulatory requirements;
 
  •  foreign technical standards;
 
  •  difficulties in staffing and managing international operations;
 
  •  international trade disputes;
 
  •  difficulties in collecting receivables from foreign entities or delayed revenue recognition; and
 
  •  potentially adverse tax consequences.
 
The combined company may rely on the capital markets and/or bank markets to provide financing.
 
The combined company may rely on the capital markets and/or bank markets to provide financing for strategic acquisitions, capital assets needed in manufacturing facilities and other general corporate needs. As of


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December 31, 2006, Agere had approximately $362 million of convertible notes outstanding and LSI had approximately $350 million of convertible notes outstanding. The combined company may need to seek additional equity financing or debt financing from time to time. Historically, each of LSI and Agere has been able to access the capital markets and the bank markets when deemed appropriate, but the combined company may not be able to access these markets in the future on acceptable terms. The availability of capital in these markets may be affected by several factors, including geopolitical risk, the interest rate environment and the condition of the economy as a whole. Moreover, any future equity or equity-linked financing may dilute the equity ownership of existing shareholders. In addition, the operating performance, capital structure and expected future performance of the combined company will affect the combined company’s ability to raise capital. LSI and Agere believe that the combined company’s cash, cash equivalents, short-term investments and expected future cash from operations will be sufficient to fund its needs in the foreseeable future.
 
The combined company will utilize indirect channels of distribution over which it will have limited control.
 
Financial results could be adversely affected if the combined company’s relationships with resellers or distributors were to deteriorate or if the financial condition of these resellers or distributors were to decline. In addition, as the combined company’s business grows, there may be an increased reliance on indirect channels of distribution. There can be no assurance that the combined company will be successful in maintaining or expanding these indirect channels of distribution. This could result in the loss of certain sales opportunities. Furthermore, the partial reliance on indirect channels of distribution may reduce visibility with respect to future business, thereby making it more difficult to accurately forecast orders.
 
The combined company may not be able to collect all of its accounts receivable from customers.
 
A majority of the trade receivables of LSI and Agere have been, and it is expected that a majority of the trade receivables of the combined company will be, derived from sales of products to large multinational computer, communication, networking, storage and consumer electronics manufacturers. None of LSI, Agere or the combined company can provide any assurances that its accounts receivable balances will be paid on time or at all.
 
The trading price of the combined company’s stock may be affected by factors different from those currently affecting the prices of LSI and Agere common stock.
 
Upon completion of the merger, holders of Agere common stock will become holders of the common stock of LSI. The results of operations of the combined company, as well as the trading price of LSI’s common stock after the merger, may be affected by factors different from those currently affecting Agere’s results of operations and the trading price of Agere’s common stock. For a discussion of the businesses of LSI and Agere and of certain factors to consider in connection with those businesses, see the documents incorporated by reference in this joint proxy statement/prospectus and referred to under “Where You Can Find More Information.”
 
The price of the combined company’s securities may be subject to wide fluctuations.
 
The stock of both LSI and Agere has experienced substantial price volatility, particularly as a result of quarterly variations in results, the published expectations of analysts and announcements by LSI, Agere and their respective competitors, and the stock of LSI after completion of the merger is likely to be subject to similar volatility. Many of the markets from which the combined company expects to derive a substantial portion of revenues are highly cyclical, and the combined company may experience declines in its revenue that are primarily related to industry conditions and not its products. In addition, the stock market has experienced price and volume fluctuations that have affected the market price of many technology companies and that have often been unrelated to the operating performance of such companies. The price of LSI’s securities may also be affected by general global, economic and market conditions. While LSI and Agere cannot predict the individual effect that these and other factors may have on the price of the LSI’s securities following completion of the merger, these factors, either individually or in the aggregate, could result in significant variations in LSI’s stock price during any given period of time. Fluctuations in LSI’s stock price after the completion of the merger may also affect the price of outstanding convertible securities of Agere and LSI, and the likelihood of the convertible securities being converted into cash or equity. If LSI’s stock price is below the conversion price of the Agere or LSI convertible notes on the date of maturity, they may not convert into equity and LSI may be required to redeem the outstanding convertible securities


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for cash. However, in the event they do not convert to equity, LSI and Agere believe that the combined company’s cash position and expected future operating cash flows will be adequate to meet these obligations as they mature.
 
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 technology industries are particularly vulnerable to this kind of litigation due to the high volatility of their stock prices. Accordingly, the combined company 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 the combined company’s management.
 
Future changes in financial accounting standards or practices or existing taxation rules or practices may cause adverse unexpected fluctuations and affect reported results of operations.
 
Financial accounting standards in the United States are constantly under review and may be changed from time to time. The combined company would be required to apply these changes. Once implemented, these changes could result in material fluctuations in the results of operations of the combined company and/or the way in which such results of operations are reported. For example, on January 1, 2006, LSI adopted SFAS 123-R. In accordance with the modified prospective transition method, LSI began recognizing compensation expense for all share-based awards granted on or after January 1, 2006, plus unvested awards granted prior to January 1, 2006. The adoption of SFAS 123-R had a significant impact on LSI’s operating results as share-based compensation expense is charged directly against reported earnings. Numerous judgments and estimates are involved in the calculation of this expense and changes to those estimates or different judgments could have a significant effect on LSI’s reported earnings.
 
Similarly, the combined company will be subject to taxation in the United States and a number of foreign jurisdictions. Rates of taxation, definitions of income, exclusions from income, and other tax policies are subject to change over time. Changes in tax laws in a jurisdiction in which the combined company has reporting obligations could have a material impact on results of operations.
 
The combined company will face uncertainties related to the effectiveness of internal controls.
 
Public companies in the United States are required to review their internal controls over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002. It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will achieve its stated goal under all potential future conditions, regardless of how remote.
 
Although each of LSI’s and Agere’s management has determined, and each of their respective independent registered public accounting firms have attested, that their respective internal controls were effective as of as of the end of their most recent fiscal years, there can be no assurance that the integration of LSI and Agere, and their respective internal control systems and procedures, will not result in or lead to a future material weakness in the combined company’s internal controls, or that the combined company or its independent registered public accounting firm will not identify a material weakness in the combined company’s internal controls in the future. A material weakness in internal controls over financial reporting would require management and the combined company’s independent public accounting firm to evaluate its internal controls as ineffective. If internal controls over financial reporting are not considered adequate, the combined company may experience a loss of public confidence, which could have an adverse effect on its business and stock price.
 
Internal control deficiencies or weaknesses that are not yet identified could emerge.
 
Over time the combined company may identify and correct deficiencies or weaknesses in its internal controls and, where and when appropriate, report on the identification and correction of these deficiencies or weaknesses. However, the internal control procedures can provide only reasonable, and not absolute, assurance that deficiencies or weaknesses are identified. Deficiencies or weaknesses that are not yet identified by LSI or Agere could emerge and the identification and correction of these deficiencies or weaknesses could have a material impact on the results of operations for the combined company.


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THE SPECIAL MEETING OF LSI STOCKHOLDERS
 
Date, Time and Place
 
The LSI special meeting of LSI stockholders will be held at 10:00 a.m., local time, on March 29, 2007 at 1621 Barber Lane, Milpitas, California.
 
Check-in will begin at 9:30 a.m. and LSI stockholders should allow ample time for the check-in procedures.
 
Item of Business
 
At the LSI special meeting, LSI stockholders will be asked to consider and vote upon a proposal to approve the issuance of shares of LSI common stock in connection with the merger as more fully described in this joint proxy statement/prospectus. LSI currently does not contemplate that any other matters will be presented at the LSI special meeting.
 
Recommendation of the LSI Board of Directors
 
After careful consideration, the LSI board of directors unanimously determined that the merger agreement and the transactions contemplated by the merger agreement are advisable and in the best interests of the LSI stockholders and has unanimously approved the merger agreement. The LSI board of directors recommends that the LSI stockholders vote “FOR” the proposal to approve the issuance of shares of LSI common stock in connection with the merger.
 
Admission to the Special Meeting
 
Only LSI stockholders, including joint holders, as of the close of business on February 2, 2007, and other persons holding valid proxies for the special meeting are entitled to attend the LSI special meeting. LSI stockholders and their proxies should be prepared to present photo identification. In addition, LSI stockholders who are record holders will have their ownership verified against the list of record holders as of the record date prior to being admitted to the meeting. LSI stockholders who are not record holders but hold shares through a broker or nominee (i.e., in street name) should provide proof of beneficial ownership on the record date, such as their most recent account statement prior to February 2, 2007, or other similar evidence of ownership. Anyone who does not provide photo identification or comply with the other procedures outlined above upon request will not be admitted to the special meeting.
 
Method of Voting; Record Date; Stock Entitled to Vote; Quorum
 
LSI stockholders are being asked to vote both shares held directly in their name as stockholders of record and any shares they hold in “street name” as beneficial owners. Shares held in “street name” are shares held in a stock brokerage account or shares held by a bank or other nominee.
 
The method of voting differs for shares held as a record holder and shares held in street name. Record holders will receive proxy cards. Holders of shares in “street name” will receive voting instruction cards in order to instruct their brokers or nominees how to vote.
 
Proxy cards and voting instruction cards are being solicited on behalf of the LSI board of directors from LSI stockholders in favor of the proposal to approve the issuance of shares of LSI common stock in connection with the merger.
 
Stockholders may receive more than one set of voting materials, including multiple copies of this joint proxy statement/prospectus and multiple proxy cards or voting instruction cards. For example, stockholders who hold shares in more than one brokerage account may receive a separate voting instruction card for each brokerage account in which shares are held. Stockholders of record whose shares are registered in more than one name will receive more than one proxy card. In addition, Agere is also soliciting votes for its annual meeting and stockholders who own shares of both LSI and Agere will also receive a proxy or voting instruction card from Agere. Please note that a vote for the issuance of shares in connection with the merger for the LSI special meeting will not constitute a vote for the proposal to adopt the merger agreement for the Agere special meeting, and vice versa. Therefore, the LSI board of directors urges LSI stockholders to complete, sign, date and return each proxy card and voting instruction card for the LSI special meeting they receive.


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Only stockholders of LSI at the close of business on February 2, 2007, the record date for the LSI special meeting, are entitled to receive notice of, and vote at, the LSI special meeting. On the record date, approximately 404,235,335 shares of LSI common stock were issued and outstanding. Stockholders of LSI common stock on the record date are each entitled to one vote per share of LSI common stock on the proposal to approve the issuance of shares of LSI common stock in connection with the merger.
 
A quorum of stockholders is necessary to have a valid meeting of LSI stockholders. A majority of the shares of LSI common stock issued and outstanding and entitled to vote on the record date must be present in person or by proxy at the LSI special meeting in order for a quorum to be established.
 
Abstentions and broker “non-votes” count as present for establishing the quorum described above. A broker “non-vote” may occur on an item when a broker is not permitted to vote on that item without instructions from the beneficial owner of the shares. Shares held by LSI in its treasury do not count toward the quorum.
 
Adjournment and Postponement
 
LSI’s bylaws provide that any adjournment or postponement of the LSI special meeting may be made at any time by the chairman of the meeting or a vote of stockholders holding a majority of shares of LSI common stock represented at the LSI special meeting, either in person or by proxy, whether or not a quorum exists, without further notice other than by an announcement made at the special meeting. LSI’s bylaws also provide that no matter may be brought before a special meeting which is not stated in the notice of the special meeting.
 
Required Vote
 
Under the applicable rules of the New York Stock Exchange, the issuance of shares of LSI common stock in connection with the merger requires an affirmative vote of a majority of the votes cast at the LSI special meeting, provided that the total votes cast on the proposal represent over 50% of all shares of LSI common stock entitled to vote on the proposal.
 
Under the applicable rules of the New York Stock Exchange, brokers and other nominees are prohibited from giving a proxy to vote their customers’ shares with respect to the proposal to be voted on at the LSI special meeting in the absence of instructions from their customers. For purposes of determining whether LSI has received the affirmative vote of a majority of the votes cast at the LSI special meeting, broker “non-votes” and abstentions will not be considered votes cast and will therefore have no effect on the outcome of the proposal.
 
For purposes of determining whether the total votes cast represent over 50% of all shares of LSI common stock entitled to vote on the proposal, broker “non-votes” and abstentions will be considered entitled to vote and will therefore make it more difficult to meet this requirement.
 
Share Ownership of Directors and Executive Officers of LSI
 
At the close of business on the record date for the LSI special meeting, directors and executive officers of LSI beneficially owned and were entitled to vote approximately 1.8% of the shares of LSI common stock outstanding on that date.
 
Voting Procedures
 
Submitting Proxies or Voting Instructions
 
Whether LSI stockholders hold shares of LSI common stock directly as stockholders of record or in “street name”, LSI stockholders may direct the voting of their shares without attending the LSI special meeting. LSI stockholders may vote by granting proxies or, for shares held in street name, by submitting voting instructions to their brokers or nominees.
 
Record holders of shares of LSI common stock may submit proxies by completing, signing and dating their proxy cards for the LSI special meeting and mailing them in the accompanying pre-addressed envelopes. LSI stockholders who hold shares in “street name” may vote by mail by completing, signing and dating the voting instruction cards for the LSI special meeting provided by their brokers or nominees and mailing them in the accompanying pre-addressed envelopes.


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If LSI stockholders of record do not include instructions on how to vote their properly signed proxy cards for the LSI special meeting, their shares will be voted “FOR” the proposal to approve the issuance of shares of LSI common stock in connection with the merger, and in the discretion of the proxy holders on any other business that may properly come before the LSI special meeting or any adjournment or postponement thereof.
 
If LSI stockholders holding shares of LSI common stock in “street name” do not provide voting instructions, their shares will not be considered to be votes cast on the proposal.
 
Stockholders of record of LSI common stock may also vote in person at the LSI special meeting by submitting their proxy cards or by filling out a ballot at the special meeting.
 
If shares of LSI common stock are held by LSI stockholders in “street name”, those LSI stockholders may not vote their shares in person at the LSI special meeting unless they bring a signed proxy from the record holder giving them the right to vote their shares and fill out a ballot at the special meeting.
 
Revoking Proxies or Voting Instructions
 
LSI stockholders may change their votes at any time prior to the vote at the LSI special meeting. LSI stockholders of record may change their votes by granting new proxies bearing a later date (which automatically revoke the earlier proxies) or by attending the LSI special meeting and voting in person. Attendance at the LSI special meeting will not cause previously granted proxies to be revoked, unless LSI stockholders specifically so request. For shares held in “street name”, LSI stockholders may change their votes by submitting new voting instructions to their brokers or nominees or by attending the LSI special meeting and voting in person, provided that they have obtained a signed proxy from the record holder giving them the right to vote their shares.
 
Proxy Solicitation
 
LSI is soliciting proxies for the LSI special meeting from LSI stockholders and Agere is soliciting proxies for the Agere annual meeting from its stockholders. Each company will bear its own fees and costs associated with printing and filing this joint proxy statement/prospectus and the registration statement on Form S-4, of which it forms a part, that has been filed by LSI with the Securities and Exchange Commission.
 
Other than the costs shared with Agere, the cost of soliciting proxies from LSI stockholders will be paid by LSI.
 
In addition to the mailing of these proxy materials, the solicitation of proxies or votes may be made in person or by telephone, facsimile, telegram or electronic means by LSI’s directors, officers and employees, who will not receive any additional compensation for such solicitation activities.
 
LSI has retained Georgeson Inc. to assist it in the solicitation of proxies.
 
Contact for Questions and Assistance in Voting
 
Any LSI stockholder who has a question about the merger, the issuance of shares in connection with the merger, or how to vote or revoke a proxy, or who wishes to obtain additional copies of this joint proxy statement/prospectus, should contact:
 
Georgeson Inc.
17 State Street, 10th Floor
New York, NY 10004
Toll Free: (866) 783-6820
Banks and Brokerage Firms: (212) 440-9800
 
If you need additional copies of this joint proxy statement/prospectus or voting materials, you should contact Georgeson Inc. as described above or send an e-mail to investorrelations@lsi.com.
 
Other Matters
 
LSI is not aware of any other business to be acted upon at the LSI special meeting. LSI’s bylaws also provide that no matter may be brought before a special meeting which is not stated in the notice of the special meeting. If, however, other matters are properly brought before the LSI special meeting or any adjournment or postponement of the LSI special meeting, the persons named as proxy holders, Abhijit Y. Talwalkar, Bryon Look and Andrew S. Hughes, will have discretion to act on those matters, or to adjourn or postpone the LSI special meeting.


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THE AGERE ANNUAL MEETING
 
Date, Time and Place of Annual Meeting
 
The Agere annual meeting is scheduled to be held at the Edward Nash Theater at the Raritan Valley Community College, Route 28W and Lamington Road, North Branch, New Jersey 08876, on March 29, 2007, at 9:00 a.m., local time.
 
Agere will also webcast its annual meeting. Stockholders can access the webcast at http://www.agere.com/webcast. Information on the Agere website, other than this joint registration statement/prospectus and form of proxy, is not part of the proxy soliciting materials.
 
Purpose of Annual Meeting
 
The purpose of the annual meeting is to:
 
  •  consider and vote on a proposal to adopt the merger agreement;
 
  •  elect three directors to serve until the next annual meeting of stockholders and until their successors are elected and qualified or until the consummation of the merger;
 
  •  re-approve the Short Term Incentive Plan;
 
  •  ratify the Audit Committee’s selection of PricewaterhouseCoopers LLP as Agere’s independent registered public accounting firm for fiscal 2007; and
 
  •  transact such other business as may properly come before the meeting and any postponement or adjournment thereof.
 
The Agere board of directors recommends that Agere stockholders vote “FOR” the proposal to adopt the merger agreement. For the reasons for this recommendation, see “The Merger — Consideration of the Merger by the Agere Board of Directors — Recommendation of the Agere Board of Directors.” The Agere board of directors also recommends that you vote “FOR” each of the director nominees listed under the heading “Election of Agere Directors,” “FOR” the re-approval of Agere’s Short Term Incentive Plan and “FOR” the ratification of the selection of PricewaterhouseCoopers LLP as Agere’s independent registered public accounting firm for fiscal 2007 at the annual meeting.
 
Who Can Vote at the Agere Annual Meeting
 
Only Agere stockholders of record at the close of business on February 2, 2007, the record date for the Agere annual meeting, will be entitled to notice of, and to vote at, the Agere annual meeting or any adjournments or postponements of the Agere annual meeting.
 
On the record date, there were 169,422,222 shares of common stock outstanding. Each share of common stock is entitled to one vote on each matter properly brought before the meeting. Shares that are held in Agere’s treasury are not considered outstanding or entitled to vote at the Agere annual meeting.
 
In accordance with Delaware law, a list of stockholders entitled to vote at the meeting will be available at the meeting, and for 10 days prior to the meeting, at 1110 American Parkway NE, Allentown, Pennsylvania 18109, between the hours of 9 a.m. and 4 p.m., local time.
 
Agere stockholders will be admitted to the Agere annual meeting beginning at 8:00 a.m., local time, on March 29, 2007. You will need your admission ticket as well as a form of personal identification to enter the meeting. The procedure for obtaining an admission ticket depends on whether you are a “record holder” of Agere stock or if your Agere shares are held in “street name.” You are a record holder if you hold your Agere shares in an account with Agere’s transfer agent, Computershare Investor Services, LLC, or if you have an Agere stock certificate. Your Agere shares are held in “street name” if you hold them in an account with a bank, broker or other record holder.
 
If you are an Agere stockholder of record and received this joint proxy statement/prospectus by mail, you will find an admission ticket in the proxy materials that were sent to you. If you are an Agere stockholder of


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record and received an e-mail describing how to view this joint proxy statement/prospectus over the Internet and want to attend the meeting in person, please write to Agere Systems Inc., 1110 American Parkway NE, Room 10A-301C, Allentown, Pennsylvania 18109, Attention: Response Center, or call 1-800-372-2447, to obtain an admission ticket.
 
