##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the Quarterly Period Ended September 28, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number: 1-10317
 LSI CORPORATION
 (Exact name of registrant as specified in its charter)
 Delaware
    
    94-2712976(State of Incorporation)
    
    (I.R.S. Employer Identification Number)
 1621 Barber Lane
Milpitas, California 95035  (Address of principal executive offices)
(Zip code)
 (408) 433-8000
(Registrants telephone number, including area code)
 þ o
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller Reporting Company o
 o þ




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##### 



LSI CORPORATION
Form 10-Q
For the Quarter Ended September 28, 2008
INDEX
 PageNo.PART I. FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    3Condensed Consolidated Balance Sheets as of September 28, 2008 (unaudited) and December 31, 2007
    
    
    3Condensed Consolidated Statements of Operations for the three months and nine months ended September 28, 2008 and September 30, 2007 (unaudited)
    
    
    4Condensed Consolidated Statements of Cash Flows for the nine months ended September 28, 2008 and September 30, 2007 (unaudited)
    
    
    5Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    21Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    32Item 4. Controls and Procedures
    
    
    32PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    33Item 1A. Risk Factors
    
    
    33Item 6. Exhibits
    
    
    34Signatures
    
    
    35Exhibit Index
    
    
    36EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  FORWARD-LOOKING STATEMENTS
  2




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PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 LSI CORPORATION
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (UNAUDITED)
 September 28,
    
    
    December 31,2008
    
    
    2007(In thousands, exceptper share amounts)ASSETSCash and cash equivalents
    
    $
    784,910
    
    
    $
    1,021,569Short-term investments
    
    
    389,017
    
    
    
    376,028Accounts receivable, less allowances of $11,191 and $10,192
    
    
    401,101
    
    
    
    406,368Inventories
    
    
    209,958
    
    
    
    240,842Prepaid expenses and other current assets
    
    
    174,587
    
    
    
    147,751Total current assets
    
    
    1,959,573
    
    
    
    2,192,558Property and equipment, net
    
    
    234,028
    
    
    
    229,732Other intangible assets, net
    
    
    1,128,590
    
    
    
    1,225,196Goodwill
    
    
    537,517
    
    
    
    499,551Other assets
    
    
    265,741
    
    
    
    249,353Total assets
    
    $
    4,125,449
    
    
    $
    4,396,390LIABILITIES AND STOCKHOLDERS EQUITYAccounts payable
    
    $
    237,397
    
    
    $
    329,444Accrued salaries, wages and benefits
    
    
    141,328
    
    
    
    118,990Other accrued liabilities
    
    
    229,866
    
    
    
    298,343Income taxes payable
    
    
    24,706
    
    
    
    15,679Total current liabilities
    
    
    633,297
    
    
    
    762,456Long-term debt
    
    
    715,595
    
    
    
    717,967Pension, post-retirement and other benefits
    
    
    124,051
    
    
    
    137,543Income taxes payable  non-current
    
    
    206,307
    
    
    
    185,036Other non-current liabilities
    
    
    90,372
    
    
    
    108,143Total long-term obligations and other liabilities
    
    
    1,136,325
    
    
    
    1,148,689Commitments and contingencies (Note 13)
    
    
    
    
    
    
    Minority interest in subsidiary
    
    
    265
    
    
    
    249Stockholders equity:Preferred stock, $.01 par value: 2,000 shares authorized; none outstanding
    
    
    
    
    
    
    Common stock, $.01 par value: 1,300,000 shares authorized; 644,432 and
680,595 shares outstanding
    
    
    6,444
    
    
    
    6,806Additional paid-in capital
    
    
    6,035,946
    
    
    
    6,152,421Accumulated deficit
    
    
    (3,754,426
    )
    
    
    (3,738,522
    )Accumulated other comprehensive income
    
    
    67,598
    
    
    
    64,291Total stockholders equity
    
    
    2,355,562
    
    
    
    2,484,996Total liabilities and stockholders equity
    
    $
    4,125,449
    
    
    $
    4,396,390
  3




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LSI CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (UNAUDITED)
 Three Months Ended
    
    
    Nine Months EndedSeptember 28, 2008
    
    
    September 30, 2007
    
    
    September 28, 2008
    
    
    September 30, 2007(In thousands, except per share amounts)Revenues
    
    $
    714,308
    
    
    $
    727,415
    
    
    $
    2,067,118
    
    
    $
    1,862,769Cost of revenues
    
    
    416,891
    
    
    
    479,550
    
    
    
    1,225,252
    
    
    
    1,268,418Gross profit
    
    
    297,417
    
    
    
    247,865
    
    
    
    841,866
    
    
    
    594,351Research and development
    
    
    169,551
    
    
    
    182,291
    
    
    
    509,383
    
    
    
    488,071Selling, general and administrative
    
    
    103,744
    
    
    
    104,518
    
    
    
    307,267
    
    
    
    280,931Restructuring of operations and other items, net
    
    
    1,586
    
    
    
    101,231
    
    
    
    26,869
    
    
    
    119,071Acquired in-process research and development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    182,900Income/(loss) from operations
    
    
    22,536
    
    
    
    (140,175
    )
    
    
    (1,653
    )
    
    
    (476,622
    )Interest expense
    
    
    (8,993
    )
    
    
    (9,033
    )
    
    
    (26,930
    )
    