If your Agere shares are held in street name (in the name of a bank, broker or other nominee) and you plan to attend the Agere annual meeting, you can obtain an admission ticket in advance by sending a written request, along with proof of ownership, such as a recent bank or brokerage account statement, to Agere Systems Inc., 1110 American Parkway NE, Room 10A-301C, Allentown, Pennsylvania 18109, Attention: Response Center.
 
If you plan to attend the Agere annual meeting, please retain the admission ticket. The admission ticket will admit you to the meeting. If you arrive at the meeting without an admission ticket, Agere will admit you if it is able to verify that you are an Agere stockholder.
 
Vote Required for Approval
 
Quorum
 
The holders of shares possessing a majority of all the votes that could be cast on every matter that is to be voted on must be present, in person or by proxy, in order to transact business at the meeting.
 
Required Vote for Adoption of Merger Agreement (Proposal 1)
 
The affirmative vote of the holders of a majority of the outstanding shares of Agere common stock is required to adopt the merger agreement.
 
Required Vote for Election of Directors (Proposal 2)
 
Directors will be elected by a plurality of votes cast. That is, the nominees receiving the greatest number of votes will be elected.
 
Required Vote for All Other Matters (Proposals 3 and 4)
 
The affirmative vote of the holders of a majority of the common stock present in person or represented by proxy and entitled to vote at the Agere annual meeting is required to re-approve the Short Term Incentive Plan and to ratify the Audit Committee’s selection of PricewaterhouseCoopers LLP as Agere’s independent registered public accounting firm for fiscal 2007.
 
Effect of Withheld Votes and Abstentions
 
All shares of Agere common stock represented at the Agere annual meeting, but not voting, including abstentions and broker non-votes, will be treated as present for purposes of determining the presence or absence of a quorum for all matters for consideration at the Agere annual meeting.
 
In the election of directors, Agere stockholders may withhold their vote. Withheld votes will be excluded from the vote and will have no effect on the outcome. Agere stockholders may vote to “abstain” on each of the other proposals. If you vote to “abstain,” or do not vote, it will have the same effect as a vote against the proposal to adopt the merger agreement. If you vote to “abstain” it will have the same effect as a vote against the proposal to re-approve the Agere Short Term Incentive Plan and the proposal to ratify the selection of PricewaterhouseCoopers LLP as Agere’s independent registered public accounting firm for fiscal 2007. Broker “non-votes”, if any, will not be counted for purposes of the proposal to re-approve the Agere Short-Term Incentive Plan or the proposal to ratify the selection of PricewaterhouseCoopers LLP as Agere’s independent registered public accounting firm for fiscal 2007.
 
If Agere stockholders return a proxy but do not indicate how to vote, the Agere common stock represented by such proxy will be voted in favor of all matters for consideration at the Agere annual meeting.


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Adjournments
 
If a quorum is not present at the Agere annual meeting, the meeting may be adjourned from time to time until a quorum is present. In addition, adjournments of the Agere annual meeting may be made for the purpose of soliciting additional proxies in favor of the proposals. However, no proxy that is voted against a proposal described in this joint proxy statement/prospectus will be voted in favor of adjournment of the Agere annual meeting for the purpose of soliciting additional proxies.
 
Proxies and Voting Procedures
 
You can vote your shares by completing and returning a proxy card or, if your shares are held in street name, a voting instruction form. Most stockholders can also vote over the Internet or by telephone. If Internet and telephone voting are available to you, you can find voting instructions in the materials accompanying this joint proxy statement/prospectus. The Internet and telephone voting facilities will close at 11:59 p.m. Eastern Daylight Time on March 28, 2007. Please be aware that if you vote over the Internet, you may incur costs such as telephone and Internet access charges for which you will be responsible. If you are a participant in Agere’s 401(k) plan, your voting instructions must be received by 11:59 p.m. Eastern Daylight Time on March 26, 2007.
 
You can revoke your proxy (including an Internet or telephone vote) at any time before it is exercised by timely delivery of a properly executed, later-dated proxy or by voting in person at the meeting.
 
The method by which you vote will in no way limit your right to vote at the meeting if you later decide to attend in person. If your shares are held in street name, you must obtain a proxy, executed in your favor, from your broker or other holder of record, to be able to vote at the meeting.
 
All shares entitled to vote and represented by properly completed proxies received prior to the meeting and not revoked will be voted at the meeting in accordance with your instructions. If you return a signed proxy card without indicating how your shares should be voted on a matter and do not revoke your proxy, the shares represented by your proxy will be voted as the Agere board of directors recommends and therefore “FOR” the adoption of the merger agreement, “FOR” each of the director nominees listed under the heading “Election of Agere Directors,” “FOR” the re-approval of Agere’s Short Term Incentive Plan and “FOR” the ratification of the selection of PricewaterhouseCoopers LLP as Agere’s independent registered public accounting firm for fiscal 2007.
 
If you hold your shares through a broker, your shares may be voted even if you do not vote or attend the annual meeting. Under the rules of the New York Stock Exchange, member brokers who do not receive instructions from beneficial owners will be allowed to vote on (1) the proposal to ratify the Audit Committee’s selection of PricewaterhouseCoopers LLP as Agere’s independent registered public accounting firm for fiscal 2007 and (2) the proposal to re-approve the Short Term Incentive Plan. Broker “non-votes,” if any, will have the same effect as votes cast against the proposal to adopt the merger agreement.
 
If you hold shares through Agere’s 401(k) plan and do not vote, those shares will be voted in the same proportion as shares in the plan that are voted by plan participants.
 
If any other matters are properly presented at the annual meeting for consideration, including, among other things, consideration of a motion to adjourn the meeting to another time or place, the individuals named as proxies will have discretion to vote on those matters according to their best judgment to the same extent as the person delivering the proxy would be entitled to vote. If the annual meeting is postponed or adjourned, your proxy will remain valid and may be voted at the postponed or adjourned meeting. You still will be able to revoke your proxy until it is voted. At the date this joint proxy statement/prospectus went to press, Agere did not know of any matters to be presented at the annual meeting other than those described in this joint proxy statement/prospectus.


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Revoking a Proxy
 
You may revoke your proxy at any time before it is exercised by timely delivering a properly executed, later-dated proxy (including by voting over the Internet or telephone) or by voting by ballot at the Agere annual meeting. Simply attending the Agere annual meeting without voting will not revoke your proxy.
 
Shares Held in “Street Name”
 
If your shares of Agere common stock are held in an account at a broker, bank or other nominee and you wish to vote, you must return your instructions to the broker, bank or other nominee.
 
If you own shares of Agere common stock through a broker, bank or other nominee and attend and vote at the Agere annual meeting, you should bring a letter from your broker, bank or other nominee identifying you as the beneficial owner of such shares of Agere common stock and authorizing you to vote.
 
Tabulation of Votes
 
Agere has appointed IVS Associates, Inc. to serve as Inspector of Election for the Agere annual meeting. Automatic Data Processing, Inc. will independently tabulate affirmative and negative votes and abstentions.
 
Dissenters Rights of Appraisal
 
Holders of Agere common stock will not have any appraisal rights under the Delaware General Corporation Law or under Agere’s certificate of incorporation in connection with the merger, and neither Agere nor LSI will independently provide holders of Agere common stock with any such rights.
 
How You Can Reduce the Number of Copies of Our Proxy Materials You Receive
 
The Securities and Exchange Commission has rules that permit us to deliver a single copy of our proxy statement and annual report on Form 10-K to stockholders sharing the same address. This process, called householding, allows Agere to reduce the amount of material printed and mail.
 
Agere has implemented householding for all stockholders who share the same last name and address and, for shares held in “street name,” where the shares are held through the same nominee (that is, all accounts are at the same brokerage firm), so that they are receiving only one copy of Agere’s proxy statement and annual report on Form 10-K per address. If you would like to receive a separate copy of this year’s proxy statement and annual report on Form 10-K, please write to Agere Systems Inc., 1110 American Parkway NE, Room 10A-301C, Allentown, Pennsylvania 18109, Attention: Response Center, or call at 1-800-372-2447.
 
If you share the same last name and address with other Agere stockholders and would like to start or stop householding for your account, you can call 1-800-542-1061 or write to Householding Department, 51 Mercedes Way, Edgewood, NY 11717, including your name, the name of your broker or other holder of record and your account number(s). If you consent to householding, your election will remain in effect until you revoke it. If you revoke your consent, Agere will send you separate copies of documents mailed at least 30 days after receipt of your revocation.
 
If you would like to view future proxy statements and annual reports over the Internet instead of receiving paper copies, you can elect to do so either by voting at http://www.proxyvote.com or by visiting http://www.investordelivery.com. Your election to view these documents over the Internet will remain in effect until you revoke it. Please be aware that if you choose to access these materials over the Internet, you may incur costs such as telephone and Internet access charges for which you will be responsible. If you choose to view future proxy statements and annual reports over the Internet, next year you will receive an e-mail with instructions on how to view those materials and vote.
 
Allowing Agere to household annual meeting materials or electing to view them electronically will help save on the cost of printing and distributing these materials.


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Cost of Proxy Distribution and Solicitation
 
Agere will pay the expenses of the preparation of the proxy materials and the solicitation of proxies. Proxies may be solicited on behalf Agere in person or by telephone, e-mail, facsimile or other electronic means by directors, officers or employees of Agere, who will receive no additional compensation for soliciting. Agere has engaged The Proxy Advisory Group, LLC to assist in the solicitation of proxies and to provide related informational support, for a fee of $20,000 plus reimbursement of expenses. In accordance with the regulations of the Securities and Exchange Commission and the New York Stock Exchange, Agere will reimburse brokerage firms and other custodians, nominees and fiduciaries for their expenses incurred in sending proxies and proxy materials to beneficial owners of Agere Systems stock.
 
Agere Fiscal Year and Common Stock Reclassification
 
Agere’s fiscal year begins on October 1 and ends on September 30. References in this joint proxy statement/prospectus to the year 2006 or fiscal 2006 with respect to Agere refer to the 12-month period from October 1, 2005 through September 30, 2006. In May 2005, Agere reclassified its 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. Information regarding Agere in this joint proxy statement/prospectus has been adjusted to reflect these transactions.


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GOVERNANCE OF AGERE
 
Pursuant to the Delaware General Corporation Law and Agere’s by-laws, Agere’s business, property and affairs are managed by or under the direction of the Agere board of directors. The Agere board of directors currently has eight members.
 
The Agere board of directors has three standing committees:
 
  •  The Audit Committee, the members of which are: Thomas P. Salice (Chair), Richard S. Hill and Harold A. Wagner.
 
  •  The Compensation Committee, the members of which are: Harold A. Wagner (Chair), Arun Netravali, Thomas P. Salice and Rae F. Sedel.
 
  •  The Nominating/Corporate Governance Committee, the members of which are: Rae F. Sedel (Chair), Arun Netravali and Harold A. Wagner.
 
The Agere board of directors has determined that all the directors other than Mr. Clemmer, including those who serve on these committees, are “independent” for purposes of Section 303A of the Listed Company Manual of the New York Stock Exchange, and that the members of the Audit Committee are also “independent” for purposes of Section 10A(m)(3) of the Securities Exchange Act of 1934. The Agere board of directors based these determinations primarily on a review of the responses of the directors and executive officers to questions regarding employment and compensation history, affiliations and family and other relationships and on discussions with the directors. The Agere board of directors also reviewed the relationships between Agere and companies with which its directors are affiliated.
 
The Agere board of directors has adopted a charter for each of the three standing committees and corporate governance guidelines that address the make-up and functioning of the Agere board of directors. The Agere board of directors has also adopted a code of conduct that applies to all of its employees, officers and directors. Agere stockholders can find links to these materials on the Agere website at: http://www.agere.com/governance. Agere stockholders can also obtain this information in print by writing to Agere Systems Inc., 1110 American Parkway NE, Room 10A-301C, Allentown, Pennsylvania 18109, Attention: Response Center, or by calling 1-800-372-2447.
 
During fiscal 2006, the Agere board of directors held twelve meetings and the committees held a total of twenty-two meetings. None of the directors attended fewer than 75% of the total number of meetings of the Agere board of directors and committees of the Agere board of directors of which he or she was a member during fiscal 2006. At least quarterly, the non-management directors meet in private session without members of management. These sessions are presided over by the Chairman of Agere’s board of directors, Mr. Wagner. If Agere stockholders would like to communicate directly with Mr. Wagner or any of the other non-management directors, follow the instructions set forth in the section below entitled “Communications with Directors.”
 
Audit Committee
 
The Audit Committee focuses its efforts on the following three areas:
 
  •  The adequacy of Agere’s internal controls and financial reporting process and the integrity of its financial statements.
 
  •  The performance of the internal auditors and the qualifications, independence and performance of the independent auditors.
 
  •  Agere’s compliance with legal and regulatory requirements.
 
The Audit Committee meets periodically with management to consider the adequacy of Agere’s internal controls and the financial reporting process. It also discusses these matters with Agere’s independent auditors and with appropriate company financial personnel. The committee reviews Agere’s financial statements and discusses them with management and the independent auditors before those financial statements are filed with the Securities and Exchange Commission. The committee met ten times in fiscal 2006.


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The committee regularly meets privately with the independent auditors, has the sole authority to retain and dismiss the independent auditors and periodically reviews their performance and independence from management. The independent auditors have unrestricted access and report directly to the committee.
 
Audit Committee Financial Expert.  The Agere board of directors has determined that the Chairman of the committee, Mr. Salice, is an “audit committee financial expert,” as that term is defined in Item 401(h) of Regulation S-K under the Securities Exchange Act of 1934. In making this determination, the Agere board of directors considered Mr. Salice’s educational background and his business experience, which is described below under “Election of Directors.” The Agere board of directors has also determined that Mr. Salice is “independent” for purposes of Section 303A of the New York Stock Exchange Listed Company Manual and Section 10A(m)(3) of the Securities Exchange Act of 1934.
 
Nominating/Corporate Governance Committee
 
The responsibilities of the Nominating/Corporate Governance Committee include:
 
  •  Identifying, evaluating and recommending to the Agere board of directors, prospective nominees for Director.
 
  •  Periodically reviewing Agere’s corporate governance guidelines.
 
  •  Periodically reviewing the performance of the Agere board of directors and its members and making recommendations to the Agere board of directors concerning the number, function and composition of the committees of the Agere board of directors.
 
  •  Making recommendations to the Agere board of directors from time to time as to matters of corporate governance.
 
The committee met five times in fiscal 2006.
 
The Agere board of directors believes that it should be comprised of directors with varied, complementary backgrounds, and that directors should, at a minimum, have expertise that may be useful to the company. Directors should also possess the highest personal and professional ethics and should be willing and able to devote the required amount of time to company business.
 
When considering candidates for director, the committee takes into account a number of factors, including the following:
 
  •  Whether the candidate has relevant business experience.
 
  •  Judgment, skill, integrity and reputation.
 
  •  Existing commitments to other businesses.
 
  •  Independence from management.
 
  •  Whether the candidate’s election would be consistent with our corporate governance guidelines.
 
  •  Potential conflicts of interest with other pursuits, including any relationship between the candidate and any customer, supplier or competitor of Agere.
 
  •  Legal considerations such as antitrust issues.
 
  •  Corporate governance background.
 
  •  Financial and accounting background, to enable the committee to determine whether the candidate would be suitable for Audit Committee membership.
 
  •  Executive compensation background, to enable the committee to determine whether the candidate would be suitable for Compensation Committee membership.
 
  •  The size and composition of the existing board of directors.


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The committee will consider candidates for director suggested by stockholders applying the criteria for candidates described above and considering the additional information referred to below. Stockholders wishing to suggest a candidate for director should write to the Corporate Secretary, at the address indicated below, and include:
 
  •  A statement that the writer is a stockholder and is proposing a candidate for consideration by the committee.
 
  •  The name of and contact information for the candidate.
 
  •  A statement of the candidate’s business and educational experience.
 
  •  Information regarding each of the factors listed above, other than the factor regarding board size and composition, sufficient to enable the committee to evaluate the candidate.
 
  •  Detailed information about any relationship or understanding between the proposing stockholder and the candidate.
 
  •  A statement that the candidate is willing to be considered and willing to serve as a director if nominated and elected.
 
Before nominating a sitting director for re-election at an annual meeting, the committee will also consider the director’s performance on the Agere board of directors.
 
When seeking candidates for director, the committee may solicit suggestions from incumbent directors, management or others. In fiscal 2006, the committee also retained an unaffiliated search firm to identify additional director candidates and to provide the committee background information on those candidates. After conducting an initial evaluation of a candidate, the committee will interview the candidate if it believes the candidate might be suitable to be a director. The committee may also ask the candidate to meet with management. If the committee believes a candidate would be a valuable addition to the Agere board of directors, it will recommend to the full board that candidate’s election.
 
This year, Mr. Mancuso, who was appointed a director by the Agere board of directors in July 2006 and Mr. Wilska, who was appointed a director by the Agere board of directors in December 2005, are standing for election by the stockholders for the first time. Mr. Mancuso was recommended to the Agere board of directors by an executive search firm that the Nominating/Corporate Governance Committee had retained to help it identify individuals whose skills and experience might make them valuable additions to the Agere board of directors. The Nominating/Corporate Governance committee believed that the Agere board of directors would benefit from Mr. Mancuso’s experience as the chief financial officer of a public company. Mr. Wilska was recommended to the Agere board of directors by a non-management director, who believed that the Agere board of directors would benefit from Mr. Wilska’s experience in the mobile phone industry.
 
Under Agere’s by-laws, nominations for Director may be made only by or at the direction of the Agere board of directors, or by a stockholder of record at the time of giving notice who is entitled to vote and delivers written notice along with the additional information and materials required by the by-laws to Agere’s Corporate Secretary not less than 45 days nor more than 75 days prior to the first anniversary of the record date for the preceding year’s annual meeting. For the annual meeting in the year 2008, in the event the merger is not completed, Agere must receive this notice on or after November 19, 2007, and on or before December 19, 2007. Agere stockholders can obtain a copy of the full text of the by-law provision by writing to Agere’s Corporate Secretary, 1110 American Parkway NE, Allentown, Pennsylvania 18109.
 
Compensation Committee
 
The Compensation Committee is responsible for setting executive officer compensation, for making recommendations to the full Agere board of directors concerning director compensation and for general oversight for the compensation and benefit programs for other employees. The committee met seven times in fiscal 2006.
 
Compensation of Directors
 
Each of Agere’s outside directors, that is, any director who is not an employee of Agere, receives annually a retainer of $45,000 and an option to purchase 10,000 shares of Agere common stock. Each new outside director receives an option to purchase 10,000 shares of Agere common stock when first elected to the Agere board of


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directors. The exercise price per share for these options, which are granted under our Non-Employee Director Stock Plan, is the fair market value of a share on the date of grant. Options granted under the plan generally have a seven-year term and become exercisable on the first anniversary of the date of grant.
 
Agere also provides outside directors with travel accident insurance when on company business.
 
Compensation Committee Interlocks and Insider Participation
 
The members of the Compensation Committee in fiscal 2006 were Richard S. Hill (through January 2006), Arun Netravali (from January 2006), Thomas P. Salice, Rae F. Sedel and Harold A. Wagner. None of the members has ever been an officer or employee of Agere or any of its subsidiaries, and no “compensation committee interlocks” existed during fiscal 2006.
 
Communications with Directors
 
Individuals who want to communicate with the Agere board of directors or any individual director can write to:
 
Agere Systems Inc.
Board Administration
Room 4U-541
400 Connell Drive
Berkeley Heights, NJ 07922
 
Your letter should indicate that you are an Agere stockholder. The Corporate Secretary’s office will review each letter. Depending on the subject matter, that office will:
 
  •  Forward the communication to the director or directors to whom it is addressed;
 
  •  Attempt to handle the inquiry directly, without forwarding it, for example where it is a request for information about Agere or it is a stock-related matter; or
 
  •  Not forward the communication if it is primarily commercial in nature or if it relates to an improper or irrelevant topic.
 
At each Agere board meeting, the Corporate Secretary presents a summary of all communications received since the last meeting that were not forwarded and makes those communications available to the directors on request. The Agere board of directors has approved this process.
 
Director Attendance at Annual Meetings
 
We typically schedule an Agere board meeting in conjunction with the Agere annual meeting and expect that Agere’s directors will attend absent a valid reason, such as a schedule conflict. Last year, all of the individuals then serving as directors, other than Mr. Wilska, attended Agere’s annual meeting. Mr. Wilska had recently joined Agere’s Board and had a pre-existing conflict.
 
Section 16(a) Beneficial Ownership Reporting Compliance
 
Agere believes that, under the Securities and Exchange Commission’s rules for reporting of securities transactions by executive officers, directors and beneficial owners of more than 10% of our common stock, all required reports for fiscal 2006 were timely filed.


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BENEFICIAL OWNERSHIP OF AGERE COMMON STOCK
 
Beneficial Owners of More Than 5% of Agere Common Stock
 
The following table sets forth information concerning the beneficial ownership of Agere common stock for each person or group of persons known to Agere, as of January 31, 2007, that beneficially owned more than 5% the shares of Agere common stock. The information below is based on public filings made with the Securities and Exchange Commission. These filings contain information as of particular dates and may not reflect current holdings of Agere common stock. To Agere’s knowledge, other than as described below, the named person or group of persons has sole voting and investment power with respect to these securities.
 
                 
Name and Address of Beneficial Owner
  Amount of Beneficial Ownership     Percent of Class(1)  
 
Capital Research and Management Company
333 South Hope Street
Los Angeles, CA 90071
    9,267,920 (2)     5.5 %
Brandes Investment Partners, L.P.
11988 El Camino Real, Suite 500
San Diego, CA 92130
    13,035,919 (3)     7.7 %
 
 
(1) Percentage of ownership was determined by dividing (i) the number of shares shown in the table by (ii) 169,332,730, the number of shares of Agere common stock outstanding as of January 31, 2007, unless otherwise indicated.
 
(2) Based on a Schedule 13G Information Statement amendment filed by Capital Research and Management (Capital Research) on February 14, 2006. Such Schedule discloses that (i) Capital Research has sole voting power with respect to 1,432,600 shares of common stock, and has sole dispositive power with respect to 9,267,920 shares of common stock and does not have shared voting power or dispositive power with respect to any shares, and (ii) Capital Research disclaims beneficial ownership with respect to all such shares.
 
(3) Based on a Schedule 13G Information Statement filed by Brandes Investment Partners, L.P., Brandes Investment Partners, Inc., Brandes Worldwide Holdings, L.P., Charles H. Brandes, Glenn R. Carlson and Jeffrey A. Busby (Brandes) on February 14, 2006. Such Schedule discloses that (i) Brandes has shared voting power with respect to 11,205,972 shares of common stock, and has shared dispositive power with respect to 13,035,919 shares of common stock and does not have sole voting or dispositive powers over any shares, and (ii) Brandes Investment Partners, Inc., Charles H. Brandes, Glenn R. Carlson and Jeffrey A. Busby disclaim direct ownership of such shares, except for an amount that is substantially less than one percent of such shares, and Brandes Worldwide Holdings, L.P. disclaims direct ownership of such shares.


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Security Ownership of Directors and Executive Officers
 
The following table sets forth information concerning the beneficial ownership of Agere common stock as of January 31, 2007 for Agere directors, the individuals named in the Summary Compensation Table and the directors and executive officers as a group. To Agere’s knowledge, except as otherwise noted, the named individual had sole voting and investment power with respect to these securities.
 
         
    Common Stock
 
    Beneficially
 
Name
  Owned(1)(2)  
 
Richard L. Clemmer
    158,204  
Richard S. Hill
    21,000(3 )
Michael J. Mancuso
    3,600  
Arun Netravali
    19,782  
Thomas P. Salice
    51,859(4 )
Rae F. Sedel
    28,747  
Harold A. Wagner
    42,500  
Kari-Pekka Wilska
     
John T. Dickson
     
Peter Kelly
    375,564  
Denis P. Regimbal
    163,991  
Samir F. Samhouri
    104,374  
Ruediger Stroh
    66,843  
Andrew Micallef
    131,315  
Jean F. Rankin
    248,860  
Directors and executive officers as a group (15 persons)
    1,419,639  
 
 
(1) No individual director, executive officer or other individual identified above owned more than 1% of our outstanding common stock as of January 31, 2007. As of that date, the directors and executive officers as a group beneficially owned less than 1% of our outstanding common stock.
 
(2) Includes beneficial ownership of the following numbers of shares of Agere common stock that may be acquired within 60 days of January 31, 2007 pursuant to stock options awarded under Agere stock plans:
 
         
    # of Shares  
 
Mr. Clemmer
    139,000  
Mr. Hill
    21,000  
Mr. Netravali
    18,000  
Mr. Salice
    21,000  
Ms. Sedel
    27,000  
Mr. Wagner
    37,000  
Mr. Kelly
    358,479  
Mr. Regimbal
    156,875  
Mr. Samhouri
    105,756  
Mr. Stroh
    66,666  
Mr. Micallef
    128,989  
Ms. Rankin
    243,215  
Directors and executive officers as a group (15 persons)
    1,322,980  
 
(3) On February 1, 2007, Mr. Hill exercised stock options in respect of 13,000 of such shares which were concurrently sold.
 
(4) Includes 27,043 shares held jointly and over which Mr. Salice shares voting and investment power with his spouse, and 3,816 shares held by a charitable trust and over which Mr. Salice shares voting and investment power with his spouse as trustees.


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PROPOSAL 1.
 
THE MERGER AGREEMENT AND THE MERGER
 
As discussed elsewhere in this joint proxy statement/prospectus, Agere stockholders are considering and voting to adopt the merger agreement. Agere stockholders should read carefully this joint proxy statement/prospectus in its entirety for more detailed information concerning the merger agreement and the merger. In particular, Agere stockholders are directed to the merger agreement which is attached as Annex A to this joint proxy statement/prospectus.
 
The Agere board of directors recommends a vote “FOR” the proposal to adopt the merger agreement.


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PROPOSAL 2.
 
ELECTION OF AGERE DIRECTORS
 
The Agere board of directors is divided into three classes. One class is elected each year for a term of three years.
 
Three directors will be elected at the annual meeting of stockholders and until their successors are elected and qualified for a three-year term expiring at the Agere annual meeting in 2010 or until the consummation of the merger. The Agere board of directors has nominated Richard L. Clemmer, Michael J. Mancuso and Kari-Pekka Wilska for the positions. Agere stockholders can find information about Messrs. Clemmer, Mancuso and Wilska below. Upon consummation of the merger, each of the directors of Agere will be replaced by the directors of Atlas Acquisition Corp. as the board of directors of the surviving corporation.
 
The persons named in the Agere proxy card will vote such proxy for the election of Messrs. Clemmer, Mancuso and Wilska, unless you indicate that your vote should be withheld. If elected, Messrs. Clemmer, Mancuso and Wilska will each continue in office until his successor has been duly elected and qualified, or until the earliest of his death, resignation or retirement. Messrs. Clemmer, Mancuso and Wilska have each indicated to the company that he will serve if elected. Agere does not anticipate that any of the nominees will be unable to stand for election, but, if that happens, your proxy will be voted in favor of another person nominated by the Agere board of directors.
 
The Agere board of directors recommends a vote “FOR” the election of Messrs. Clemmer, Mancuso and Wilska as Agere directors.
 
Nominees for Terms Expiring in 2010
 
Richard L. Clemmer, Director since October 2002.  Mr. Clemmer has been Agere’s President and Chief Executive Officer since October 2005. 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 of directors 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 Incorporated’s Semiconductor Group. Mr. Clemmer is a director of i2 Technologies, Inc. Age: 54.
 
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.
 
Michael J. Mancuso, Director since July 2006.  From 1994 to 2006, Mr. Mancuso was chief financial officer of General Dynamics, a supplier of business aviation and aircraft services, land and amphibious combat systems and shipbuilding and marine systems. Prior to joining General Dynamics in 1993, he was vice president and controller of United Technologies Corporation’s Pratt and Whitney Commercial Engine business unit. He also served 21 years with General Electric in various financial management positions. Mr. Mancuso is a director of SPX Corporation and The Shaw Group. Age: 64.
 
Kari-Pekka Wilska, Director since December 2005.  Since October 2005, Mr. Wilska has been a partner at Austin Ventures, a venture capital firm. Prior to joining Austin Ventures, Mr. Wilska was President of Vertu Ltd., a subsidiary of Nokia Corporation and a provider of luxury mobile phones. From 1993 to 2004, Mr. Wilska held a variety of leadership positions in Nokia’s U.S. mobile phone operations. Mr. Wilska is also a director of Brightpoint, Inc. and Mavenir Systems. Age: 59.


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Directors Whose Terms Will Expire in 2008
 
Richard S. Hill, Director since July 2003.  Mr. Hill has been Chief Executive Officer and a director of Novellus Systems, Inc., a supplier of integrated circuit manufacturing equipment, since 1993 and has been Chairman of its board of directors since 1996. Before joining Novellus, Mr. Hill spent 12 years at Tektronix, Inc., where he held a variety of positions, including President of Tektronix Development Company, Vice President of the Test and Measurement Group and President of Tektronix Components Corporation. Prior to joining Tektronix, he held engineering management and engineering positions at General Electric, Motorola and Hughes Aircraft Company. Mr. Hill is a director of Arrow Electronics, Inc. and the University of Illinois Foundation. Age: 54.
 
Arun Netravali, Director since July 2004.  Since November 2004, Mr. Netravali has been managing partner of OmniCapital Group LLC, a venture capital firm. From January 2002 to April 2003, Mr. Netravali was Chief Scientist for Lucent Technologies Inc., a provider of services, systems and software for communications networks, working with academic and investment communities to identify and implement new networking technologies. From 1999 to January 2002, Mr. Netravali was President of Bell Labs as well as Lucent’s Chief Technology Officer and Chief Network Architect. Mr. Netravali currently serves on the board of Level 3 Communications Inc. and on the advisory board of Veridicom International Inc. Age: 60.
 
Harold A. Wagner, Director since March 2001 and Chairman of the Agere board of directors since December 2001.  In December 2000, Mr. Wagner retired from his position as Chairman and Chief Executive Officer of Air Products and Chemicals, Inc., a multi-national chemicals manufacturing company, a position he had held since 1998. From 1992 to 1998, Mr. Wagner served as Chairman, President and Chief Executive Officer of Air Products and Chemicals. He is also a director of CIGNA Corporation, United Technologies Corporation and PACCAR Inc. He is a trustee of the Eisenhower Exchange Fellowships, Inc. and is a member of the Business Advisory Committee of A.P. Møller. Age: 71.
 
Directors Whose Terms Will Expire in 2009
 
Thomas P. Salice, Director since July 2003.  Mr. Salice is a co-founder and has been a managing member of SFW Capital Partners, LLC, a private equity firm, since January 2005. Prior to his current position, he served as Vice Chairman of AEA Investors LLC, a private equity firm, and had served at AEA Investors since 1989. Mr. Salice is a director of Mettler-Toledo International Inc. and Waters Corporation and is a trustee of Fordham University. Age: 47.
 
Rae F. Sedel, Director since March 2001.  Ms. Sedel has been a Managing Director since 1987, and a member of the board of directors since October 2005, of Russell Reynolds Associates, Inc., an executive recruiting firm. From 1991 until October 2005, she was the lead partner on sector verticals and, from 1991 until December 2004, she was head of the technology sector at Russell Reynolds. Before joining Russell Reynolds, Ms. Sedel spent fifteen years with Pacific Telesis Group, where she was Vice President-Consumer Markets. Age: 57.


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PROPOSAL 3.
 
RE-APPROVAL OF THE AGERE SYSTEMS INC.
SHORT TERM INCENTIVE PLAN
 
Agere is asking its stockholders to re-approve the Short Term Incentive Plan to preserve the federal income tax deduction for compensation it pays to its chief executive officer and the four other most highly compensated executive officers. These individuals are our “covered employees.” Section 162(m) of the Internal Revenue Code limits the federal income tax deduction for compensation paid to each of the “covered employees” of a publicly held corporation to $1 million per fiscal year, with exceptions for performance-based compensation made under qualifying plans. Under Section 162(m), Agere must periodically seek stockholder approval of the plan; the plan was last approved by stockholders in 2002. Agere is not proposing any changes to the plan. A summary of the principal features of the plan is provided below. Agere stockholders can find a complete copy of the plan attached to the proxy statement available over the Internet through the Securities and Exchange Commission’s EDGAR service.
 
Awards.  Agere pays annual bonuses to officers under the Short Term Incentive Plan. The plan provides for the payment of cash bonuses for executive officers after performance periods selected by the Compensation Committee, in accordance with targets established at or near the beginning of the performance periods. Each fiscal year is typically a performance period, although other periods of time could be selected.
 
Typically, the committee makes any award payments subject to Agere having a minimum level of net income for the performance period. If that level of net income is met, the committee will consider additional factors in setting each individual’s bonus (with respect to “covered employees” the additional factors may only work to reduce the bonus amount). Factors that may be considered in determining the amount of individual bonuses may include the executive officer’s individual performance, which may be measured by the quality of strategic plans, organizational and management development, special project leadership and similar indicators of individual performance or other measures, and the company’s financial performance, which may be measured by revenue, operating income, cash flow, earnings per share, return on equity, total return to stockholders in the form of stock price appreciation and dividends, if paid, or other measures. Net income for these purposes is defined as our net income before taxes for a specified period of time, excluding the following items:
 
  •  extraordinary items;
 
  •  cumulative effects of changes in accounting principles;
 
  •  securities gains and losses;
 
  •  amortization or write-off of goodwill, acquired intangibles, and purchased in-process research and development; and
 
  •  nonrecurring items including, but not limited to, gains or losses on asset dispositions and sales of divisions, business units or subsidiaries, restructuring and separation charges and gains and losses from qualified benefit plan curtailments and settlements.
 
Agere believes that it is not appropriate for these items to have an impact on the level of executive compensation paid. Agere uses the net income test so that awards to “covered employees” can be deducted by Agere for federal income tax purposes. Subject to this limitation and the maximum award under the plan, the amount of each executive officer’s award is determined in the sole discretion of the committee or, in the case of an award to an officer who is not a “covered employee,” in the sole discretion of the committee or a person or committee to whom the committee has delegated that authority. With respect to a “covered employee,” the committee may reduce, but may not increase, the amount of a bonus that otherwise would be payable.
 
When it determined officer bonuses for fiscal 2006, the committee also took into account the extent to which the company met revenue and non-GAAP operating margin targets.
 
The maximum amount that may be paid under the plan to any participant in any fiscal year is $9 million. In fiscal 2006, there were nine participants in the plan.


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Plan Administration.  The Compensation Committee administers the Short Term Incentive Plan.
 
Other Provisions.  The Agere board of directors may modify or terminate the Short Term Incentive Plan at any time.
 
Tax Rules.  The following is a brief summary of the federal income tax consequences of payments made under the Short Term Incentive Plan based on current federal income tax laws. This summary is not intended to be exhaustive and does not describe state or local tax consequences. In general, ordinary income will be recognized by participants in the plan at the time that awards are paid or made available to them. At the time that a participant recognizes ordinary income, Agere will be entitled to a corresponding deduction if, among other things, (i) the income meets the test of reasonableness, is an ordinary and necessary business expense and is not an “excess parachute payment” within the meaning of Section 280G of the Internal Revenue Code and is not disallowed by the $1 million limitation on compensation paid to “covered employees” and (ii) any applicable reporting obligations are satisfied.
 
Awards made in the future to any officer will be based on the officer’s individual performance and the company’s future performance. Accordingly, the amount of cash bonuses to be paid in the future to current or future participating officers cannot be determined at this time. Actual amounts will depend on the individual’s and Agere’s actual performance. Agere stockholders can find the amounts Agere paid to certain participants for bonuses under the plan in fiscal 2006 in the Agere Summary Compensation Table below.
 
The Agere board of directors recommends a vote “FOR” the re-approval of the Agere Systems Inc. Short Term Incentive Plan.
 
Information about Agere’s equity compensation plans.  The following table summarizes information about Agere’s equity compensation plans as of September 30, 2006. For additional information about Agere’s equity compensation plans, see note 4 to the financial statements in Item 8 of Agere’s 2006 annual report on Form 10-K.
 
                         
                Number of Securities
 
                Remaining Available
 
    Number of Securities
          for Future Issuance
 
    to be Issued Upon
    Weighted-Average
    Under Equity
 
    Exercise of
    Exercise Price of
    Compensation Plans
 
    Outstanding Options,
    Outstanding Options,
    (Excluding Securities
 
    Warrants and Rights(1)     Warrants and Rights     Reflected in Column (a))  
    (a)     (b)     (c)  
 
Equity compensation plans approved by security holders
    25,290,226     $ 29.0283       20,768,864 (2)
Equity compensation plans not approved by security holders(3)
    1,476,915     $ 270.7757       0  
Total
    26,767,141     $ 42.3671       20,768,864  
 
 
(1) In connection with Agere’s spin-off from Lucent, Agere assumed stock options that had originally been granted by Lucent or AT&T Corp. or companies that Lucent had acquired. The table does not include information for equity compensation plans assumed by Lucent in connection with acquisitions of the companies that originally established those plans. At September 30, 2006, 114,302 shares were issuable upon exercise of outstanding options, with a weighted-average exercise price of $57.0218 per share, under these plans. Since the spin-off Agere has not granted, and Agere will not grant in the future, any additional options under these plans.
 
(2) Includes 15,606,788 shares available for issuance under Agere’s 2001 Long Term Incentive Plan, all of which were available in connection with stock options, stock appreciation rights, restricted stock awards, performance shares and units, dividend equivalents and other stock unit awards. The amount shown in the table also includes 4,855,663 shares available under Agere’s employee stock purchase plan and 306,413 shares available for issuance in connection with stock options, restricted stock units and restricted stock granted under the Agere Non-Employee Director Stock Plan.
 
(3) All of the shares reported in this row relate to stock options granted prior to Agere’s spin-off by Lucent under Lucent plans that had not been approved by Lucent’s stockholders and that Agere assumed in connection with the spin-off. Since the spin-off, Agere has not granted, and will not grant in the future, any further awards under these plans.


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PROPOSAL 4.
 
RATIFICATION OF SELECTION OF PRICEWATERHOUSECOOPERS LLP AS
AGERE’S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
The Agere Audit Committee has selected PricewaterhouseCoopers LLP to serve as Agere’s independent registered public accounting firm for fiscal 2007. Representatives of PricewaterhouseCooopers LLP will be at the annual meeting to answer questions. They will also have the opportunity to make a statement if they desire to do so.
 
While not required by law or Agere’s governing documents, the Agere board of directors is asking our stockholders to ratify the Audit Committee’s selection of PricewaterhouseCoopers LLP as Agere’s independent registered public accounting firm for fiscal 2007. The Agere board of directors is doing this as a matter of good corporate practice. If Agere stockholders do not ratify the selection of PricewaterhouseCoopers LLP, the Audit Committee will consider whether to select an alternate firm as Agere’s independent registered public accounting firm. Even if stockholders do ratify the selection of PricewaterhouseCoopers LLP, the Audit Committee may, in its discretion, select a different firm if it believes doing so is in the interest of the company and its stockholders.
 