    
    (21,972
    )Interest income and other, net
    
    
    8,028
    
    
    
    11,808
    
    
    
    30,879
    
    
    
    33,129Income/(loss) before income taxes
    
    
    21,571
    
    
    
    (137,400
    )
    
    
    2,296
    
    
    
    (465,465
    )Provision for income taxes
    
    
    10,200
    
    
    
    3,200
    
    
    
    18,200
    
    
    
    23,156Net income/(loss)
    
    $
    11,371
    
    
    $
    (140,600
    )
    
    $
    (15,904
    )
    
    $
    (488,621
    )Net income/(loss) per share:Basic
    
    $
    0.02
    
    
    $
    (0.20
    )
    
    $
    (0.02
    )
    
    $
    (0.78
    )Diluted
    
    $
    0.02
    
    
    $
    (0.20
    )
    
    $
    (0.02
    )
    
    $
    (0.78
    )Shares used in computing per share amounts:Basic
    
    
    643,849
    
    
    
    715,733
    
    
    
    648,519
    
    
    
    623,692Diluted
    
    
    647,418
    
    
    
    715,733
    
    
    
    648,519
    
    
    
    623,692
  4




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LSI CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 Nine Months EndedSeptember 28, 2008
    
    
    September 30, 2007(In thousands)Operating activities:Net loss
    
    $
    (15,904
    )
    
    $
    (488,621
    )Adjustments:Depreciation and amortization
    
    
    239,945
    
    
    
    216,720Stock-based compensation expense
    
    
    54,292
    
    
    
    55,772Non-cash restructuring and other items
    
    
    (3,163
    )
    
    
    88,354Acquired in-process research and development
    
    
    
    
    
    
    182,900Write-down of debt and equity securities
    
    
    4,500
    
    
    
    2,396Loss/(gain) on sale of property and equipment, including assets held-for-sale
    
    
    14
    
    
    
    (9,513
    )Non-cash foreign exchange loss
    
    
    6,988
    
    
    
    3,221Changes in deferred tax assets and liabilities
    
    
    4,397
    
    
    
    (6,797
    )Changes in assets and liabilities, net of assets acquired and liabilities
assumed in business combinations:Accounts receivable, net
    
    
    5,237
    
    
    
    143,998Inventories
    
    
    30,884
    
    
    
    95,148Prepaid expenses and other assets
    
    
    9,192
    
    
    
    35,061Accounts payable
    
    
    (92,323
    )
    
    
    (134,621
    )Accrued and other liabilities
    
    
    (64,194
    )
    
    
    658Net cash provided by operating activities
    
    
    179,865
    
    
    
    184,676Investing activities:Purchases of debt securities available-for-sale
    
    
    (158,601
    )
    
    
    (154,087
    )Proceeds from maturities and sales of debt securities available-for-sale
    
    
    131,719
    
    
    
    493,029Purchases of equity securities
    
    
    (8,500
    )
    
    
    (10,500
    )Purchases of property, equipment and software
    
    
    (95,005
    )
    
    
    (76,986
    )Proceeds from sale of property and equipment
    
    
    11,400
    
    
    
    13,790Cash acquired from acquisition of Agere, net of acquisition costs
    
    
    
    
    
    
    517,712Acquisition of other companies, net of cash acquired
    
    
    (95,137
    )
    
    
    (52,079
    )Proceeds from sale of Consumer Products Group
    
    
    
    
    
    
    22,555Increase in non-current assets and deposits
    
    
    (13,300
    )
    
    
    Proceeds received from the resolution of a pre-acquisition income tax contingency
    
    
    4,821
    
    
    
    2,442Net cash (used in)/provided by investing activities
    
    
    (222,603
    )
    
    
    755,876Financing activities:Issuance of common stock
    
    
    36,370
    
    
    
    28,994Purchases of common stock under repurchase programs
    
    
    (229,231
    )
    
    
    (549,113
    )Net cash used in financing activities
    
    
    (192,861
    )
    
    
    (520,119
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (1,060
    )
    
    
    1,700(Decrease)/increase in cash and cash equivalents
    
    
    (236,659
    )
    
    
    422,133Cash and cash equivalents at beginning of year
    
    
    1,021,569
    
    
    
    327,800Cash and cash equivalents at end of period
    
    $
    784,910
    
    
    $
    749,933
  5




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LSI CORPORATION
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1  BASIS OF PRESENTATION
     Recent Accounting Pronouncements
     6




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Fair Value Measurements as of September 28, 2008Level 1
    
    Level 2
    
    Level 3
    
    Total(In thousands)Short-term investments in debt securities and certain cash equivalents
    
    $
    704,354
    
    
    $
    345,769
    
    
    
    
    
    
    $
    1,050,123Long-term investments in marketable equity securities
    
    $
    1,276
    
    
    
    
    
    
    
    
    
    
    $
    1,276Rabbi Trust  all invested in money market funds
    
    $
    10,107
    
    
    
    
    
    
    
    
    
    
    $
    10,107
     NOTE 2  STOCK-BASED COMPENSATION
  
    
    Making a total of 45 million shares available for use under the 2003 Plan. Of that
amount, 15 million shares were available for grants of restricted stock and restricted stock
units;
    
    Allowing non-employee directors to be eligible to participate in the 2003 Plan;
 7




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##### Table of Contents




    
    Including stock appreciation rights as a permitted type of award under the 2003 Plan;
    
    Increasing the limits on the size of awards that can be granted under the 2003 Plan to
any person in one year from two million to four million shares for stock options and from
0.5 million to one million shares for restricted stock and restricted stock units; and
    
    Allowing incentive stock options to be granted under the 2003 Plan until May 14, 2018.
   