Agere’s Relationship with its Independent Auditors
 
The fees billed by PricewaterhouseCoopers LLP to Agere during fiscal 2006 and fiscal 2005 were as follows:
 
                 
    Fiscal 2006     Fiscal 2005  
 
Audit Fees
  $ 2,076,000     $ 2,366,000  
Audit-Related Fees
               
Financial due diligence
          54,000  
Intellectual property royalty audits
          10,000  
Services related to our reclassification and reverse stock split
          35,000  
Consultations regarding GAAP
    65,000       50,000  
                 
Total Audit-Related Fees
  $ 65,000     $ 149,000  
                 
Tax Fees
               
Transfer pricing
  $ 175,000       175,000  
International tax compliance
    240,000       249,000  
International tax advice
    30,000       30,000  
                 
Total Tax Fees
  $ 445,000     $ 454,000  
All Other Fees
    4,000 (1)      
                 
Total Fees Billed
  $ 2,590,000     $ 2,969,000  
                 
 
 
(1) For access to a web-based, accounting research product provided by PricewaterhouseCoopers LLP.
 
Under its charter, the Audit Committee must pre-approve all engagements of the independent auditors unless an exception to such pre-approval exists under the Securities Exchange Act of 1934 or the rules of the Securities and Exchange Commission. Each year, the committee approves the retention of the independent auditors to audit Agere’s financial statements, including proposed fees, before the filing of the preceding year’s annual report on Form 10-K. At the beginning of the fiscal year, the Audit Committee will evaluate other known potential engagements of the independent auditors, including the scope of the work proposed to be performed and the proposed fees, and approve or reject each service, taking into account whether the services are permissible under applicable law and the possible impact of each non-audit service on the independent auditors’ independence from management. At each subsequent committee meeting, the committee will receive updates on the services actually provided by the independent auditors, and management may present additional services for approval. Typically,


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these would be services such as due diligence for an acquisition, that would not have been known at the beginning of the year. The committee has delegated to the Chairman of the committee the authority to evaluate and approve engagements on behalf of the committee in the event that a need arises for pre-approval between committee meetings. This might occur, for example, if Agere proposed to execute a financing on an accelerated timetable. If the Chairman approves any engagements pursuant to this delegation, he will report that approval to the full committee at the next committee meeting.
 
In fiscal 2006 and fiscal 2005, each new engagement of PricewaterhouseCoopers LLP was approved in advance by the Audit Committee or its Chairman, and none of those engagements made use of the de minimis exception to pre-approval contained in the Securities and Exchange Commission’s rules.
 
The Agere board of directors recommends a vote “FOR” the Audit Committee’s selection of PricewaterhouseCoopers LLP as Agere’s independent registered public accounting firm for fiscal 2007.


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EXECUTIVE COMPENSATION
 
The following table shows information concerning the compensation of (i) Agere’s Chief Executive Officer, (ii) Agere’s former Chief Executive Officer, (iii) each of Agere’s other executive officers who were serving as such at the end of fiscal 2006 and (iv) two additional individuals who were executive officers for part of fiscal 2006, but were not serving as such at fiscal year end.
 
SUMMARY COMPENSATION TABLE
 
                                                         
                Long-Term
       
                Compensation
       
          Annual Compensation     Awards        
                      Other
                   
                      Annual
          Securities
    All Other
 
Name and
  Fiscal
                Compensation
    Restricted Stock
    Underlying
    Compensation
 
Principal Position (1)
  Year     Salary ($)     Bonus ($)     ($)(2)     Awards ($)(3)     Options (#)     ($)(4)  
 
Richard L. Clemmer
    2006       636,825       425,000       140,369       3,022,500       500,000       10,800  
President and Chief Executive Officer
                                                       
John T. Dickson
    2006       66,667             1,400                   6,174,820  
President and Chief
    2005       800,000             35,727             200,000       14,040  
Executive Officer
    2004       800,000       320,000       33,843             250,000       23,331  
Peter Kelly
    2006       400,000       120,000       34,854       1,343,000       175,000       9,060  
Executive Vice
    2005       400,000       200,000       51,286             100,000       25,922  
President and Chief
    2004       400,000       150,000       29,351             100,000       8,910  
Financial Officer
                                                       
Denis P. Regimbal
    2006       291,667       110,000       18,054       1,007,250       115,000       9,127  
Executive Vice President, Mobility
                                                       
Samir F. Samhouri
    2006       250,000       120,000       35,650       1,007,250       115,000       10,765  
Executive Vice President, Networking
                                                       
Ruediger Stroh
    2006       279,451       120,000       34,074       1,343,000       200,000       101,560  
Executive Vice President, Storage
                                                       
Andrew Micallef
    2006       300,000       90,000       51,897       1,007,250       100,000       238,898  
Executive Vice President, Global
Operations
                                                       
Jean F. Rankin
    2006       320,000       96,000       35,862       1,007,250       100,000       9,360  
Executive Vice President, General
Counsel & Secretary
                                                       
 
 
(1) Mr. Clemmer was appointed President and Chief Executive Officer when Mr. Dickson retired from those positions in October 2005. Messrs. Micallef, Regimbal and Samhouri and Ms. Rankin became executive officers in October 2005. Following the management changes that occurred after Mr. Clemmer became President and Chief Executive Officer, the positions of Mr. Micallef and Ms. Rankin ceased being considered executive officer positions in December 2005. Mr. Stroh joined Agere in November 2005.
 
(2) For fiscal 2006, the amounts shown in this column are comprised of the following:
 


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                      Tax Gross-ups
 
                      on
 
          Financial
          International
 
          Counseling and
    Commuting
    Assignment
 
Name
  Car Allowance     Tax Gross-up     Expenses     Payments  
 
Mr. Clemmer
    16,800       18,054       105,515        
Mr. Dickson
    1,400                    
Mr. Kelly
    16,800       18,054              
Mr. Regimbal
          18,054              
Mr. Samhouri
    16,800       18,850              
Mr. Stroh
    15,400       18,674              
Mr. Micallef
          14,862             37,035  
Ms. Rankin
    16,800       19,062              
 
 
Under Mr. Clemmer’s employment agreement, we paid him $100,000 to be used for housing and/or commuting expenses. We also provided him $5,515 of additional commuting benefits during an initial, transition period after he became President and Chief Executive Officer.
 
(3) The amounts shown in this column represent the grant date value of restricted stock units received by the named individuals in fiscal 2006. This value was computed using the closing price of a share of Agere common stock on the date of grant for each restricted stock unit. We do not pay dividend equivalents on restricted stock units. The following table gives information about the restricted stock units granted in fiscal 2006.
 
                         
    Performance-Based
             
    Restricted Stock
    Time-Based Restricted
    Value at Fiscal Year-End
 
    Units Granted
    Stock Units Granted in
    of All Restricted Stock
 
Name
  in Fiscal 2006 (#)     Fiscal 2006 (#)     Units Held ($)  
 
Mr. Clemmer
    150,000       100,000       3,732,500  
Mr. Kelly
    50,000       50,000       1,493,000  
Mr. Regimbal
    25,000       50,000       1,119,750  
Mr. Samhouri
    25,000       50,000       1,119,750  
Mr. Stroh
    100,000             1,493,000  
Mr. Micallef
    25,000       50,000       1,119,750  
Ms. Rankin
    25,000       50,000       1,119,750  
 
 
The performance-based restricted stock units shown in the table will be paid out on the fourth anniversary of the date of grant if total stockholder return for Agere exceeds the market capitalization weighted total stockholder return of a peer group and the holder remains employed through that date. If the merger is completed, the performance test will be deemed satisfied. One quarter of the time-based restricted stock units shown in the table for Mr. Clemmer will be paid out on each of the first four anniversaries of the grant date if he remains employed through the date of payment. The other time-based restricted stock units shown in the table will be paid out on the second anniversary of the date of grant if the holder remains employed through that date. If the holder’s employment terminates after the merger, the holder may be entitled to immediate payment of all restricted stock units under our Officer Severance Policy.
 
(4) For fiscal 2006, includes the following amounts:
 

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    401(k)
    Term Life
          International
       
    Matching
    Insurance
    Sign-on
    Assignment
    Severance
 
Name
  Contributions ($)     Premiums ($)     Bonus ($)     Payments ($)     Payments ($)  
 
Mr. Clemmer
    6,600       4,200                      
Mr. Dickson
          705                   6,174,115  
Mr. Kelly
    6,300       2,760                    
Mr. Regimbal
    7,567       1,560                    
Mr. Samhouri
    9,925       840                    
Mr. Stroh
          1,560       100,000              
Mr. Micallef
    6,500       1,110             231,288        
Ms. Rankin
    6,600       2,760                    
 
 
During fiscal 2006, Mr. Micallef was on a temporary, international assignment in Singapore. Under our international assignment policy, which is available to all employees on a temporary international assignment and is designed so that employees are not disadvantaged by their international assignment, Mr. Micallef received the amounts shown in the table above, which consist principally of additional living and travel expenses, as well as the tax gross-ups shown in the table in footnote 2.
 
OPTION GRANTS IN LAST FISCAL YEAR
 
                                                 
    Number of
    % of
                Potential Realizable Value
 
    Securities
    Total Options
                at Assumed Annual Rates
 
    Underlying
    Granted to
                of Stock Price Appreciation
 
    Options
    Employees in
    Exercise Price
          for Option Term ($)(1)  
Name
  Granted (#)(2)     Fiscal Year     ($/Share)     Expiration Date     5%     10%  
 
Richard L. Clemmer
    500,000       11.0       9.845       10/29/2012       2,003,952       4,670,080  
John T. Dickson
                                   
Peter Kelly
    175,000       3.9       13.315       11/30/2012       948,595       2,210,629  
Denis P. Regimbal
    115,000       2.5       13.315       11/30/2012       623,362       1,452,699  
Samir F. Samhouri
    115,000       2.5       13.315       11/30/2012       623,362       1,452,699  
Ruediger Stroh
    200,000       4.4       13.315       11/30/2012       1,084,108       2,526,434  
Andrew Micallef
    100,000       2.2       13.315       11/30/2012       542,054       1,263,217  
Jean F. Rankin
    100,000       2.2       13.315       11/30/2012       542,054       1,263,217  
 
 
(1) These amounts represent hypothetical gains that might be achieved for the respective stock options if exercised at the end of the option term. The assumed 5% and 10% rates of stock price appreciation are prescribed by the Securities and Exchange Commission. None of the assumed rates of stock price appreciation represents our estimate or projection of the future price of our common stock. The real value of the stock options in this table depends upon the actual changes in the market price of our common stock during the term of the stock options.
 
(2) One quarter of Mr. Clemmer’s stock option becomes exercisable on each of the first four anniversaries of the grant date. One quarter of each of the other stock options shown in the table becomes exercisable on the first anniversary of the grant date. The remainder of each of these stock options becomes exercisable in equal monthly increments over a three-year period thereafter. Under our Officer Severance Policy, earlier exercisability of these options may occur following a change in control if the named individual subsequently leaves the company.

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AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
 
                                                 
                Number of Securities
    Value of Unexercised
 
    Shares
          Underlying Unexercised
    In-the-Money Options at
 
    Acquired on
    Value
    Options at Fiscal Year-End (#)     Fiscal Year-End ($)  
Name
  Exercise (#)     Realized ($)     Exercisable     Unexercisable     Exercisable     Unexercisable  
 
Richard L. Clemmer
                14,000       500,000       29,290       2,542,500  
John T. Dickson
                                   
Peter Kelly
                267,852       265,628       407,369       361,756  
Denis P. Regimbal
                103,802       162,034       174,605       245,170  
Samir F. Samhouri
                66,522       143,846       32,562       222,013  
Ruediger Stroh
                      200,000             323,000  
Andrew Micallef
                112,842       135,315       234,531       196,269  
Jean F. Rankin
                229,673       155,211       220,560       207,940  
 
Pension Plans
 
We have two programs that provide benefits under our pension plans: a service based program and an account balance program. Which program an employee participates in depends on their date of hire. Employees hired after June 30, 2003 do not participate in our pension plans. We have a non-qualified, supplemental pension plan that provides benefits using the same formulas as the tax-qualified pension plan based on compensation that exceeds the amount that may be taken into account under a tax-qualified pension plan.
 
Service Based Program
 
The service based program generally covers most management employees hired prior to January 1, 1999. Pensions provided under this program are computed on an adjusted career average pay basis. A participant’s annual pension benefit is equal to 1.4% of the sum of the individual’s:
 
  •  Average annual pay for the five years ending December 31, 1998, excluding the annual bonus award paid in December 1997, times the number of years of service prior to January 1, 1999;
 
  •  Pay subsequent to December 31, 1998; and
 
  •  Annual bonus award paid in December 1997.
 
Average annual pay includes base salary and annual bonus awards.
 
The normal retirement age under the service based program is 65. However, employees who are at least age 50 with at least 15 years of service can retire with reduced benefits. If an employee’s age is at least 50 and, when added to the employee’s years of service, is equal to or greater than 75, the employee may retire with unreduced pension benefits. A 3% reduction is made for each year that age plus years of service is less than 75. The unreduced pension benefit under this early retirement provision is determined based on an employee’s service and compensation history as of January 1, 2005, and age and years of service when the employee retires.
 
Account Balance Program
 
The account balance program generally covers management employees hired on or after January 1, 1999 and before July 1, 2003. Under this program, we establish an account for each participating employee and make annual


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contributions to that account based on the employee’s age, salary and bonus, in accordance with the following schedule:
 
         
    Contributions as a percent
 
Age
  of salary and bonus  
 
less than 30
    3.00 %
30 — less than 35
    3.75 %
35 — less than 40
    4.50 %
40 — less than 45
    5.50 %
45 — less than 50
    6.75 %
50 — less than 55
    8.25 %
55+
    10.00 %
 
In addition, interest is credited on the last day of the year. Once vested, normally after five years of service, an employee participating in the account balance program is entitled to the amounts in his or her account when he or she leaves the company.
 
Management employees hired on or after July 1, 2003, including Messrs. Clemmer and Stroh, do not participate in our pension plans.
 
Messrs. Regimbal and Samhouri and Ms. Rankin each participates in the service based program. Mr. Dickson participated in the service based program. Messrs. Kelly and Micallef participate in the account balance program.
 
Federal laws place limitations on compensation amounts that may be included under the qualified pension plan. In 2006, up to $220,000 in eligible base salary and bonus could be included in the calculation under the plan.
 
Compensation and benefit amounts that exceed the applicable federal limitations are taken into account, and pension amounts related to annual bonus awards payable to executive officers are paid, under the supplemental pension plan. That plan is a non-contributory plan and has the same two programs and uses the same benefit formulas and eligibility rules as the qualified pension plan. Pension amounts under the qualified pension plan and supplemental pension plan are not subject to reductions for social security benefits or other offset amounts.
 
The supplemental pension plan also provides executive officers with minimum pensions. Eligible retired executive officers and surviving spouses may receive an annual minimum pension equal to 15% of the sum of final base salary plus annual bonus awards. This minimum pension will be offset by amounts received by plan participants as pensions under the qualified and supplemental pension plans.
 
If Messrs. Kelly and Micallef continue to be employed by the company until age 65, we estimate that their balance in the account balance program will be $1,324,358 for Mr. Kelly and $1,442,189 for Mr. Micallef. This represents a lump sum payment; other optional forms of payment are available. This estimate assumes a 3% per year increase in base salary and a bonus paid at target level each year.
 
If Messrs. Regimbal and Samhouri and Ms. Rankin continue to be employed by the company until age 65, we estimate that the annual pension payable to them under the qualified and supplemental pension plans would be $231,505, $374,053 and $235,951, respectively. These are single-life annuity amounts. Other optional forms of payment, which provide for actuarially reduced pensions, are available. These estimates assume a 3% per year increase in base salary and a bonus paid at target level each year. If the actual amounts they are paid differ, or if they leave the company at a different time, their actual pensions will differ.
 
OTHER ARRANGEMENTS WITH AGERE EXECUTIVES
 
Officer Severance Plan
 
Agere Systems has a severance policy that provides benefits for an officer who is terminated by us other than for cause or who chooses to leave following a change in control and within three months of one of the following events occurring after the change in control: either a diminution in job responsibility or a material negative change in employment terms, including a reduction in base salary or a material reduction in target bonus.


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The benefits under this policy include continuation of salary and health and welfare benefits and payment of annual bonus at target levels for two years. These salary and bonus payments would be taken into account for purposes of computing pensions. During this two-year period, participation and vesting under our stock-based benefit plans would continue. Alternatively, Agere may make payment of the salary and target bonus in a lump sum, in which event participation in company plans would end upon payment of those amounts. Payment of any amount under these arrangements will be conditional upon signing a release and will be offset by any individually negotiated arrangement. The policy provides that if an officer is subject to the tax imposed under Section 4999 of the Internal Revenue Code, the officer will receive additional payments from the company such that, after payment of all taxes, the officer retains the amount that the officer would have retained had that tax not applied.
 
Employment Agreements
 
Mr. Clemmer
 
We entered into a letter agreement dated October 30, 2005, with Mr. Clemmer that outlines the terms of his employment with Agere Systems. Under the letter agreement, Mr. Clemmer serves as our President and Chief Executive Officer. His salary was initially set at $680,000 per year and his target bonus is 125% of his base salary. For fiscal 2006, we agreed to pay him a bonus of at least $425,000. Any bonus in future years will depend on the level of achievement of goals set by the Compensation Committee of our Board.
 
Mr. Clemmer received the following awards as hiring incentives:
 
  •  A seven-year stock option covering 500,000 shares. One quarter of the option becomes exercisable on each of the first four anniversary dates of the date of grant.
 
  •  100,000 restricted stock units, one quarter of which are paid out on each of the first four anniversary dates of the date of grant.
 
  •  150,000 restricted stock units which will be paid out after four years only if our total stockholder return exceeds the market capitalization-weighted total stockholder return for a peer group of nine companies.
 
  •  A lump sum payment of $100,000, to be used for housing and/or commuting expenses.
 
Mr. Clemmer also receives $1 million of company-paid term life insurance, a $1,400 per month car allowance and a $10,000 per year financial counseling allowance. The financial counseling payments are “grossed up” for taxes, so that Mr. Clemmer receives $10,000 after taxes.
 
Mr. Clemmer has the benefit of our officer severance policy, which may affect the equity awards described above if Mr. Clemmer leaves the combined company after the merger under certain circumstances. In order to receive the benefit of the severance plan, Mr. Clemmer agreed that if he leaves the company, he will serve as non-executive chairman of our Board for up to two years, if the Board requests.
 
Mr. Stroh
 
We entered into a letter agreement dated October 26, 2005, with Ruediger Stroh that outlines the terms of his employment with Agere Systems. Under the letter agreement, Mr. Stroh serves as our Executive Vice President, Storage. His salary was initially set at $325,000 per year and his target bonus is 75% of his base salary.
 
Mr. Stroh received the following awards as hiring incentives:
 
  •  A $100,000 sign-on bonus that is repayable in full if Mr. Stroh voluntarily resigns or is terminated for cause before November 22, 2007.
 
  •  A seven-year stock option covering 200,000 shares that becomes exercisable over a four-year period.
 
  •  100,000 restricted stock units which will be paid out after four years only if our total stockholder return exceeds the market capitalization-weighted total stockholder return for a peer group of nine companies.


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Mr. Stroh also receives $500,000 of company-paid term life insurance, a $1,400 per month car allowance and a $10,000 per year financial counseling allowance. The financial counseling payments are “grossed up” for taxes, so that Mr. Stroh will receive $10,000 after taxes.
 