    
    Making a total of 25 million shares available for purchase under the US ESPP after
May 14, 2008;
    
    Consolidating the Companys International Employee Stock Purchase Plan (IESPP) into
the US ESPP, which is expected to occur in November 2008; and
    
    Extending the term of the US ESPP through May 14, 2018.
  Three Months Ended
    
    
    Nine Months EndedStock-Based Compensation Expense Included in:
    
    September 28, 2008
    
    
    September 30, 2007
    
    
    September 28, 2008
    
    
    September 30, 2007(In thousands)Cost of revenues
    
    $
    2,252
    
    
    $
    2,824
    
    
    $
    6,885
    
    
    $
    7,916Research and development
    
    
    6,593
    
    
    
    8,916
    
    
    
    21,985
    
    
    
    22,611Selling, general and administrative
    
    
    8,005
    
    
    
    10,035
    
    
    
    25,422
    
    
    
    25,245Total stock-based compensation expense
    
    $
    16,850
    
    
    $
    21,775
    
    
    $
    54,292
    
    
    $
    55,772
  Stock Options
  Three Months Ended
    
    Nine Months EndedSeptember 28, 2008
    
    September 30, 2007
    
    September 28, 2008
    
    September 30, 2007Weighted average estimated grant date fair
value per share
    
    $
    2.63
    
    
    $
    2.54
    
    
    $
    2.06
    
    
    $
    3.31Weighted average assumptions in calculation:Expected life (years)
    
    
    4.38
    
    
    
    4.36
    
    
    
    4.37
    
    
    
    4.35Risk-free interest rate
    
    
    3
    %
    
    
    4
    %
    
    
    3
    %
    
    
    5
    %Volatility
    
    
    53
    %
    
    
    49
    %
    
    
    52
    %
    
    
    46
    %
   8




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Weighted Average
    
    
    Weighted AverageExercise
    
    
    Remaining
    
    
    AggregateNumber of
    
    
    Price Per
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Share
    
    
    Term
    
    
    Value(In thousands)
    
    
    
    
    
    
    (In years)
    
    
    (In thousands)Options outstanding at December 31, 2007
    
    
    100,242
    
    
    $
    16.12
    
    
    
    
    
    
    
    Options granted
    
    
    17,993
    
    
    
    5.75
    
    
    
    
    
    
    
    Options exercised
    
    
    (4,679
    )
    
    
    (5.41
    )
    
    
    
    
    
    
    Options canceled
    
    
    (26,035
    )
    
    
    (21.78
    )
    
    
    
    
    
    
    Options outstanding at September 28, 2008
    
    
    87,521
    
    
    $
    12.88
    
    
    
    4.22
    
    
    $
    12,251Options exercisable at September 28, 2008
    
    
    49,203
    
    
    $
    17.45
    
    
    
    3.02
    
    
    $
    3,993
   Employee Stock Purchase Plans
  Three Months EndedJune 29, 2008
    
    July 1, 2007Weighted average estimated grant date fair value per share
    
    $
    2.13
    
    
    $
    2.37Weighted average assumptions in calculation:Expected life (years)
    
    
    0.8
    
    
    
    0.8Risk-free interest rate
    
    
    2
    %
    
    
    5
    %Volatility
    
    
    44
    %
    
    
    38
    %
 Restricted Stock Awards
  9




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Number of
Shares(In thousands)Non-vested shares at December 31, 2007
    
    
    9,177Granted
    
    
    1,736Vested
    
    
    (2,337
    )Forfeited
    
    
    (512
    )Non-vested shares at September 28, 2008
    
    
    8,064
  NOTE 3  RESTRUCTURING AND OTHER ITEMS
  Restructuring and Impairment of Long-Lived Assets
   First Quarter of 2008:
  
    
    A gain of $2.0 million from the sale of land in Gresham, Oregon, which had a net book
value of $0.9 million. Total proceeds from the sale were $2.9 million;
    
    A charge of $5.0 million for lease termination costs, which included $3.1 million for
additional lease termination costs in the United States and $1.9 million for changes in
previously accrued facility lease exit costs including changes in the time-value of
accruals; and
    
    A credit of $1.2 million primarily for severance and termination benefits for employees
due to a change in estimates primarily for restructuring actions taken in January 2008.
 Second Quarter of 2008:
  
    
    A charge of $3.4 million for lease termination costs, which included $2.7 million for
additional United States lease termination costs including the related write-off of
leasehold improvements and $0.7 million in charges for changes in assumptions and changes in
the time value of accruals for previously accrued facility lease exit costs; and
    
    A charge of $3.7 million for severance and termination benefits for employees, which
included $1.8 million for integrating operations in Asia and $1.9 million for changes in
estimates related to various restructuring actions taken since June 2007.
 Third Quarter of 2008:
  10




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
    
    A credit of $0.6 million for the reversal of a prior accrual offset by changes in
previously accrued facility lease exit costs including changes in the time-value of
accruals; and
    
    A charge of $1.4 million for severance and termination benefits for employees, which
included $0.8 million as the result of a change in severance estimates related to
restructuring actions taken in January 2008 and $0.6 million primarily for integrating
operations in Asia.
  Balance at
    
    
    Restructuring
    
    
    Utilized
    
    
    Balance at
    
    
    Restructuring
    
    
    Utilized
    
    
    Balance at
    
    
    Restructuring
    
    
    Utilized
    
    
    Balance atDecember 31,
    
    
    Expense
    
    
    During
    
    
    March 30,
    
    
    Expense
    
    
    During
    
    
    June 29,
    
    
    Expense
    
    
    During
    
    
    September 28,2007
    
    
    Q1 2008
    
    
    Q1 2008
    
    
    2008
    
    
    Q2 2008
    
    
    Q2 2008
    
    
    2008
    
    
    Q3 2008
    
    
    Q3 2008
    
    
    2008(In thousands)Write-down of
excess assets and
other liabilities
(a)
    
    $
    225
    
    
    $
    (1,976
    )
    
    $
    1,834
    
    
    $
    83
    
    
    $
    876
    
    
    $
    (876
    )
    
    $
    83
    
    
    $
    (828
    )
    
    $
    828
    
    
    $
    83Lease terminations
(b)
    
    
    23,318
    
    
    
    4,998
    
    
    
    (1,961
    )
    
    
    26,355
    
    
    
    2,494
    
    
    
    (4,333
    )
    
    
    24,516
    
    
    
    252
    
    
    
    (3,612
    )
    
    
    21,156Payments to
employees for
severance (c)
    
    
    24,817
    
    
    
    (1,230
    )
    
    
    (12,899
    )
    
    
    10,688
    
    
    
    3,723
    
    
    
    (4,446
    )
    
    
    9,965
    
    
    
    1,370
    
    
    
    (3,626
    )
    
    
    7,709Total
    
    $
    48,360
    
    
    $
    1,792
    
    
    $
    (13,026
    )
    
    $
    37,126
    
    
    $
    7,093
    
    
    $
    (9,655
    )
    
    $
    34,564
    
    
    $
    794
    
    
    $
    (6,410
    )
    
    $
    28,948
 
 (a)
    
    The amount utilized in Q1, 2008 includes a gain from the sale of land in Gresham, Oregon.(b)
    
    Amounts utilized represent cash payments. The balance remaining for real estate lease
terminations is expected to be paid during the remaining terms of the leases, which extend
through 2011.(c)
    
    Amounts utilized include $6.5 million related to stock grants exercised or expired. The
majority of the balance remaining for severance is expected to be paid by the end of 2009. Restructuring Actions Associated with the Agere Merger
   First Quarter of 2008:
  
    
    A charge of $1.1 million for changes in assumptions and the time value of accruals
previously recorded for facility lease exit costs;
    
    A charge of $1.6 million for severance and termination benefits due to a change in
severance estimates; and
    
    A gain of $1.2 million from the sale of assets held for sale in Singapore.
 11




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Second Quarter of 2008:
  
    
    A charge of $3.0 million for lease termination costs, which included $2.4 million for
changes in assumptions resulting from changes in market conditions and $0.6 million for the
change in the time value of accruals previously recorded for facility lease exit costs;
    
    A net charge of $0.2 million for severance and termination benefits due to a change in
severance estimates; and
    
    A net credit of $0.3 million including a gain of $0.6 million primarily from the sale of
assets held for sale in Singapore, a credit of $0.4 million primarily for the reversal of an
earlier write-down of held for sale assets which were put back for use and a $0.7 million
charge for plant closing costs.
 Third Quarter of 2008:
   Change in
    
    
    
    
    
    
    
    
    
    
    Changes in
    
    
    
    
    
    
    
    
    
    
    Changes inBalance at
    
    
    Estimates
    
    
    Utilized
    
    
    Balance at
    
    
    Estimates
    
    
    Utilized
    
    
    Balance at
    
    
    Estimates
    
    
    Utilized
    
    
    Balance atDecember 31,
    
    
    During
    
    
    During
    
    
    March 30,
    
    
    During
    
    
    During
    
    
    June 29,
    
    
    During
    
    
    During
    
    
    September 28,2007
    
    
    Q1 2008
    
    
    Q1 2008
    
    
    2008
    
    
    Q2 2008
    
    
    Q2 2008
    
    
    2008
    
    
    Q3 2008
    
    
    Q3 2008
    
    
    2008(In thousands)Lease terminations
(a)
    
    $
    33,439
    
    
    $
    1,068
    
    
    $
    (3,671
    )
    
    $
    30,836
    
    
    $
    3,002
    
    
    $
    (3,647
    )
    
    $
    30,191
    
    
    $
    877
    
    
    $
    (2,723
    )
    
    $
    28,345Payments to
employees for
severance (b)
    
    
    18,926
    
    
    
    1,635
    
    
    
    (10,581
    )
    
    
    9,980
    
    
    
    190
    
    
    
    (5,102
    )
    
    
    5,068
    
    
    
    4
    
    
    
    (738
    )
    
    
    4,334Stock compensation
charges in
accordance with FAS
123R (c)
    
    
    20,860
    
    
    
    
    
    
    
    (7,844
    )
    
    
    13,016
    
    
    
    
    
    
    
    (11,290
    )
    
    
    1,726
    
    
    
    
    
    
    
    
    
    
    