Mr. Stroh has the benefit of our officer severance policy, which may affect the equity awards described above if Mr. Stroh leaves the combined company after the merger under certain circumstances.
 
Mr. Dickson’s Separation Agreement
 
On November 4, 2005, we entered into a separation agreement with John T. Dickson, our former President and Chief Executive Officer, relating to his retirement from the company. Under the agreement:
 
  •  Mr. Dickson did not receive a bonus for fiscal 2005.
 
  •  Mr. Dickson received a severance payment of $3.6 million, which is equal to two years’ salary and bonus at target. This payment was conditioned on Mr. Dickson signing a waiver and release.
 
  •  Mr. Dickson received a transition assistance payment of $133,333, which is equal to two months’ salary, in return for his assistance with business and customer transition issues.
 
  •  Mr. Dickson’s stock options were governed by the terms of the awards, which provide that any portion of any stock option that was exercisable on October 26, 2005, remained exercisable for 90 days, and any portion of any stock option that was not then exercisable terminated.
 
  •  We paid Mr. Dickson $1,504,899, which was the value of Mr. Dickson’s accrued benefit under our supplemental pension plan.
 
  •  We paid Mr. Dickson $682,612, which is equal to the amount of additional benefit that Mr. Dickson would have accrued under the supplemental pension plan had he continued to be employed by the company for an additional two years and become eligible for an early retirement benefit under the plan.
 
  •  We paid Mr. Dickson $253,271, which was equal to his accrued benefit under our tax-qualified pension plan.


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REPORT OF THE AGERE COMPENSATION COMMITTEE
ON EXECUTIVE COMPENSATION
 
The Agere Compensation Committee oversees the company’s compensation plans and practices. We review and establish the individual compensation levels for members of senior management and we work with management to establish the outlines of Agere’s compensation programs for other employees.
 
Executive Compensation Philosophy
 
We designed our compensation program to attract, motivate and retain highly talented individuals to drive business success. The program reflects the following principles:
 
  •  Compensation should be related to performance
 
Our compensation program reinforces the company’s business and financial objectives. Employee compensation will vary based on company and individual performance. When the company performs well against the objectives we set, employees will receive greater incentive compensation. When the business does not meet these objectives, incentive awards will be reduced or eliminated. An employee’s individual compensation will also vary based on the person’s performance, contribution and overall value to the business. And, employees with sustained high performance should be rewarded more than those in similar positions with lesser performance.
 
  •  Agere employees should think like Agere stockholders
 
We believe that Agere employees should act in the interests of Agere stockholders and the best way to encourage them to do that is through an equity interest in the company. We do this in a number of ways. We have, over time, granted equity-based awards, such as stock options and/or restricted stock units, to most employees. In addition, we have an employee stock purchase plan that enables employees to purchase Agere stock at a discount through payroll deductions and a 401(k) plan under which U.S. employees can invest in Agere common stock. Our goal is to have market competitive stock programs that encourage each employee to think like an owner of the business.
 
  •  Incentive compensation should be a greater part of total compensation for more senior positions
 
The proportion of an individual’s total compensation that varies with individual and company performance objectives should increase as the individual’s business responsibilities increase.
 
  •  Other goals
 
We have designed our compensation program to balance short and long-term financial objectives, to encourage building stockholder value and to reward individual and company performance.
 
When we determine compensation levels for executive officers, we generally consider the advice of independent, outside consultants retained by the committee, and recommendations made by the company’s senior human resources executive. We also review compensation survey data from our consultants and other independent sources to ensure that our total compensation program is competitive and that the amounts and types of compensation the company pays its leaders are appropriate. We look at compensation data from companies in our industry as well as from companies in a broad cross-section of the technology sector and similarly sized companies. We target overall compensation opportunities to be competitive with our industry comparison group. In addition, we consider the compensation level of each of our officers and attempt to maintain appropriate relationships between the compensation of the different officers.
 
Deductibility of Compensation Paid under Section 162(m) of the Internal Revenue Code
 
It is our policy to have the compensation paid to the company’s five most highly compensated executive officers qualify as performance-based and deductible for federal income tax purposes under Section 162(m) of the Internal Revenue Code unless there is a valid compensation reason that would justify paying non-deductible amounts. That law provides that compensation paid to those individuals in excess of $1 million per year is not deductible for federal income tax purposes unless it is performance-based and a number of other requirements are met.


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Our stock options and bonuses, other than guaranteed bonuses, are intended to be “performance-based” and thus should be deductible for federal income tax purposes, regardless of amount. The other compensation we have paid generally is not deductible to the extent that the total amount of that compensation for one of those officers is more than $1 million in any year.
 
2006 Background
 
At the beginning of fiscal 2006, John Dickson retired as Chief Executive Officer of the company and we hired Rick Clemmer to fill that position. Soon after his appointment, we and Rick made a number of changes in senior management. Some people left the company. Others moved into new positions of responsibility. Almost all senior management positions were held by different people than a year earlier.
 
We believed that these changes created a great deal of uncertainty for those who remained. Would the new CEO like their strategy and management style? Would they agree with any policy changes that resulted from the management change? At the same time, we wanted to challenge the new leadership team to improve the company’s financial performance and wanted to provide meaningful financial incentives to reinforce that challenge. In our discussion below, you will see that we addressed these matters in a number of aspects of our executives’ compensation.
 
Compensation Program
 
Our executive compensation program has a number of components, including:
 
  •  Base Salary
 
  •  Short-Term Incentives
 
  •  Long-Term Incentives
 
  •  Retirement Benefits
 
  •  Severance policy
 
  •  Perquisites
 
Each of these components is discussed below.
 
Base Salary
 
We target base salaries for senior management at levels that are comparable to base salaries for similar positions at similarly sized technology companies. We review surveys periodically to ensure that our salaries are competitive. We also take into account other elements of our compensation package so that senior management’s total compensation opportunity will be competitive.
 
In the first few years after our initial public offering in 2001, we experienced significant declines in our revenue as a result of extreme drops in market demand for telecommunications products of the types we supplied. In response to these declines, we exited our optoelectronics business and sold or discontinued a number of other product lines.
 
We believe a significantly lower revenue level and less complex business make it appropriate to consider whether lower salary levels are appropriate; however, we also recognized that the declining revenues were resulting in lower bonuses and no value being recognized from stock options and chose not to adjust executives’ base salaries as the size and complexity of the company became smaller. However, in 2006, we hired a new CEO and moved new people into senior management positions and did take into account the size and complexity of the company in determining executive officer salaries.
 
Bonus
 
Each year, our executives have an opportunity to earn a bonus. We set financial performance goals each year based on our view of what would be an acceptable level of performance for the company, taking into account


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management’s outlook for the year, semiconductor industry conditions and competitors’ performance. The extent to which these goals are met determines in large part the level of executive bonuses. We feel that financial performance measures alone do not fully reflect executives’ contributions to the company and also take into account personal performance characteristics such as quality of strategy, leadership and execution in setting final bonus amounts. In the past, our actual performance has generally not reached a level we viewed as meriting target level bonuses and actual payouts have generally been much lower than target level as a result.
 
In fiscal 2006, bonuses for all employees, including senior management, were tied to achievement of annual revenue and non-GAAP operating margin targets. In addition, the company had to meet a non-GAAP net income test in order for any bonuses to be payable to the officers named in the Summary Compensation Table, other than Mr. Clemmer. Non-GAAP operating margin and non-GAAP net income excluded items that we felt were not appropriate either to hold against employees, such as restructuring charges, or to give employees the benefit of, such as a large gain from the settlement of tax contingencies.
 
We set the non-GAAP net income target used to determine whether named executive officers could earn any bonus in October 2005, before the senior management changes occurred. Because this target determines only whether bonuses can be paid and not the actual amount, we set the target at a level below which we felt that we would not want to pay bonuses to senior executives, based on the then-current forecast for fiscal 2006. This target was met. Making the non-GAAP net income test does not, however, guarantee that any bonus will be paid. Making the non-GAAP net income target does make any bonuses paid “performance-based compensation” for purposes of Section 162(m) of the Internal Revenue Code and allows us to deduct the amount of the bonuses for federal income tax purposes.
 
Normally, we would set the other targets used to determine executive officer bonuses at the beginning of the fiscal year in October. This year, because of the significant management changes, we felt that we needed to wait until new management could review the business’ forecasts before setting the targets. We discussed bonus metrics at a meeting in December 2005, and then set the revenue and non-GAAP operating margin targets in April 2006 based on management’s outlook for the year at that time as approved by the board of directors. At that time, we set the levels of performance required to achieve bonuses paid at the target level above management’s then-current outlook for the year.
 
The company’s performance in fiscal 2006 did not meet the threshold level of performance for revenue and fell between the threshold and target levels of performance for non-GAAP operating margin and resulted in company-wide bonus funding at less than half the target level. Bonuses for our executive officers were adjusted based on individual and business unit performance and relative base salaries of different officers and ranged from 40 to 64% of target.
 
Equity Awards
 
Last year, we awarded three types of long-term incentives to executive officers: stock options, time-based restricted stock units and performance-based restricted stock units. We have historically granted stock options each year as part of our regular compensation program. Last year we also granted time-based and performance-based restricted stock units to address specific issues related to the management changes. We target long-term incentive grants, other than last year’s time-based restricted stock unit awards, to provide an above-median long-term compensation opportunity and attempt to structure the awards so that the company must achieve competitive or better performance in order for our officers to actually achieve above-median long-term compensation.
 
We discussed and approved the equity awards that were part of the regular compensation program at a series of meetings, the latest of which occurred on December 1, 2005. December 1, 2005 was the grant date for these awards. This was also the grant date for equity awards for other employees under our annual grant program and the annual stock option grant received by non-employee Directors. In accordance with our normal new-hire practice, Mr. Stroh’s sign-on equity awards were granted on the first day of the month following the commencement of his employment. Mr. Clemmer’s equity awards were granted after we announced that he had been appointed President and Chief Executive Officer.


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Stock options.  In fiscal 2006, we granted stock options to our executive officers in order to align their pay with stockholders’ interests and competitive market practice. For each executive officer, the Compensation Committee awarded stock options based on an evaluation of competitive market value, the size of awards made to other executive officers and the officer’s relative impact to the business. The grants made to Messrs. Clemmer and Stroh were part of the package offered when they joined the company, and were larger than a typical annual grant for their positions.
 
Time-based restricted stock units.  We felt that the management changes at the beginning of fiscal 2006 created significant uncertainty for many of our officers. To encourage these officers not to leave the company, we granted them restricted stock units that would vest, or become payable in shares of stock, if they stayed with the company for two years.
 
Performance-based restricted stock units.  We also wanted to create an incentive for our management team to improve the company’s total stockholder return. To do this, we awarded officers restricted stock units that will be paid out four years from the date of grant if the recipient stays with the company and a company performance test is met. That test requires that Agere’s total stockholder return over a four-year period exceed that of a peer group. The companies included in the peer group are: Advanced Micro Devices, Analog Devices, Atmel, Broadcom, Intersil, LSI Logic, Marvell Technology Group, National Semiconductor and PMC-Sierra. These performance-based restricted stock units were granted to Mr. Clemmer when he joined the company and to the other executive officers on December 1, 2005, the regular, annual grant date for our equity programs. As of November 30, 2006, our performance was meeting the performance test.
 
The time-based restricted stock unit awards and the performance-based restricted stock unit awards will not constitute “performance-based compensation” for purposes of section 162(m) of the Internal Revenue Code and thus will not be deductible for federal income tax purposes for us to the extent that the value of those awards upon vesting, together with other non-deductible amounts, exceeds $1 million. We believed that adding a performance test to the time-based restricted stock unit awards was not consistent with why we granted the awards — to retain valued members of the management team. We felt that adding a non-GAAP net income test, which is the test that would be required by our stock plan, to the performance-based restricted stock units, would have detracted from the focus that our executives would have on the total stockholder return test and could have led to an unintended result.
 
Retirement Benefits
 
We have pension plans that are described in detail elsewhere in this joint proxy statement/prospectus. Individuals hired since July 2003, including Messrs. Clemmer and Stroh, do not participate in these plans. Benefits under these plans depend on a participant’s eligible compensation, which includes salary and bonus. Eligible compensation does not include other items such as stock option gains or the value of restricted stock unit awards. We have not credited any executive officer with more years of service under any of these plans than they have actually served with the company or its predecessors. Our pension plans were originally put in place by our predecessors. Many of our competitors do not have pension plans and we have been reducing participation and benefits under the plans in recent years in an effort to become more competitive with other companies in our industry.
 
Severance Policy
 
We have an officer severance policy that provides benefits to officers who are terminated other than for cause or who leave the company after a change in control if they leave for “good reason.” You can find a detailed description of the policy elsewhere in this joint proxy statement/prospectus. We provide these benefits because we want executives to focus on the company’s business and enhancing stockholder value without undue concern about any possible loss of their job.
 
Perquisites
 
The only perquisites that we provide to our executive officers are a car allowance and a financial counseling allowance. The car allowance is $16,800 a year. We provide it because our officers often travel to meetings with customers, suppliers and investors and we do not feel it a productive use of their time to track and submit


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reimbursement requests for business use of their own cars. We also believe that providing the car allowance would reduce the need for the company to provide a car and driver to transport executive officers to meetings. The car allowance is subject to tax and is not grossed up. The financial counseling allowance is $10,000 per year. We provide a tax gross-up on the financial counseling allowance so that our executives can actually obtain that amount of financial counseling.
 
Compensation of the Chief Executive Officer
 
John Dickson was our Chief Executive Officer until he retired in late October 2005. At that time, we appointed Rick Clemmer to succeed him. A discussion of the compensation of both individuals follows.
 
Mr. Dickson
 
Mr. Dickson retired near the beginning of the fiscal year, before we had made any compensation decisions for him. When he retired, we entered into an agreement with him that provided for benefits consistent with our Officer Severance Policy. Under the circumstances, we believed that Mr. Dickson was entitled to the benefit of that policy. You can find a description of this agreement on page 54. We also agreed to pay Mr. Dickson two additional months’ salary in return for his assistance with business and customer transition issues.
 
Mr. Clemmer
 
Prior to his appointment as President and Chief Operating Officer, Mr. Clemmer was a partner in a venture capital firm and had his own technology consulting company in addition to being an outside director of Agere. When he joined us, he withdrew from these outside activities. At that time, we entered into an employment agreement with him. You can find a description of that agreement on page 53. In that agreement we provided that Mr. Clemmer would receive an initial base salary of $680,000 a year. This is lower than what Mr. Dickson was receiving and reflects our view that a lower salary was appropriate given the smaller size of the company than in the past.
 
We made Mr. Clemmer a participant in our annual bonus program, with a target bonus of 125% of his base salary. Because the metrics in our annual bonus program, particularly annual revenue, are difficult for a new CEO to impact in the short-term, we also agreed that he would receive a bonus for fiscal 2006 of at least $425,000. This amount is one half of his target. This is the amount he actually received as our actual performance would have resulted in a bonus equal to 40% of target, or $340,000. We agreed to pay him at least $425,000 in order to encourage him to join us and to stay at least until that amount was paid.
 
In order to provide Mr. Clemmer with a more meaningful equity stake in the company than he had as an outside director so that his interests would quickly be aligned in a more meaningful way with those of our stockholders, our employment agreement with Mr. Clemmer also provided for a stock option grant, a time-based restricted stock unit award and a performance-based restricted stock unit award. We determined the size and structure of these awards after discussing our objectives and possible structures with an outside compensation consultant. We believe that these awards provided Mr. Clemmer with a strong incentive to improve the company’s financial performance.
 
Because we are based in Allentown, PA and Mr. Clemmer lived on the West Coast of the United States, we gave him a lump sum of $100,000, to be used for housing and/or commuting expenses. We also provided Mr. Clemmer $5,515 of additional commuting benefits during an initial transition period after he became President and Chief Executive Officer.
 
In addition, based on the positions and opportunities he was giving up to join the company, we agreed that if he chose to leave Agere before October 26, 2006, we would pay him one year’s salary and bonus at target. We refer to this arrangement below as the “one-year termination arrangement.” Since he is still with the company, he will not receive this amount. If he had chosen to leave, he would have forfeited his right to receive the guaranteed bonus for fiscal 2006 and all of the equity awards granted pursuant to his employment agreement.
 
Mr. Clemmer, like other new hires, does not participate in our pension plans.


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Mr. Clemmer does participate in our Officer Severance Policy. If, on September 30, 2006, he had been terminated without cause and ignoring the one-year termination arrangement, he would have been entitled to the following benefits:
 
  •  Two years base salary and bonus at target — $3,060,000 in total. This amount can be paid in a lump sum, or over a two-year period.
 
  •  If payments are made over a two-year period, he would have received the following for that two-year period:
 
  •  Continued vesting of stock options and time-based restricted stock units.
 
  •  The opportunity to earn approximately one half of his performance-based restricted stock units if the four-year performance test is met. If he elected a lump sum payment, this award would have been canceled.
 
  •  Continued participation in company health and welfare plans.
 
  •  Continued payment of car allowance and financial counseling allowance and tax gross-up on financial counseling allowance — $69,708 in total.
 
In addition to the events described above, if on September 30, 2006, Mr. Clemmer had been terminated other than for cause or had left the company for “good reason” following a recent change in control, and ignoring the one-year termination arrangement, all of his outstanding equity awards would have become fully vested at the time he ceased being an employee of the company.
 
We believe that Mr. Clemmer’s total compensation for fiscal 2006 was as follows:
 
         
Description of Compensation
  Amount  
 
Salary1
  $ 636,825  
Bonus1
    425,000  
Other annual compensation1
    140,369  
Equity awards2
    4,358,555  
All other compensation1
    10,800  
         
Total
  $ 5,571,549  
 
 
1 Amount taken from Summary Compensation Table.
 
2 This amount is the sum of the grant-date present values of Mr. Clemmer’s 2006 equity awards used for financial reporting purposes. This is an estimate of amounts that Mr. Clemmer may receive in the future. Depending on our stock price performance, he may receive more or less than the amount shown.
 
We believe that the amount we have paid Mr. Clemmer for fiscal 2006 is a fair and reasonable amount.
 
Harold A. Wagner (Chair)
Arun Netravali
Thomas P. Salice
Rae Sedel


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REPORT OF THE AGERE AUDIT COMMITTEE
 
Agere’s Audit Committee has reviewed Agere’s audited financial statements as of, and for the fiscal year ended, September 30, 2006, and met with both management and PricewaterhouseCoopers LLP, Agere’s independent public registered accounting firm, to discuss those financial statements. Management has represented to Agere’s Audit Committee that the financial statements were prepared in accordance with accounting principles generally accepted in the United States of America.
 
Management has primary responsibility for Agere’s financial statements and the overall reporting process, including the company’s system of internal controls. The independent auditors audit the annual financial statements prepared by management, express an opinion as to whether those financial statements present fairly, in all material respects, the financial position, results of operations and cash flows of the company in conformity with accounting principles generally accepted in the United States of America and discuss with us their independence and any other matters they are required to discuss with us or that they believe should be raised with us. Agere’s Audit Committee oversees these processes, although the Agere Audit Committee must rely on the information provided to it and on the representations made by management and the independent auditors.
 
Agere’s Audit Committee has received from and discussed with PricewaterhouseCoopers LLP the written disclosure and the letter required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees). These items relate to that firm’s independence from the company. Agere’s Audit Committee also discussed with PricewaterhouseCoopers LLP any matters required to be discussed by Statement on Auditing Standards No. 61 (Communication with Audit Committees).
 
Based on these reviews and discussions, the Agere Audit Committee recommended to the Agere board of directors that Agere’s audited financial statements be included in its annual report on Form 10-K for the fiscal year ended September 30, 2006.
 
Thomas P. Salice (Chairman)
Richard S. Hill
Harold A. Wagner


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AGERE PERFORMANCE GRAPHS
 
The following graphs compare the cumulative total stockholder return on Agere common stock to that of the S&P 500 Index and the S&P 500 Semiconductors Index. The graphs assume that a $100 investment was initially made in Agere’s Class A common stock, Class B common stock and each of the indices at the earliest date shown, and that dividends, if any, were reinvested in all cases. The stock price performance shown on the graph is not necessarily indicative of future price performance. The graphs below take into account the reclassification of each share of Class A common stock and each share of Class B common stock into one share of common stock on May 27, 2005. Agere stockholders now own only common stock.
 
The following graph compares the return on an investment in our Class A common stock, the S&P 500 Index and the S&P 500 Semiconductors Index from September 30, 2001 through September 30, 2006.
 
(PERFORMANCE GRAPH)
 
Value of a $100 Investment
 
                                                             
      30-Sep-01     30-Sep-02     30-Sep-03     30-Sep-04     30-Sep-05     30-Sep-06
Agere Systems Inc. 
    $ 100.00       $ 26.57       $ 74.15       $ 25.36       $ 25.14       $ 36.06  
S&P 500 Index
    $ 100.00       $ 79.51       $ 98.91       $ 112.63       $ 126.44       $ 140.08  
S&P 500 Semiconductors Index
    $ 100.00       $ 63.62       $ 118.35       $ 98.21       $ 127.27       $ 117.28  
                                                             
 
Percentage Return
 
                                                   
      Fiscal 2002     Fiscal 2003     Fiscal 2004     Fiscal 2005     Fiscal 2006
Agere Systems Inc. 
      (73.43 )%       179.09 %       (65.80 )%       (0.86 )%       43.42 %
S&P 500 Index
      (20.49 )%       24.40 %       13.87 %       12.25 %       10.79 %
S&P 500 Semiconductors Index
      (36.38 )%       86.02 %       (17.02 )%       29.59 %       (7.85 )%
                                                   


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The following graph compares the return on an investment in our Class B common stock, the S&P 500 Index and the S&P 500 Semiconductors Index from June 3, 2002, the date on which Agere’s Class B common stock began trading on the New York Stock Exchange, through September 30, 2006.
 
(PERFORMANCE GRAPH)
 
Value of a $100 Investment
 
                                                             
      03-Jun-02     30-Sep-02     30-Sep-03     30-Sep-04     30-Sep-05     30-Sep-06
Agere Systems Inc. 
    $ 100.00       $ 31.63       $ 92.33       $ 32.59       $ 33.26       $ 47.70  
S&P 500 Index
    $ 100.00       $ 78.79       $ 98.01       $ 111.60       $ 125.28       $ 138.80  
S&P 500 Semiconductors Index
    $ 100.00       $ 49.98       $ 92.96       $ 77.14       $ 99.97       $ 92.12  
                                                             
 
Percentage Return
 
                                                   
      03-Jun-02 through
                       
      30-Sep-02     Fiscal 2003     Fiscal 2004     Fiscal 2005     Fiscal 2006
Agere Systems Inc. 
      (68.37 )%       191.92 %       (64.71 )%       2.06 %       43.42 %
S&P 500 Index
      (21.21 )%       24.40 %       13.87 %       12.25 %       10.79 %
S&P 500 Semiconductors Index
      (50.02 )%       86.02 %       (17.02 )%       29.59 %       (7.85 )%
                                                   


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THE MERGER
 
The following is a description of the material aspects of the merger, including the merger agreement. While we believe that the following description covers the material terms of the merger, the description may not contain all of the information that is important to you. We encourage you to read carefully this entire joint proxy statement/prospectus, including the merger agreement attached to this joint proxy statement/prospectus as Annex A, for a more complete understanding of the merger.
 
Background of the Merger
 
LSI and Agere are both participants in the semiconductor industry, and are very familiar with each other’s businesses. Each of them routinely evaluates business alternatives and strategic opportunities as part of their ongoing evaluation of developments in the marketplace, and participates in discussions with third parties regarding possible transactions. Senior management of LSI and Agere from time to time in recent years have informally discussed the future of the semiconductor and storage systems sectors and various ways in which the two companies could work together, including a possible combination of LSI and Agere.
 
In June 2006, Mr. Abhijit Talwalkar, President and Chief Executive Officer of LSI, and Mr. Richard Clemmer, President and Chief Executive Officer of Agere, met and discussed the hard disk drive and networking businesses. Mr. Talwalkar and Mr. Clemmer met again on July 13, 2006 and August 3, 2006 and discussed their respective businesses. Shortly thereafter, Mr. Talwalkar contacted Mr. Clemmer suggesting a meeting to explore a possible combination of their two companies. On August 21, 2006, Agere and LSI entered into a confidentiality agreement to facilitate the exchange of due diligence materials between the two companies. On August 23, 2006, Mr. Talwalkar, together with Mr. Jeffrey Richardson, Executive Vice President for LSI’s Custom Solutions Group, Mr. James Anderson, Senior Director of Marketing and Strategic Planning for LSI’s Custom Solutions Group, and Mr. Eric Williams, Senior Director, Corporate Development, met at the offices of Goldman Sachs in Los Angeles to discuss the businesses of Agere and LSI, their respective strategies and the challenges and opportunities that each company faced. On August 28 and 29, 2006, Mr. Richardson met with Mr. Samir Samhouri, executive vice president with and general manager of Agere’s Networking Division, and Mr. Anderson at Agere’s offices in Allentown, Pennsylvania to discuss the respective businesses of LSI and Agere, as well as a possible combination of the two companies. Peter Kelly, Chief Financial Officer of Agere, and Mr. Bryon Look, Chief Financial Officer of LSI, held similar discussions on the same dates, and also discussed potential cost synergies that could result from a combination of the two businesses.
 
On August 22, 2006, members of the Agere board of directors received an update on the status of contacts between LSI and Agere from Agere management and representatives of Goldman Sachs. In addition, the Agere board of directors authorized management and representatives of Goldman Sachs to pursue contacts with certain private equity investors regarding their potential interest in a transaction involving Agere. During September and October 2006, Mr. Clemmer, Mr. Kelly, Ms. Jean Rankin, executive vice president, general counsel and secretary of Agere and representatives of Goldman Sachs met with several private equity investors, identified with the assistance of Goldman Sachs and Agere management, in order to gauge potential interest in an acquisition of Agere. None of these meetings resulted in any offers that were acceptable to Agere’s board of directors.
 
On September 5, 2006, Mr. Talwalkar telephoned Mr. Clemmer to further discuss the potential for a business combination transaction. Although no particular transaction was discussed, both agreed that the possibility of a transaction between LSI and Agere merited further analysis and consideration.
 
On September 11, 2006, Mr. Talwalkar provided the LSI board of directors with a telephonic update of the discussions with Mr. Clemmer. On September 18, 2006, the LSI board of directors again met telephonically to discuss the transaction with members of LSI management, representatives of Morgan Stanley, financial advisor to LSI, and LSI’s legal advisor, Wilson Sonsini. The LSI board of directors was provided with a detailed overview of the Agere business units, the framework for a formal term sheet, and a request for approval for continuing the investigation by LSI management of a possible business combination.
 
On September 24, 2006, the LSI board of directors met telephonically with members of LSI management, representatives of Morgan Stanley and Wilson Sonsini for the purpose of reviewing a proposed non-binding set of transaction terms, which included (i) merger transaction with a fixed exchange ratio pursuant to which Agere


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stockholders would receive 2.05 shares of LSI common stock for each Agere share, (ii) proposals with respect to the corporate governance of the combined company, and in particular provided that Mr. Talwalkar would be the Chief Executive Officer of the combined company, that the combined company would have a nine member board, of which four members would be nominated by Agere, and that the chairman of the board of directors of the combined company would be an independent director of LSI and (iii) a proposed termination fee of $125 million if the transaction were terminated under certain circumstances. The LSI board of directors authorized management to deliver the non-binding set of transaction terms to management of Agere.
 
On September 25, 2006, Mr. Talwalkar and Mr. Clemmer met in Los Angeles to discuss the companies’ respective business models and the strategic rationale for a possible business combination. During this meeting, Mr. Talwalkar and Mr. Clemmer discussed a tax-free exchange of stock to effect the transaction in a manner that would enable the stockholders of both companies to realize the benefits of a combination. Mr. Talwalkar proposed a non-binding set of transaction terms for a merger of LSI and Agere, which included (i) a fixed exchange ratio pursuant to which Agere stockholders would receive 2.05 shares of LSI common stock for each Agere share, (ii) proposals with respect to the corporate governance of the combined company, and in particular provided that Mr. Talwalkar would be the Chief Executive Officer of the combined company, that the combined company would have a nine member board, of which four members would be nominated by Agere, and that the chairman of the board of directors of the combined company would be an independent director of LSI, and (iii) a proposed termination fee of $125 million if the transaction were terminated under certain circumstances.
 
On September 28, 2006, members of the Agere board of directors received a telephonic update on the status of contacts between LSI and Agere from Agere management and representatives of Goldman Sachs.
 
On October 10, 2006, members of Agere senior management, together with representatives of Goldman Sachs, met with members of LSI senior management and representatives of Morgan Stanley, financial advisor to LSI, in Milpitas, California. During this meeting, Agere and LSI senior management reviewed their respective businesses, and further discussed the potential synergies of a business combination between the two companies.
 
On October 11, 2006, representatives of Agere and Goldman Sachs had a conference call with representatives of LSI and Morgan Stanley in which the participants continued to discuss the respective businesses and operations of Agere and LSI.
 
On October 13, 2006, Mr. Clemmer and Mr. Talwalkar met to discuss the progress made by their respective teams in analyzing the strategic merits of a business combination, and each agreed to continue the review and analysis of the other’s business and operations.
 
During October 2006, representatives of LSI and Agere continued to exchange information about their respective businesses, and had several telephonic meetings in which business and operational issues were discussed. Members of senior management of Agere, together with representatives of Goldman Sachs, had periodic discussions with LSI and representatives of Morgan Stanley throughout October and early November 2006 regarding the exchange ratio and the key social and governance issues presented by the merger. In this regard, Agere consulted with Goldman Sachs and Skadden, Arps, and LSI consulted with Morgan Stanley and Wilson Sonsini.
 
On October 13 and October 19, 2006, the LSI board of directors met telephonically. At these meetings, Mr. Talwalkar and other members of LSI management discussed with the board the potential strategic benefits of the transaction, risks related to the transaction and alternative strategies including other acquisition targets and continuing on a standalone basis. In addition, LSI management updated the board on the status of management’s due diligence investigation.
 
On October 19, 2006, members of the Agere board of directors received a telephonic update on the status of contacts between LSI and Agere from Agere management and representatives of Goldman Sachs.
 
At a regularly scheduled meeting of the Agere board of directors on October 24, 2006, Mr. Clemmer briefed the board members on discussions with senior management of LSI. Representatives of Goldman Sachs and Skadden, Arps were present for the portion of the meeting during which the LSI proposal was discussed. At this meeting, Agere’s board of directors discussed the possibility of a transaction with LSI and the terms of LSI’s proposal. The Agere board of directors authorized management to continue due diligence and discussions with LSI


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on the exchange ratio, governance and other issues presented by LSI’s proposal, in order to ascertain whether this transaction was beneficial to Agere and its stockholders and, if so, whether an acceptable proposal might be available.
 
On November 2, 2006, Agere provided a revised proposal to LSI seeking (i) a fixed exchange ratio resulting in 49.99% of the diluted equity of the combined company being held by Agere stockholders, (ii) governance proposals for the combined company, including a combined company board of directors comprised of five directors from LSI and five directors from Agere, and a chairman selected from among the Agere independent directors, (iii) maintenance of current levels of employee compensation and benefits for a two-year period following closing, and (iv) a termination fee equal to 3% of the imputed Agere equity value.
 
On November 3, 2006, the LSI board of directors met telephonically with members of LSI management, and representatives of Morgan Stanley and Wilson Sonsini for the purpose of reviewing the revised proposal provided by Agere. The board considered the Agere proposal, including the impact of different valuation scenarios and corporate governance matters related to the proposal.
 
Discussions between Agere and LSI continued on a regular basis during November 2006 with respect to the exchange ratio and other key terms of the proposed transaction. On November 7, 2006, representatives of Morgan Stanley delivered to representatives of Goldman Sachs a revised set of non-binding proposed transaction terms which included (i) a fixed exchange ratio pursuant to which Agere stockholders would receive 2.15 LSI shares for each share of Agere common stock, (ii) governance terms consistent with LSI’s earlier proposal, (iii) maintenance of current levels of employee compensation and benefits for a two-year period and (iv) a termination fee equal to 3% of the imputed Agere equity value. On November 17, 2006, LSI, through Wilson Sonsini, delivered a draft merger agreement to Agere through its legal advisor Skadden, Arps. From November 17, 2006 through December 3, 2006, representatives of Agere and Skadden, Arps reviewed and negotiated the draft merger agreement with LSI and Wilson Sonsini.
 
On November 9, 2006, at a regularly-scheduled meeting of the LSI board of directors, representatives of Morgan Stanley reviewed the financial terms of the proposed transaction and representatives from Wilson Sonsini updated the board on outstanding issues between the parties.
 
On November 15 and 16, 2006, members of Agere senior management, together with representatives of Goldman Sachs, met with members of LSI senior management and representatives of Morgan Stanley in San Jose, California. During these meetings, Agere and LSI senior management reviewed their respective businesses, and further discussed the potential synergies of a business combination between the two companies.
 
The LSI board of directors met telephonically on November 17, 2006 with members of LSI management and representatives of Morgan Stanley and Wilson Sonsini for the purpose reviewing the ongoing due diligence and outstanding issues between the parties.
 
The Agere board of directors met on November 20, 2006, with representatives of Goldman Sachs and Skadden, Arps in attendance. At the invitation of the Agere board of directors, Mr. Talwalkar made a presentation to the Agere board of directors on the business and operations of LSI, as well as the strategic rationale for the proposed transaction. Following Mr. Talwalkar’s presentation, members of Agere management and representatives of Goldman Sachs and Skadden, Arps briefed the Agere board of directors on the status of discussions with LSI, the ongoing due diligence and outstanding issues between the parties, including the proposed exchange ratio, the proposed governance terms, and the terms of the non-solicitation and recommendation covenants. Representatives of Goldman Sachs reviewed with Agere’s board of directors its financial analyses with respect to LSI’s proposal. Following discussion and review with its legal and financial advisors, the Agere board authorized further discussions with LSI for the purpose of determining whether an agreement on price and other material terms could be reached.
 
Concurrently with the review and discussions regarding the draft merger agreement, representatives of LSI, Agere, Skadden, Arps and Wilson Sonsini conducted due diligence investigations with respect to business, legal, regulatory, tax and other matters of LSI and Agere. LSI and Agere also had extensive discussions during this time with respect to contractual issues, including (i) the non-solicitation covenant, including either party’s ability to have discussions with potential third-party acquirers, (ii) the circumstances under which either party could change its


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recommendation of the transaction, (iii) the nature and extent of representations and warranties to be given by each company, (iv) the conditions to closing and (v) the circumstances under which termination fees would be payable.
 
On November 22, 2006, the LSI board of directors met telephonically with members of LSI management, representatives of Morgan Stanley and Wilson Sonsini for the purpose reviewing the proposed transaction including proposed exchange ratios and corporate governance matters.
 
On November 30, 2006, members of Agere senior management, together with representatives of Goldman Sachs and Skadden, Arps provided members of the Agere board of directors with a telephonic update as to the status of negotiations with LSI. The representatives of Goldman Sachs informed the board members as to the status of discussions regarding the exchange ratio, and indicated that in order to obtain additional enhancement of the exchange ratio it would likely be necessary to agree to reduce the representation of Agere directors on the board of the combined company to three directors and agree that an LSI independent director would be chairman of the board of directors of the combined company. The Agere board members discussed, among other things, the proposed exchange ratio and the corporate governance of the combined company, and gave guidance to Agere’s senior management with respect to the negotiation of those terms with LSI.
 
On November 30, 2006, the LSI board of directors met telephonically with members of LSI management and representatives of Morgan Stanley and Wilson Sonsini for the purpose reviewing the proposed transaction. The board discussed proposed exchange ratios for the transaction and governance related matters and received an update on the due diligence review conducted by management and LSI’s advisors.
 
Following further discussions between LSI and Agere and their representatives, LSI agreed to increase the exchange ratio to 2.16 LSI shares for each Agere share and Agere agreed to accept the governance provisions requested by LSI. On December 3, 2006, Agere, LSI and their respective legal advisors finalized a proposed merger agreement to be executed by the parties. Later that day, a telephonic meeting of the Agere board of directors was convened to consider whether to approve the merger agreement. At the meeting, Mr. Clemmer and Ms. Rankin informed the Agere board of directors that the merger agreement had been finalized and included an exchange ratio of 2.16 LSI shares for each Agere share. Management then reviewed certain aspects of the proposed transaction. Representatives of Skadden, Arps reviewed certain legal matters, and the terms of the proposed merger agreement, including the governance terms, representations and warranties, covenants, conditions to completion of the merger and termination provisions. Goldman Sachs reviewed with Agere’s board of directors its financial analyses with respect to the proposed transaction and then rendered its oral opinion, subsequently confirmed by delivery of its written opinion, dated December 3, 2006, to Agere’s board of directors that, as of the date of its opinion and based upon and subject to the factors and assumptions set forth in the opinion, the exchange ratio of 2.16 shares of LSI common stock to be received for each share of Agere common stock pursuant to the merger agreement was fair from a financial point of view to the holders of shares of Agere common stock. The Agere board of directors, by unanimous vote of the directors present, determined that the merger agreement and the transactions contemplated by the merger agreement are advisable and in the best interests of the Agere stockholders and approved and adopted the merger agreement and the transactions contemplated thereby, and determined to recommend that the Agere stockholders adopt the merger agreement.
 
Also on December 3, 2006, a telephonic meeting of the LSI board of directors was convened to consider whether to approve the merger agreement. At the meeting, LSI management informed the LSI board of directors that the merger agreement had been finalized and included an exchange ratio of 2.16 LSI shares for each Agere share. Management then reviewed certain aspects of the proposed transaction. Representatives of Wilson Sonsini reviewed certain legal matters, and the terms of the proposed merger agreement, including the governance terms, representations and warranties, covenants, conditions to completion of the merger and termination provisions. Morgan Stanley, delivered its oral opinion, later confirmed in writing, that, as of December 3, 2006 and based upon and subject to the factors and assumptions set forth in the opinion, the exchange ratio pursuant to the proposed merger agreement was fair from a financial point of view to LSI. A description of this opinion appears under “The Merger — Consideration of the Merger by the LSI Board of Directors.” Following such discussion, the LSI board of directors, by unanimous vote, determined that the merger agreement and the transactions contemplated by the merger agreement are advisable and in the best interests of the LSI stockholders and approved the merger agreement


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and the transactions contemplated thereby, and determined to recommend that the LSI stockholders approve the issuance of LSI common stock in connection with the merger.
 
Promptly after the meetings of the boards of directors of LSI and Agere, the management of LSI and Agere executed the merger agreement and a joint press release announcing the transaction was issued early in the morning of December 4, 2006.
 
Reasons for the Merger
 
Overview
 
The boards of directors and management teams of both LSI and Agere believe that the proposed merger represents the best strategic alternative for delivering increased value to our respective stockholders.
 