    1,726Write-down of
excess assets and
other liabilities
(d)
    
    
    
    
    
    
    (1,163
    )
    
    
    1,163
    
    
    
    
    
    
    
    (320
    )
    
    
    320
    
    
    
    
    
    
    
    47
    
    
    
    (47
    )
    
    
    Total
    
    $
    73,225
    
    
    $
    1,540
    
    
    $
    (20,933
    )
    
    $
    53,832
    
    
    $
    2,872
    
    
    $
    (19,719
    )
    
    $
    36,985
    
    
    $
    928
    
    
    $
    (3,508
    )
    
    $
    34,405
 
 (a)
    
    The amount utilized in Q1, 2008 includes $2.9 million in cash payments and $0.8 million for
write-off of leasehold improvements. The balance remaining for real estate lease terminations
is expected to be paid during the remaining terms of these contracts, which extend through
2013. There were no write-offs of assets during the second and third quarters of 2008.(b)
    
    Amounts utilized represent cash severance payments to employees. The majority of the balance
remaining for severance is expected to be paid by the end of 2008.(c)
    
    Amounts utilized represent stock grants exercised or expired. The balance is expected to be
utilized by the end of 2009.(d)
    
    The amount in Q1, 2008 represents a gain on the sale of assets  in Singapore. The
amount in Q2, 2008 includes a $0.6 million  gain on the sale of assets  in
Singapore. Assets Held for Sale
  12




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##### Table of Contents



Other Items
  NOTE 4  BUSINESS COMBINATIONS
 Acquisition of Hard Disk Drive Semiconductor Business of Infineon
    Entity Name or Typeof Technology;Segment Included in;
    
    
    
    
    
    Total
    
    
    
    
    
    Fair Value ofDescription of
    
    
    
    
    
    Purchase
    
    Type of
    
    Other Assets
    
    
    
    
    
    AmortizableAcquired Business
    
    Acquisition Date
    
    Price
    
    Consideration
    
    Acquired
    
    Goodwill
    
    Intangible Assets(Dollars in millions)HDD semiconductor business of
Infineon; Semiconductor segment;
Silicon solutions for hard disk
drive makers
    
    April 25, 2008
    
    $
    95.1
    
    
    cash
    
    $
    10.3
    
    
    $
    6.6
    
    
    $
    78.2
  WeightedAverageFair Value
    
    
    Useful Life(In millions)
    
    
    (in years)Current technology
    
    $
    46.5
    
    
    
    4Customer base
    
    
    31.7
    
    
    
    5Total acquired identifiable intangible assets
    
    $
    78.2
  Agere Merger  Pro Forma Results
  13




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##### Table of Contents



Nine MonthsEndedSeptember 30, 2007Revenues
    
    $
    2,197,613Net loss
    
    $
    (309,374
    )Basic loss per share
    
    $
    (0.41
    )Diluted loss per share
    
    $
    (0.41
    )
 NOTE 5  BENEFIT OBLIGATIONS
   Three Months EndedSeptember 28, 2008
    
    
    September 30, 2007Pension
    
    
    Post-retirement
    
    
    Pension
    
    
    Post-retirementBenefits
    
    
    Benefits
    
    
    Benefits
    
    
    Benefits(In thousands)Service cost
    
    $
    1,298
    
    
    $
    25
    
    
    $
    1,867
    
    
    $
    41Interest cost
    
    
    18,947
    
    
    
    745
    
    
    
    18,395
    
    
    
    932Expected return on plan assets
    
    
    (20,701
    )
    
    
    (1,258
    )
    
    
    (21,026
    )
    
    
    (1,235
    )Amortization of prior service cost
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    Net actuarial gain recognized
    
    
    
    
    
    
    (30
    )
    
    
    
    
    
    
    Total benefit credit
    
    $
    (452
    )
    
    $
    (518
    )
    
    $
    (764
    )
    
    $
    (262
    )
 Nine Months EndedSeptember 28, 2008
    
    
    September 30, 2007Pension
    
    
    Post-retirement
    
    
    Pension
    
    
    Post-retirementBenefits
    
    
    Benefits
    
    
    Benefits
    
    
    Benefits(In thousands)Service cost
    
    $
    4,201
    
    
    $
    77
    
    
    $
    3,734
    
    
    $
    82Interest cost
    
    
    56,084
    
    
    
    2,278
    
    
    
    36,791
    
    
    
    1,863Expected return on plan assets
    
    
    (61,865
    )
    
    
    (3,775
    )
    
    
    (41,885
    )
    
    
    (2,429
    )Amortization of prior service cost
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    Net actuarial gain recognized
    
    
    (1
    )
    
    
    (89
    )
    
    
    
    
    
    
    Total benefit credit
    
    $
    (1,569
    )
    
    $
    (1,509
    )
    
    $
    (1,360
    )
    
    $
    (484
    )
  14




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##### Table of Contents



NOTE 6  INTANGIBLE ASSETS AND GOODWILL
 Intangible Assets
  September 28, 2008
    
    
    December 31, 2007Gross
    
    
    Accumulated
    
    
    Gross
    
    
    AccumulatedCarrying Amount
    
    
    Amortization
    
    
    Carrying Amount
    
    
    Amortization(In thousands)Semiconductor:Current technology
    
    $
    894,808
    
    
    $
    (394,702
    )
    
    $
    848,656
    
    
    $
    (298,525
    )Trademarks
    
    
    26,657
    
    
    
    (26,236
    )
    
    
    26,730
    
    
    
    (26,272
    )Customer base
    
    
    399,508
    
    
    
    (65,782
    )
    
    
    367,808
    
    
    
    (20,761
    )Non-compete agreements
    
    
    1,949
    
    
    
    (1,639
    )
    
    
    1,949
    
    
    
    (1,165
    )Existing purchase orders
    
    
    200
    
    
    
    (200
    )
    
    
    200
    
    
    
    (200
    )Supply agreement
    
    
    100
    
    
    
    (100
    )
    
    
    100
    
    
    
    (100
    )Patent licensing
    
    
    313,800
    
    
    
    (54,367
    )
    
    
    313,800
    
    
    
    (27,183
    )Order backlog
    
    
    41,300
    
    
    
    (41,300
    )
    
    
    41,300
    
    
    
    (41,300
    )Workforce
    
    
    3,567
    
    
    
    (1,108
    )
    
    
    3,567
    
    
    
    (661
    )Trade names
    
    
    2,248
    
    
    
    (375
    )
    
    
    2,248
    
    
    
    (94
    )Subtotal
    
    
    1,684,137
    
    
    
    (585,809
    )
    
    
    1,606,358
    
    
    
    (416,261
    )Storage Systems:Current technology
    
    
    164,339
    
    
    
    (134,668
    )
    
    
    164,339
    
    
    
    (130,361
    )Trademarks
    
    
    7,150
    
    
    
    (7,150
    )
    
    
    7,150
    
    
    
    (7,149
    )Customer base
    
    
    5,010
    
    
    
    (5,010
    )
    
    
    5,010
    
    
    
    (5,010
    )Non-compete agreements
    
    
    1,600
    
    
    
    (1,600
    )
    
    
    1,600
    
    
    
    (1,156
    )Supply agreement
    
    
    8,147
    
    
    
    (8,147
    )
    
    
    8,147
    
    
    
    (8,147
    )Trade names
    
    
    800
    
    
    
    (209
    )
    
    
    800
    
    
    
    (124
    )Subtotal
    
    
    187,046
    
    
    
    (156,784
    )
    
    
    187,046
    
    
    
    (151,947
    )Total intangible assets
    
    $
    1,871,183
    
    
    $
    (742,593
    )
    
    $
    1,793,404
    
    
    $
    (568,208
    )
   Weighted
    
    
    Nine Months EndedAverage Lives
    
    
    September 28, 2008
    
    
    September 30, 2007(In months)
    
    
    (In thousands)Current technology
    
    
    57
    
    
    $
    100,833
    
    
    $
    65,392Trademarks
    
    
    83
    
    
    
    37
    
    
    
    839Customer base
    
    
    45
    
    
    
    45,020
    
    
    
    13,809Non-compete agreements
    
    
    27
    
    
    
    918
    
    
    
    1,238Supply agreement
    
    
    32
    
    
    
    
    
    
    
    775Patent licensing
    
    
    36
    
    
    
    27,183
    
    
    
    18,259Order backlog
    
    
    2
    
    
    
    
    
    
    
    53,000Workforce
    
    
    72
    
    
    
    447
    
    
    
    447Trade names
    
    
    75
    
    
    
    366
    
    
    
    86Total
    
    
    50
    
    
    $
    174,804
    
    
    $
    153,845
  Amount(In thousands)Fiscal Year:2008 (September 29 through December 31, 2008)
    
    $
    60,2792009
    
    
    234,9262010
    
    
    191,6662011
    
    
    149,9142012 and thereafter
    
    
    491,805Total
    
    $
    1,128,590
 15




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##### Table of Contents



Goodwill
  Semiconductor
    
    
    Storage SystemsSegment
    
    
    Segment
    
    
    Total(In thousands)Balance as of December 31, 2007
    
    $
    323,927
    
    
    $
    175,624
    
    
    $
    499,551Goodwill acquired during the year *
    
    
    6,624
    
    
    
    
    
    
    
    6,624Goodwill acquired in
a prior year for a pre-acquisition
income tax contingency **
    
    
    31,342
    
    
    
    
    
    
    
    31,342Balance as of September 28, 2008
    
    $
    361,893
    
    
    $
    175,624
    
    
    $
    537,517
 
 *
    
    During the nine months ended September 28, 2008, the Company recorded $6.6 million of
goodwill in connection with the acquisition of Infineons HDD semiconductor business.**
    
    During the nine months ended September 28, 2008, the Company recorded $37.1 million of
goodwill primarily relating to a re-measurement of uncertain tax positions based on new
information received in the third quarter of 2008 offset by $5.8 million of income tax
refunds. NOTE 7  DERIVATIVE INSTRUMENTS
   NOTE 8  OTHER BALANCE SHEET DETAILS
 September 28,
    
    
    December 31,2008
    
    
    2007(In thousands)Cash and cash equivalents:Cash in financial institutions
    
    $
    65,751
    
    
    $
    117,464Cash equivalents
    
    
    719,159
    
    
    
    904,105Total cash and cash equivalents
    
    $
    784,910
    
    
    $
    1,021,569Available-for-sale debt securities: *Asset-backed and mortgage-backed securities
    
    $
    206,523
    
    
    $
    207,290U.S. government and agency securities
    
    
    163,226
    
    
    