LSI and Agere believe the merger presents a unique opportunity to create a combined entity that will offer a comprehensive set of building block solutions, including semiconductors, systems and related software for storage, networking and consumer electronics products, and that the merger should allow the combined company to deliver significant benefits to its customers, stockholders and employees. The LSI and Agere boards of directors and their respective management teams each analyzed various alternative strategies to address their respective risks and challenges as stand-alone entities. See the section entitled “Background of the Merger” beginning on page 64. After reviewing and debating their respective strategic alternatives and the opportunity for the combined company presented by the merger, as more fully described below, the LSI and Agere boards of directors each determined to pursue the merger in lieu of the other alternatives because each believes the merger will create a combined company that will be able to achieve the strategic and financial benefits described below.
 
The LSI and Agere boards of directors each identified the following anticipated strategic and financial benefits of the merger:
 
  •  Complementary Businesses.  The products and development capabilities of the two companies are complementary, and should enable the combined company to compete more effectively in attractive markets. The combined company should be stronger than either company on its own, with greater breadth and depth in storage and networking/communications product offerings and a greater ability to develop new product offerings in these market segments. In addition, the combined company is expected to benefit from access to large growth markets, such as those provided by the mobile products business of Agere and the consumer products business of LSI.
 
  •  Customers.  The combined company will have deep relationships with many of the market-leading customers in our chosen market segments. LSI and Agere expect to improve their existing ability to expand current customer relationships, and expect to increase the penetration of new customer accounts. LSI and Agere believe that the combination of the two companies’ product lines and engineering resources should enable the combined company to meet customer needs more effectively and to deliver more complete solutions to our customers. In addition, LSI and Agere believe the larger sales organization, greater marketing resources and financial strength of the combined company may lead to improved opportunities for marketing the combined company’s products.
 
  •  Engineering Talent.  The combined company will have over 4,200 engineers, including over 1,700 that hold masters or doctorate degrees, which should enable the combined company to compete more effectively by developing innovative products and delivering greater value to customers more rapidly than either company could do on a standalone basis.
 
  •  Intellectual Property Portfolio.  The combined company will have over 10,000 pending and issued U.S. patents, which will be one of the largest intellectual property portfolios in the semiconductor industry. This portfolio is expected to provide the combined company with additional licensing opportunities.
 
  •  Reduction in Operating Costs.  The combined company is expected to realize substantial cost savings beginning in 2007, with annual cost savings reaching at least $125 million in 2008 from increased efficiencies in manufacturing and operating expenses. LSI and Agere expect the combined company to achieve benefits from exercising greater purchasing power with its suppliers; consolidation and reduction of


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  areas of overlap in operating expenses; and elimination of redundant expenses, including the expenses of maintaining two separate public companies.
 
  •  Stronger Financial Position.  The combined company will have greater scale and financial resources, including total cash and short term investments of approximately $1.4 billion on a pro forma basis as adjusted to reflect the repayment of LSI’s convertible notes in November 2006. LSI and Agere expect that this stronger financial position will improve the combined company’s ability to support product development strategies; to respond more quickly and effectively to customer needs, technological change, increased competition and shifting market demand; and to pursue strategic growth opportunities in the future, including acquisitions.
 
  •  Stock-for-Stock Transaction with Fixed Exchange Ratio.  The stockholders of each company will share in the benefits expected from the synergies and cost savings the combined company will generate. The fact that the merger consideration is based on a fixed exchange ratio provides certainty as to the number of shares of LSI common stock that will be issued to Agere shareholders.
 
There can be no assurance that the anticipated strategic and financial benefits of the merger will be achieved, including that the anticipated cost savings resulting from the merger will be achieved and/or reflected in the trading price of LSI common stock following the completion of the merger.
 
Consideration of the Merger by the LSI Board of Directors
 
Recommendation of the LSI Board of Directors
 
At a meeting held on December 3, 2006, the LSI board of directors unanimously:
 
  •  determined that the merger agreement and the transactions contemplated by the merger agreement are advisable and in the best interests of the LSI stockholders;
 
  •  approved the merger agreement;
 
  •  directed that the issuance of shares of LSI common stock in connection with the merger be submitted for consideration by LSI stockholders at an LSI special meeting; and
 
  •  resolved to recommend that the LSI stockholders vote “for” the proposal to approve the issuance of shares of LSI common stock in connection with the merger.
 
Among other things considered by the LSI board of directors in making this recommendation, the LSI board of directors requested and considered the written opinion of Morgan Stanley, described below in the section entitled “Opinion of LSI Financial Advisor” beginning on page 71, that as of December 3, 2006, and subject to the assumptions, considerations and limitations set forth in its opinion, the exchange ratio provided for in the merger agreement is fair, from a financial point of view, to LSI. The Morgan Stanley opinion addresses only the fairness of the exchange ratio pursuant to the merger agreement from a financial point of view to LSI. The LSI board of directors has determined that the merger agreement and the transactions contemplated thereby are advisable and in the best interests of the LSI stockholders, based upon its consideration of the Morgan Stanley opinion and numerous other factors described below.
 
In reaching its decision to approve the merger agreement, the LSI board of directors consulted with LSI’s management, LSI’s legal counsel regarding the legal terms of the merger, LSI’s business consultants regarding the strategic aspects of the merger, and LSI’s financial advisors regarding the financial aspects of the merger and the fairness, from a financial point of view, of the exchange ratio to LSI. The factors that the LSI board of directors considered in reaching its determination include, but were not limited to, the following:
 
  •  the strategic benefits of the merger, as described in the section entitled “Reasons for the Merger” beginning on page 68 of this joint proxy statement/prospectus;
 
  •  historical information concerning LSI’s and Agere’s respective businesses, prospects, financial performance and condition, operations, technology, management and competitive position, including public reports concerning results of operations during the most recent fiscal year and fiscal quarter for each company filed with the Securities and Exchange Commission;


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  •  management’s view of the financial condition, results of operations and businesses of LSI and Agere before and after giving effect to the merger;
 
  •  current financial market conditions and historical market prices, volatility and trading information with respect to the common stock of LSI and the common stock of Agere;
 
  •  the relationship between the market value of the common stock of Agere and the consideration to be paid to stockholders of Agere in connection with the merger;
 
  •  the belief that the terms of the merger agreement, including the parties’ representations, warranties and covenants, and the conditions to their respective obligations, are reasonable;
 
  •  management’s view of the prospects of LSI as an independent company;
 
  •  other strategic alternatives for LSI, including the potential to enter into strategic relationships with third parties or acquire or combine with third parties;
 
  •  detailed financial analyses and pro forma and other information with respect to LSI and Agere presented by Morgan Stanley, including Morgan Stanley’s opinion to the effect that, as of the date of the written opinion, and based upon and subject to the considerations and limitations set forth in its opinion, the exchange ratio pursuant to the merger agreement was fair, from a financial point of view, to LSI. A copy of Morgan Stanley’s written opinion is attached to this joint proxy statement/prospectus as Annex B;
 
  •  the impact of the merger on LSI’s customers, suppliers and employees; and
 
  •  reports from management, legal and financial advisors as to the results of the due diligence investigation of Agere.
 
In addition, the LSI board of directors also identified and considered a variety of potentially negative factors in its deliberations concerning the merger, including, but not limited to:
 
  •  the risk that the potential benefits sought in the merger, including anticipated synergies, might not be fully realized;
 
  •  the possibility that the merger might not be completed, or that completion might be unduly delayed;
 
  •  the effect of public announcement of the merger on LSI’s sales and operating results, and LSI’s ability to attract and retain key management, marketing and technical personnel;
 
  •  the substantial charges to be incurred in connection with the merger, including costs of integrating LSI and Agere and transaction expenses arising from the merger;
 
  •  the risk that despite the efforts of the combined company, key technical and management personnel might not remain employed by the combined company; and
 
  •  various other risks associated with the merger and the businesses of LSI and the combined company described in the section entitled “Risk Factors” beginning on page 14 of this joint proxy statement/prospectus.
 
The LSI board of directors concluded, however, that these negative factors could be managed or mitigated by LSI or by the combined company or were unlikely to have a material impact on the merger or the combined company, and that, overall, the potentially negative factors associated with the merger were outweighed by the potential benefits of the merger.
 
The above discussion of the material factors considered by the LSI board of directors is not intended to be exhaustive, but does set forth the principal factors considered by the LSI board of directors. The LSI board of directors collectively reached the unanimous conclusion to approve the merger agreement and the merger in light of the various factors described above and other factors that each member of the LSI board of directors felt were appropriate. In view of the wide variety of factors considered by the LSI board of directors in connection with its evaluation of the merger and the complexity of these matters, the LSI board of directors did not consider it practical, and did not attempt, to quantify, rank or otherwise assign relative weights to the specific factors it considered in


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reaching its decision. Rather, the LSI board of directors made its recommendation based on the totality of information presented to and the investigation conducted by it. In considering the factors discussed above, individual directors may have given different weights to different factors.
 
The LSI board of directors believes that the merger is advisable and in the best interests of the LSI stockholders.
 
Opinion of LSI Financial Advisor
 
LSI retained Morgan Stanley to provide it with financial advisory services and a financial opinion in connection with a possible merger, acquisition or other strategic combination. The LSI board of directors selected Morgan Stanley to act as its financial advisor based on Morgan Stanley’s qualifications, expertise and reputation and its knowledge of the business and affairs of LSI. At the meeting of the LSI board of directors on December 3, 2006, Morgan Stanley rendered its oral opinion, subsequently confirmed in writing, that as of December 3, 2006, and based upon and subject to the various considerations set forth in the opinion, the exchange ratio pursuant to the merger agreement was fair, from a financial point of view, to LSI.
 
The full text of the written opinion of Morgan Stanley, dated as of December 3, 2006, is attached to this joint proxy statement/prospectus as Annex B. The opinion sets forth, among other things, the assumptions made, procedures followed, matters considered and limitations on the scope of the review undertaken by Morgan Stanley in rendering its opinion. LSI stockholders are urged to read the opinion provided by Morgan Stanley to the LSI board of directors carefully and in its entirety. In addition, LSI stockholders should carefully consider the following description of the analysis performed by Morgan Stanley in connection with rendering its opinion when LSI stockholders determine whether to approve the issuance of shares of LSI common stock in connection with the merger. Morgan Stanley’s opinion is directed to the LSI board of directors and addresses only the fairness from a financial point of view of the exchange ratio pursuant to the merger agreement to LSI as of the date of the opinion. It does not address any other aspects of the merger and does not constitute a recommendation to any holder of LSI common stock as to how to vote at the LSI special meeting with respect to the proposal to approve the issuance of shares of LSI common stock in connection with the merger. The summary of the opinion of Morgan Stanley set forth in this joint proxy statement/prospectus is qualified in its entirety by reference to the full text of the opinion.
 
In connection with rendering its opinion, Morgan Stanley, among other things:
 
  •  reviewed certain publicly available financial statements and other business and financial information of LSI and Agere, respectively;
 
  •  reviewed certain internal financial statements and other financial and operating data concerning LSI and Agere, respectively, prepared by the managements of LSI and Agere, respectively;
 
  •  reviewed certain financial projections concerning LSI and Agere, respectively, prepared by the managements of LSI and Agere, respectively;
 
  •  discussed the past and current operations and financial condition and the prospects of LSI and Agere, respectively, with senior executives of LSI and Agere, respectively;
 
  •  discussed certain strategic, financial and operational benefits anticipated from the merger with the managements of LSI and Agere, respectively;
 
  •  reviewed the pro forma financial impact of the merger on LSI’s earnings per share, consolidated capitalization and financial ratios;
 
  •  reviewed the reported prices and trading activity for LSI common stock and Agere common stock, respectively;
 
  •  compared the financial performance of LSI and Agere, respectively, and the prices and trading activity of LSI common stock and Agere common stock, respectively, with that of certain other publicly-traded companies comparable with LSI and Agere, respectively, and their securities;
 
  •  reviewed the financial terms, to the extent publicly available, of certain comparable acquisition transactions;


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  •  participated in discussions and negotiations among representatives of LSI and Agere and their financial and legal advisors;
 
  •  reviewed the merger agreement and certain related documents; and
 
  •  performed such other analyses and considered such other factors as Morgan Stanley deemed appropriate.
 
In arriving at its opinion, Morgan Stanley assumed and relied upon without independent verification the accuracy and completeness of the information supplied or otherwise made available to it by LSI and Agere for the purposes of its opinion. With respect to the internal financial statements and projections, including information relating to the strategic, financial and operational benefits anticipated from the merger and assessments regarding the prospects of LSI and Agere, Morgan Stanley assumed that they were reasonably prepared on bases reflecting the best currently available estimates and judgments of the future financial performance of LSI and Agere, respectively. In addition, Morgan Stanley assumed that the merger would be consummated in accordance with the terms set forth in the merger agreement without any waiver, amendment or delay of any terms or conditions, including, among other things, that the merger will be treated as a tax-free reorganization pursuant to the Internal Revenue Code of 1986, as amended. Morgan Stanley also assumed that in connection with the receipt of all the necessary regulatory approvals for the proposed merger, no restrictions would be imposed or delays would result that would have a material adverse affect on the contemplated benefits expected to be derived in the proposed merger. Morgan Stanley is not a legal, tax, regulatory or actuarial advisor. Morgan Stanley is a financial advisor only and relied upon, without independent verification, the assessment of LSI and its legal, tax, regulatory and actuarial advisors with respect to such matters.
 
Morgan Stanley relied upon, without independent verification, the assessment by the managements of LSI and Agere of: (i) the strategic, financial and other benefits expected to result from the merger; (ii) the timing and risks associated with the integration of LSI and Agere; (iii) their ability to retain key employees of LSI and Agere, respectively and (iv) the validity of, and risks associated with, LSI’s and Agere’s existing and future intellectual property, products, services and business models. Morgan Stanley did not make any independent valuation or appraisal of the assets or liabilities of LSI and Agere, nor was Morgan Stanley furnished with any such appraisals. Morgan Stanley’s opinion was necessarily based on financial, economic, market and other conditions as in effect on, and the information made available to it as of December 3, 2006. Events occurring after the date thereof may affect Morgan Stanley’s opinion and the assumptions used in preparing it, and Morgan Stanley does not assume any obligation to update, revise or reaffirm its opinion.
 
The following is a brief summary of the material analyses performed by Morgan Stanley in connection with its oral opinion and the preparation of its written opinion letter dated December 3, 2006. The various analyses summarized below were based on closing prices for the common stock of LSI and Agere as of December 1, 2006, the last full trading day preceding the day of the special meeting of the LSI board of directors to consider and approve, adopt and authorize the merger agreement. Although each analysis was provided to the LSI board of directors, in connection with arriving at its opinion, Morgan Stanley considered all of its analyses as a whole and did not attribute any particular weight to any analysis described below. Some of these summaries of financial analyses include information presented in tabular format. In order to fully understand the financial analyses used by Morgan Stanley, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the financial analyses.
 
On December 3, 2006, LSI and Agere entered into a merger agreement whereby each share of Agere common stock would be converted into the right to receive 2.16 shares of LSI common stock. Based on the closing prices of LSI common stock as of December 1, 2006, this exchange ratio represented an implied price of $22.81 per share of Agere common stock. Based on the exchange ratio and shares, restricted stock units and options outstanding as of September 30, 2006, Morgan Stanley calculated that as a result of the merger, LSI’s stockholders would own approximately 52% of the combined company on a fully diluted basis using the treasury stock method and Agere’s shareholders would own approximately 48% following completion of the merger pursuant to the merger agreement.


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Agere
 
Trading Range Analysis.  Morgan Stanley performed a trading range analysis to provide background and perspective with respect to the historical share prices of Agere common stock. Morgan Stanley reviewed the range of closing prices of Agere common stock for various periods ended on December 1, 2006. Morgan Stanley observed the following:
 
         
Period Ended December 1, 2006
 
Range of Closing Prices
 
Last 30 Trading Days
  $ 15.90 - $18.72  
Last 60 Trading Days
  $ 14.51 - $18.72  
Last 90 Trading Days
  $ 14.38 - $18.72  
Last 12 Months
  $ 12.00 - $18.72  
 
Morgan Stanley noted that as of December 1, 2006 the closing price per share of Agere common stock as of that date was $17.79.
 
Historical Exchange Ratio Range Analysis.  Morgan Stanley reviewed the ratios of the range of closing prices of Agere common stock divided by the corresponding closing prices of LSI common stock over various periods ended on December 1, 2006. For each of the periods reviewed, Morgan Stanley observed the relevant range of low and high exchange ratios.
 
Morgan Stanley calculated a range of implied ownership of Agere shareholders on a fully diluted basis, using the treasury stock method, based on observed relevant range of low and high exchange ratios. The following table summarizes Morgan Stanley’s analysis:
 
             
    Range of
  Implied
Period Ended December 1, 2006
 
Exchange Ratios
 
Agere Ownership
 
Last 30 Trading Days
    1.63x - 1.97 x   40% - 45%
Last 60 Trading Days
    1.63x - 2.02 x   40% - 46%
Last 90 Trading Days
    1.63x - 2.02 x   40% - 46%
Last 12 Months
    1.23x - 2.02 x   34% - 46%
 
Morgan Stanley noted that the exchange ratio pursuant to the merger agreement was 2.16x and that based on the prices of shares of Agere and LSI common stock on December 1, 2006, the exchange ratio as of that date was 1.68x.
 
Comparable Company Analysis.  Morgan Stanley performed a comparable company analysis, which attempts to provide an implied value of a company by comparing it to similar companies. Morgan Stanley compared certain financial information of Agere with publicly available consensus estimates for other companies that shared similar business characteristics of Agere. The companies used in this comparison included the following storage, enterprise and networking, and wireless component companies:
 
  •  Atheros Communications, Inc.
 
  •  Broadcom Corporation
 
  •  Conexant Systems, Inc.
 
  •  Emulex Corporation
 
  •  Freescale Semiconductor, Inc.
 
  •  Infineon Technologies AG
 
  •  Marvell Technology Group Ltd.
 
  •  PMC-Sierra, Inc.
 
  •  QLogic Corporation
 
  •  Qualcomm Incorporated
 
  •  RF Micro Devices, Inc.


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  •  Skyworks Solutions, Inc.
 
  •  STMicroelectronics N.V.
 
  •  Texas Instruments Incorporated
 
For purposes of this analysis, Morgan Stanley analyzed the following statistics of each of these companies for comparison purposes:
 
  •  the ratios of aggregate value to estimated sales for calendar year 2006 and 2007 (in each case, based on publicly available consensus equity research estimates).
 
  •  the ratios of price to estimated earnings per share for calendar year 2006 and 2007 (in each case, based on publicly available consensus equity research estimates).
 
Based on the analysis of the relevant metrics for each of the comparable companies, Morgan Stanley selected representative ranges of financial multiples of the comparable companies and applied these ranges of multiples to the relevant Agere financial statistic. For purposes of estimated calendar year 2006 and 2007 sales and earnings per share Morgan Stanley utilized publicly available equity research estimates available as of December 1, 2006. Based on Agere’s outstanding shares and options as of September 30, 2006, Morgan Stanley estimated the implied value per Agere share as of December 1, 2006 as follows:
 
                 
    Comparable
   
    Company
   
    Representative
  Implied Value
Calendar Year Financial Statistic
 
Multiple Range
 
per Share of Agere
 
Aggregate Value to Estimated 2006 Revenue
    1.5x -   3.2x     $ 13.91 - $28.42  
Aggregate Value to Estimated 2007 Revenue
    1.4x -   2.8x     $ 13.85 - $26.60  
Price to Estimated 2006 EPS
    18.0x - 24.0x     $ 14.75 - $19.67  
Price to Estimated 2007 EPS
    16.0x - 22.0x     $ 17.84 - $24.52  
 
Morgan Stanley noted that as of December 1, 2006 the closing price per share of Agere common stock as of that date was $17.79.
 