    121,350Corporate and municipal debt securities
    
    
    19,268
    
    
    
    47,388Total short-term investments
    
    $
    389,017
    
    
    $
    376,028Inventories:Raw materials
    
    $
    31,560
    
    
    $
    30,023Work-in-process
    
    
    63,696
    
    
    
    95,262Finished goods
    
    
    114,702
    
    
    
    115,557Total inventories
    
    $
    209,958
    
    
    $
    240,842
 Interest
    
    
    Conversion
    
    
    September 28,
    
    
    December 31,Maturity
    
    
    Rate
    
    
    Price
    
    
    2008
    
    
    2007(In thousands)Long-term debt:2003 Convertible Subordinated Notes
    
    
    2010
    
    
    
    4.00
    %
    
    $
    13.4200
    
    
    $
    350,000
    
    
    $
    350,0002002 Convertible Subordinated Notes **
    
    
    2009
    
    
    
    6.50
    %
    
    $
    15.3125
    
    
    
    361,645
    
    
    
    361,660Accrued debt premium
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,589
    
    
    
    8,589720,234
    
    
    
    720,249Amortization of accrued debt premium
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,639
    )
    
    
    (2,282
    )Total long-term debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    715,595
    
    
    $
    717,967
 16




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##### Table of Contents



*
    
    During the three and nine months ended September 28, 2008, the Company recognized impairment
charges of $1.7 million and $3.8 million for certain available-for-sale debt securities, after
determining that the decline in their fair value was other than temporary.**
    
    During the nine months ended September 28, 2008, $15,000 of the principal amount of these
notes was converted into 977 shares of LSIs common stock at the conversion price of $15.3125
per share.See Note 14 regarding subsequent events. NOTE 9  RECONCILIATION OF BASIC AND DILUTED INCOME/(LOSS) PER SHARE
  Three Months EndedSeptember 28, 2008
    
    September 30, 2007Per-Share
    
    
    
    
    
    
    
    
    
    Per-ShareIncome*
    
    Shares+
    
    Amount
    
    Loss*
    
    Shares+
    
    Amount(In thousands except per share amounts)Basic income/(loss) per share:Net income/(loss) available
to common stockholders
    
    $
    11,371
    
    
    
    643,849
    
    
    $
    0.02
    
    
    $
    (140,600
    )
    
    
    715,733
    
    
    $
    (0.20
    )Stock options, employee
stock purchase rights and
restricted stock unit awards
    
    
    
    
    
    
    3,569
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted income/(loss) per share:Net income/(loss) available
to common stockholders
    
    $
    11,371
    
    
    
    647,418
    
    
    $
    0.02
    
    
    $
    (140,600
    )
    
    
    715,733
    
    
    $
    (0.20
    )
 Nine Months EndedSeptember 28, 2008
    
    September 30, 2007Per-Share
    
    
    
    
    
    
    
    
    
    Per-ShareLoss*
    
    Shares+
    
    Amount
    
    Loss*
    
    Shares+
    
    Amount(In thousands except per share amounts)Basic loss per share:Net loss available to common stockholders
    
    $
    (15,904
    )
    
    
    648,519
    
    
    $
    (0.02
    )
    
    $
    (488,621
    )
    
    
    623,692
    
    
    $
    (0.78
    )Stock options, employee stock purchase
rights and restricted stock unit awards
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted loss per share:Net loss available to common stockholders
    
    $
    (15,904
    )
    
    
    648,519
    
    
    $
    (0.02
    )
    
    $
    (488,621
    )
    
    
    623,692
    
    
    $
    (0.78
    )
 
 *
    
    Numerator+
    
    Denominator   17




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##### Table of Contents



NOTE 10  SEGMENT REPORTING
  Summary of Operations by Segment
  Three Months Ended
    
    
    Nine Months EndedSeptember 28, 2008
    
    
    September 30, 2007
    
    
    September 28, 2008
    
    
    September 30, 2007(In thousands)Revenues:Semiconductor
    
    $
    500,432
    
    
    $
    530,013
    
    
    $
    1,421,244
    
    
    $
    1,287,227Storage Systems
    
    
    213,876
    
    
    
    197,402
    
    
    
    645,874
    
    
    
    575,542Total
    
    $
    714,308
    
    
    $
    727,415
    
    
    $
    2,067,118
    
    
    $
    1,862,769Income/(loss) from operations:Semiconductor
    
    $
    8,892
    
    
    $
    (147,344
    )
    
    $
    (47,371
    )
    
    $
    (485,996
    )Storage Systems
    
    
    13,644
    
    
    
    7,169
    
    
    
    45,718
    
    
    
    9,374Total
    
    $
    22,536
    
    
    $
    (140,175
    )
    
    $
    (1,653
    )
    
    $
    (476,622
    )
   Significant Customers
  Three Months Ended
    
    Nine Months EndedSeptember 28, 2008
    
    September 30, 2007
    
    September 28, 2008
    
    September 30, 2007Semiconductor segment:Number of significant customers
    
    
    1
    
    
    
    2
    
    
    
    1
    
    
    
    2Percentage of segment revenues
    
    
    26
    %
    
    
    29%, 17
    %
    
    
    27
    %
    
    
    26%, 14
    %Storage Systems segment:Number of significant customers
    
    
    4
    
    
    
    3
    
    
    