No company utilized in the comparable company analysis is identical to Agere. In evaluating comparable companies, Morgan Stanley made judgments and assumptions with regard to industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond the control of Agere, such as the impact of competition on the businesses of Agere and the industry generally, industry growth and the absence of any adverse material change in the financial condition and prospects of Agere or the industry or in the financial markets in general. Mathematical analysis (such as determining the average or median) is not in itself a meaningful method of using comparable company data.
 
Discounted Equity Value Analysis.  Morgan Stanley performed a discounted equity value analysis, which is designed to provide insight into the future value of a company’s common equity as a function of the company’s future earnings and its current forward price to earnings. The resulting value is subsequently discounted to arrive at a present value for such company’s stock price. In connection with this analysis, Morgan Stanley calculated a range of present equity values per share of Agere’s common stock on a standalone basis. To calculate the discounted equity value, Morgan Stanley utilized calendar year 2008 forecasts that were extrapolated from equity research estimates using a range of revenue growth assumptions from 10.0% — 14.0% and operating margin assumptions of 12.0% — 16.0%. Morgan Stanley applied a range of price to earnings multiples to these estimates and applied a discount rate of 11%.


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The following table summarizes Morgan Stanley’s analysis:
 
                 
    Comparable
   
    Company
   
    Representative
  Implied Value
Calendar Year 2008 Assumed Revenue Growth/Operating Margin
 
Multiple Range
 
per Share of Agere
 
10.0% Revenue Growth/12.0% Operating Margin
    15.0x - 18.0x       $14.72 - $17.66  
12.0% Revenue Growth/14.1% Operating Margin
    17.0x - 20.0x       $19.95 - $23.47  
14.0% Revenue Growth/16.0% Operating Margin
    20.0x - 23.0x       $27.11 - $31.18  
 
Morgan Stanley noted that as of December 1, 2006 the closing price per share of Agere common stock as of that date was $17.79.
 
Securities Research Analysts’ Price Targets.  Morgan Stanley reviewed and analyzed future public market trading price targets for Agere common stock prepared and published by equity research analysts. These targets reflect each analyst’s estimate of the future public market trading price of Agere common stock. The range of undiscounted analyst price targets for Agere was $13.00 to $24.00.
 
Morgan Stanley noted that as of December 1, 2006 the closing price per share of Agere common stock as of that date was $17.79.
 
The public market trading price targets published by the securities research analysts do not necessarily reflect current market trading prices for Agere common stock and these estimates are subject to uncertainties, including the future financial performance of Agere and future financial market conditions.
 
Analysis of Precedent Transactions.  Morgan Stanley also performed a precedent transaction analysis, which is designed to imply a value of a company based on publicly available financial terms and premiums of selected transactions that share some characteristics with the merger. In connection with its analysis, Morgan Stanley compared publicly available statistics for 7 selected merger transactions in the technology sector between January 1, 2003 and December 1, 2006 in which the target company was publicly traded, transaction values were greater than $500 million and the target shareholders’ implied pro forma fully diluted ownership was greater than 30%. The following is a list of these transactions:
 
Selected Technology Merger Transactions (Target/Acquiror)
 
  •  ChipPAC, Inc./ST Assembly Test Services Ltd.
 
  •  GlobespanVirata, Inc./Conexant Systems, Inc.
 
  •  Integrated Circuit Systems, Inc./Integrated Device Technology, Inc.
 
  •  Lucent Technologies Inc./Alcatel
 
  •  McDATA Corporation/Brocade Communications Systems, Inc.
 
  •  Nextel Communications, Inc./Sprint Corporation
 
  •  VERITAS Software Corporation/Symantec Corporation
 
For each transaction noted above Morgan Stanley noted the provisions for corporate governance such as who would be the chief executive officer, chairman and members of the board of directors of the combined company, as provided for in the transaction’s definitive documentation. Morgan Stanley also noted the implied exchange ratio premium to the 30 trading day average exchange ratio for the constituent companies, where available.
 
Morgan Stanley noted that certain of the transactions noted above could be characterized as “mergers of equals” in which the transaction’s definitive documentation provided for the corporate governance profile of the combined company to generally be filled in a balanced manner from both the acquiror and the acquired company, or “shared upside” mergers in which the transaction’s definitive documentation provided for the corporate governance profile of the combined company to generally be filled in a less balanced manner. For each category of “merger of equals” and “shared upside” transactions, Morgan Stanley selected a representative range of implied exchange ratio premiums to the 30 trading day average exchange ratio for such groups and compared such representative ranges to


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the average exchange ratio of Agere and LSI common stock over the 30 trading day period ended December 1, 2006. The following table summarizes Morgan Stanley’s analysis:
 
                         
    Reference Range of
       
    30 Day Average Exchange
  Implied
  Implied Agere
Merger Transactions
 
Ratio Premiums
 
Exchange Ratios
 
Ownership
 
“Merger of Equals” Transactions
    0% - 20%       1.74x - 2.09x       42% - 47%  
“Shared Upside” Transactions
    10% - 30%       1.92x - 2.26x       45% - 49%  
 
Morgan Stanley noted that the exchange ratio pursuant to the merger agreement was 2.16x and that based on the prices of shares of Agere and LSI common stock on December 1, 2006, the exchange ratio as of that date was 1.68x.
 
Morgan Stanley also compared publicly available statistics for 21 selected transactions in the semiconductor and hardware sectors between January 1, 2001 and December 1, 2006 in which the target company was publicly traded and transaction values were greater than $500 million. The following is a list of these transactions:
 
Selected Semiconductor/Hardware Transactions (Target/Acquiror)
 
  •  Advanced Digital Information Corporation/Quantum Corporation
 
  •  Artisan Components, Inc./ARM Holdings PLC
 
  •  ATI Technologies Inc./Advanced Micro Devices, Inc.
 
  •  C-Cube Microsystems Inc./LSI Logic Corporation
 
  •  ChipPAC, Inc./ST Assembly Test Services Ltd.
 
  •  Dallas Semiconductor Corporation/Maxim Integrated Products, Inc.
 
  •  Elantec Semiconductor, Inc./Intersil Corporation
 
  •  Freescale Semiconductor, Inc./Consortium
 
  •  General Semiconductor, Inc./Vishay Intertechnology, Inc.
 
  •  GlobespanVirata, Inc./Conexant Systems, Inc.
 
  •  Integrated Circuit Systems, Inc./Integrated Device Technology, Inc.
 
  •  Lexar Media, Inc./Micron Technology, Inc.
 
  •  Maxtor Corporation/Seagate Technology
 
  •  McDATA Corporation/Brocade Communications Systems, Inc.
 
  •  msystems Ltd./SanDisk Corporation
 
  •  Mykrolis Corporation/Entegris, Inc.
 
  •  NPTest Holding Corp./Credence Systems Corporation
 
  •  Sawtek Inc./TriQuint Semiconductor, Inc.
 
  •  Storage Technology Corporation/Sun Microsystems, Inc.
 
  •  Symbol Technologies, Inc./Motorola, Inc.
 
  •  Xicor, Inc./Intersil Corporation
 
For each transaction noted above Morgan Stanley noted the following financial ratios where available: (1) implied premium to acquired companies’ stock price one trading day prior to announcement; (2) implied premium to acquired companies’ 30 trading day average stock price prior to announcement; (3) implied exchange ratio premium to 30 trading day average exchange ratio of the constituent companies’ stocks; (4) implied exchange ratio premium to 60 trading day average exchange ratio of the constituent companies’ stocks; (5) aggregate value of the transaction to next twelve months estimated revenues; and (6) price of the acquired company’s stock to next


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twelve months estimated earnings per share. Morgan Stanley noted that based on the exchange ratio pursuant to the merger agreement and the prices of shares of Agere and LSI common stock for the period ending December 1, 2006, each of the aforementioned metrics for the merger was within the range of such corresponding metrics, where available, noted in the group of transactions above.
 
Morgan Stanley noted that the exchange ratio pursuant to the merger agreement was 2.16x and that based on the prices of shares of Agere and LSI common stock on December 1, 2006, the exchange ratio as of that date was 1.68x.
 
No company or transaction utilized in the precedent transaction analysis is identical to LSI or Agere or the merger. In evaluating the precedent transactions, Morgan Stanley made judgments and assumptions with regard to general business, market and financial conditions and other matters, which are beyond the control of LSI and Agere, such as the impact of competition on the business of LSI, Agere or the industry generally, industry growth and the absence of any adverse material change in the financial condition of LSI, Agere or the industry or in the financial markets in general, which could affect the public trading value of the companies and the aggregate value of the transactions to which they are being compared.
 
Relative Contribution Analysis.  Morgan Stanley compared Agere and LSI stockholders’ respective percentage ownership of the combined company to Agere’s and LSI’s respective percentage contribution (and the implied ownership and the implied exchange ratio based on such contribution) to the combined company using estimated calendar year 2006, 2007 and 2008 revenue, operating income and net income based on publicly available equity research analysts’ estimates. Morgan Stanley compared the revenue, operating income and net income of Agere and LSI (i) excluding the impact of any expected synergies resulting from their merger and excluding the unfunded amount of Agere’s pension and postretirement plans as of September 30, 2006; (ii) allocating $125 million of assumed synergies to Agere’s operating income and net income contribution and excluding the unfunded amount of Agere’s pension and postretirement plans as of September 30, 2006; and (iii) excluding the impact of any expected synergies resulting from their merger and allocating the unfunded status of Agere’s pension and postretirement plans as of September 30, 2006 to Agere’s net debt contribution. Based on LSI’s common stock price per share of $10.56 and Agere’s common stock price per share of $17.79 as of December 1, 2006, Morgan Stanley calculated an implied exchange ratio for Agere’s shareholders.
 
The following table summarizes Morgan Stanley’s analysis:
 
         
    Range of Implied
 
    Exchange Ratios  
 
Revenue
       
Calendar Year 2006-2008 (Without Synergies, Excluding Pension and Postretirement Plans)
    1.62x - 1.65x  
Calendar Year 2006-2008 (With Synergies, Excluding Pension and Postretirement Plans)
    1.62x - 1.65x  
Calendar Year 2006-2008 (Without Synergies, Including Pension and Postretirement Plans)
    1.51x - 1.53x  
Operating Income
       
Calendar Year 2006-2008 (Without Synergies, Excluding Pension and Postretirement Plans)
    1.36x - 1.61x  
Calendar Year 2006-2008 (With Synergies, Excluding Pension and Postretirement Plans)
    2.23x - 2.30x  
Calendar Year 2006-2008 (Without Synergies, Including Pension and Postretirement Plans)
    1.25x - 1.49x  
Net Income
       
Calendar Year 2006-2008 (Without Synergies, Excluding Pension and Postretirement Plans)
    1.43x - 1.80x  
Calendar Year 2006-2008 (With Synergies, Excluding Pension and Postretirement Plans)
    2.44x - 2.61x  
Calendar Year 2006-2008 (Without Synergies, Including Pension and Postretirement Plans)
    1.43x - 1.80x  
 
Morgan Stanley noted that the exchange ratio pursuant to the merger agreement was 2.16x and that based on the prices of shares of Agere and LSI common stock on December 1, 2006, the exchange ratio as of that date was 1.68x.
 
Relative Securities Research Analysts’ Price Targets.  Morgan Stanley reviewed and analyzed the exchange ratio implied by the range of future public market trading price targets for Agere common stock divided by the range of future public market trading price targets for LSI common stock, in each case prepared and published by equity research analysts. The range of exchange ratios implied by such undiscounted analyst price targets for Agere and LSI was 1.21x to 2.29x. Morgan Stanley noted that the exchange ratio pursuant to the merger agreement was 2.16x


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and that based on the prices of shares of Agere and LSI common stock on December 1, 2006, the exchange ratio as of that date was 1.68x.
 
LSI
 
Trading Range Analysis.  Morgan Stanley performed a trading range analysis to provide background and perspective with respect to the historical share prices of LSI common stock. Morgan Stanley reviewed the range of closing prices of LSI common stock for various periods ended on December 1, 2006. Morgan Stanley observed the following:
 
         
    Range of
Period Ended December 1, 2006
 
Closing Prices
 
Last 30 Trading Days
  $ 8.27 - $10.94  
Last 60 Trading Days
  $ 8.03 - $10.94  
Last 90 Trading Days
  $ 7.46 - $10.94  
Last 12 Months
  $ 7.46 - $11.66  
 
Morgan Stanley noted that as of December 1, 2006, the closing price of LSI common stock was $10.56 per share.
 
Comparable Company Analysis.  Morgan Stanley performed a comparable company analysis, which attempts to provide an implied value of a company by comparing it to similar companies. Morgan Stanley compared certain financial information of LSI with publicly available consensus estimates for other companies that shared similar business characteristics of LSI. The companies used in this comparison included the following storage, enterprise and networking and wireless component companies:
 
  •  Atheros Communications, Inc.
 
  •  Broadcom Corporation
 
  •  Conexant Systems, Inc.
 
  •  Emulex Corporation
 
  •  Freescale Semiconductor, Inc.
 
  •  Infineon Technologies AG
 
  •  Marvell Technology Group Ltd.
 
  •  PMC-Sierra, Inc.
 
  •  QLogic Corporation
 
  •  Qualcomm Incorporated
 
  •  RF Micro Devices, Inc.
 
  •  Skyworks Solutions, Inc.
 
  •  STMicroelectronics N.V.
 
  •  Texas Instruments Incorporated
 
For purposes of this analysis, Morgan Stanley analyzed the following statistics of each of these companies for comparison purposes:
 
  •  the ratios of aggregate value to estimated sales for calendar year 2006 and 2007 (in each case, based on publicly available consensus equity research estimates).
 
  •  the ratios of price to estimated earnings per share for calendar year 2006 and 2007 (in each case, based on publicly available consensus equity research estimates).


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Based on the analysis of the relevant metrics for each of the comparable companies, Morgan Stanley selected representative ranges of financial multiples of the comparable companies and applied these ranges of multiples to the relevant LSI financial statistic. For purposes of estimated calendar year 2006 and 2007 revenues and earnings per share Morgan Stanley utilized publicly available equity research estimates as of December 1, 2006. Based on LSI’s outstanding shares and options as of September 30, 2006, Morgan Stanley estimated the implied value per LSI share as of December 1, 2006 as follows:
 
                 
    Comparable Company
  Implied Value
Calendar Year Financial Statistic
 
Representative Multiple Range
 
per Share of LSI
 
Aggregate Value to Estimated 2006 Revenue
    1.5x -   3.2x     $ 8.82 - $15.49  
Aggregate Value to Estimated 2007 Revenue
    1.4x -   2.8x     $ 8.83 - $14.67  
Price to Estimated 2006 EPS
    18.0x - 24.0x     $ 10.28 - $13.71  
Price to Estimated 2007 EPS
    16.0x - 22.0x     $ 10.39 - $14.29  
 
Morgan Stanley noted that as of December 1, 2006, the closing price of LSI common stock was $10.56 per share.
 
No company utilized in the comparable company analysis is identical to LSI. In evaluating the comparable companies, Morgan Stanley made judgments and assumptions with regard to industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond the control of LSI, such as the impact of competition on the businesses of LSI and the industry generally, industry growth and the absence of any adverse material change in the financial condition and prospects of LSI or the industry or in the financial markets in general. Mathematical analysis (such as determining the average or median) is not in itself a meaningful method of using comparable company data.
 
Discounted Equity Value Analysis.  Morgan Stanley performed a discounted equity value analysis, which is designed to provide insight into the future value of a company’s common equity as a function of the company’s future earnings and its current forward price to earnings ratio. The resulting value is subsequently discounted to arrive at a present value for such company’s stock price. In connection with this analysis, Morgan Stanley calculated a range of present equity values per share of LSI’s common stock on a standalone basis. To calculate the discounted equity value, Morgan Stanley utilized calendar year 2008 forecasts that were extrapolated from equity research estimates using a range of revenue growth assumptions from 7.5% — 12.5% and operating margin assumptions of 12.0% — 16.0%. Morgan Stanley applied a range of price to earnings multiples to these estimates and applied a discount rate of 12%.
 
The following table summarizes Morgan Stanley’s analysis:
 
                 
    Comparable
   
    Company
   
    Representative
  Implied Value
Calendar Year 2008 Assumed Revenue Growth/Operating Margin
 
Multiple Range
 
per Share of LSI
 
7.5% Revenue Growth/12.0% Operating Margin
    15.0x - 18.0x     $  7.71 - $ 9.25  
10.0% Revenue Growth/14.5% Operating Margin
    17.0x - 20.0x     $ 10.81 - $12.72  
12.5% Revenue Growth/16.0% Operating Margin
    20.0x - 23.0x     $ 14.34 - $16.49  
 
Morgan Stanley noted that as of December 1, 2006, the closing price of LSI common stock was $10.56 per share.
 
Securities Research Analysts’ Price Targets.  Morgan Stanley reviewed and analyzed future public market trading price targets for LSI common stock prepared and published by equity research analysts. These targets reflect each analyst’s estimate of the future public market trading price of LSI common stock. The range of undiscounted analyst price targets for LSI was $7.00 to $15.00. Morgan Stanley noted that as of December 1, 2006, the closing price of LSI common stock was $10.56 per share.
 
The public market trading price targets published by the securities research analysts do not necessarily reflect current market trading prices for LSI common stock and these estimates are subject to uncertainties, including the future financial performance of LSI and future financial market conditions.
 
Pro Forma Merger Analysis.  Morgan Stanley analyzed the potential pro forma impact of the transaction on LSI’s earnings per share for calendar years 2007 and 2008, excluding the impact of one-time and non-cash acquisition-related expenses, except for the non-cash impact related to the acquisition-related write-off of deferred


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revenue as estimated by LSI management. Morgan Stanley calculated such pro forma earnings per share on the basis of an assumed closing date for the merger of March 31, 2007, the transaction exchange ratio provided for by the merger agreement, publicly available equity research estimates of earnings per share for LSI and Agere as of December 1, 2006 and synergies resulting from the merger estimated by LSI management. Morgan Stanley noted that the transaction would be dilutive to LSI’s earnings per share for calendar year 2007 and accretive for calendar year 2008.
 
In connection with the review of the merger by the LSI board of directors, Morgan Stanley performed a variety of financial and comparative analyses for purposes of rendering its opinion. The preparation of a financial opinion is a complex process and is not necessarily susceptible to a partial analysis or summary description. In arriving at its opinion, Morgan Stanley considered the results of all of its analyses as a whole and did not attribute any particular weight to any analysis or factor it considered. Morgan Stanley believes that selecting any portion of its analyses, without considering all analyses as a whole, would create an incomplete view of the process underlying its analyses and opinion. In addition, Morgan Stanley may have given various analyses and factors more or less weight than other analyses and factors, and may have deemed various assumptions more or less probable than other assumptions. As a result, the ranges of valuations resulting from any particular analysis described above should not be taken to be Morgan Stanley’s view of the actual value of Agere or LSI or their respective common stock. In performing its analyses, Morgan Stanley made numerous assumptions with respect to industry performance, general business and economic conditions and other matters. Many of these assumptions are beyond the control of Agere or LSI. Any estimates contained in Morgan Stanley’s analyses are not necessarily indicative of future results or actual values, which may be significantly more or less favorable than those suggested by such estimates.
 
Morgan Stanley conducted the analyses described above solely as part of its analysis of the fairness of the exchange ratio pursuant to the merger agreement from a financial point of view to LSI and in connection with the delivery of its opinion dated December 3, 2006 to the LSI board of directors. These analyses do not purport to be appraisals or to reflect the prices at which shares of common stock of Agere or LSI might actually trade. The exchange ratio was determined by LSI and Agere through arm’s length negotiations between LSI and Agere an