    2
    
    
    
    2Percentage of segment revenues
    
    
    46%, 12%, 10%, 10
    %
    
    
    46%, 15%, 11
    %
    
    
    45%, 15
    %
    
    
    46%, 18
    %Consolidated:Number of significant customers
    
    
    2
    
    
    
    3
    
    
    
    2
    
    
    
    2Percentage of consolidated revenues
    
    
    18%, 15
    %
    
    
    21%, 13%, 12
    %
    
    
    19%, 15
    %
    
    
    18%, 15
    %
 Information about Geographic Areas
   18




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##### Table of Contents



NOTE 11  COMPREHENSIVE INCOME/(LOSS)
  Three Months Ended
    
    
    Nine Months EndedSeptember 28, 2008
    
    
    September 30, 2007
    
    
    September 28, 2008
    
    
    September 30, 2007(In thousands)Net income/(loss)
    
    $
    11,371
    
    
    $
    (140,600
    )
    
    $
    (15,904
    )
    
    $
    (488,621
    )Change in unrealized gain/(loss) on
available-for-sale securities
    
    
    249
    
    
    
    2,217
    
    
    
    (2,117
    )
    
    
    4,354Unrealized gain on cash-flow hedges
    
    
    78
    
    
    
    
    
    
    
    78
    
    
    
    Change in foreign currency translation adjustments
    
    
    (336
    )
    
    
    8,862
    
    
    
    5,459
    
    
    
    5,506Amortization of prior service cost and actuarial
gains included in net periodic benefit credit
    
    
    (62
    )
    
    
    
    
    
    
    (113
    )
    
    
    Comprehensive income/(loss)
    
    $
    11,300
    
    
    $
    (129,521
    )
    
    $
    (12,597
    )
    
    $
    (478,761
    )
 NOTE 12  RELATED PARTY TRANSACTIONS
    NOTE 13  COMMITMENTS, CONTINGENCIES AND LEGAL MATTERS
 Purchase Commitments
    19




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##### Table of Contents



Guarantees
 Product Warranties:
   Balance as of December 31, 2007
    
    $
    14,734Accruals for warranties issued during the period
    
    
    11,331Accruals related to pre-existing warranties (including changes in estimates)
    
    
    (1,529
    )Settlements made during the period (in cash or in kind)
    
    
    (10,737
    )Balance as of September 28, 2008
    
    $
    13,799
 Convertible Subordinated Notes:
  Standby Letters of Credit:
  FASB Interpretation No. 48 (FIN 48) Liabilities
   Indemnifications
  20




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##### Table of Contents



Legal Matters
      NOTE 14  SUBSEQUENT EVENTS
  
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 This Managements discussion and analysis should be read in conjunction with the other
sections of this Form 10-Q , including Part 1, Item 1- Financial Statements.
 21




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##### Table of Contents



OVERVIEW
      
    
    The acquisition of SiliconStor, a provider of semiconductor solutions for enterprise
storage networks, in March 2007;
    
    The acquisition of Agere Systems in April 2007, through the merger of Agere and a
subsidiary of ours. Agere was a provider of integrated circuit solutions for a variety of
communications and computing applications;
    
    The sale of our Consumer Products Group in July 2007;
    
    The sale of the Mobility Products Group in October 2007, which we acquired from Agere;
    
    The sale of, or discontinuation of operations at, our semiconductor and storage systems
assembly and test facilities, and the transition of the work performed at those facilities
to contract manufacturers;
    
    The acquisition of Tarari, a maker of silicon and software that provides content and
application awareness in packet and message processing, in October 2007; and
    
    The acquisition of the hard disk drive semiconductor business of Infineon Technologies in
April 2008.
  22




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##### Table of Contents



RESULTS OF OPERATIONS
 Revenues
  Three Months Ended
    
    
    Nine Months EndedSeptember 28, 2008
    
    
    September 30, 2007
    
    
    September 28, 2008
    
    
    September 30, 2007(In millions)Semiconductor segment
    
    $
    500.4
    
    
    $
    530.0
    
    
    $
    1,421.2
    
    
    $
    1,287.2Storage Systems segment
    
    
    213.9
    
    
    
    197.4
    
    
    
    645.9
    
    
    
    575.6Consolidated
    
    $
    714.3
    
    
    $
    727.4
    
    
    $
    2,067.1
    
    
    $
    1,862.8
 Three months ended September 28, 2008 compared to the three months ended September 30,
2007:
  Semiconductor Segment:
  
    
    A $42.9 million increase in revenues attributable to increased demand for semiconductors
used in storage product applications and revenues from the HDD semiconductor business acquired
from Infineon in April 2008;
    
    A $19.0 million increase in revenues from the licensing of intellectual property; and
    
    A $7.7 million increase in revenues from the sale of semiconductors used in networking
standard products.
 23




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Storage Systems Segment:
  Nine months ended September 28, 2008 compared to the nine months ended September 30, 2007:
  Semiconductor Segment:
  Storage Systems Segment:
   Revenues by Geography
  Three Months Ended
    
    
    Nine Months EndedSeptember 28, 2008
    
    
    September 30, 2007
    
    
    September 28, 2008
    
    
    September 30, 2007(In millions)North America *
    
    $
    155.2
    
    
    $
    205.2
    
    
    $
    582.8
    
    
    $
    623.9Asia **
    
    
    390.9
    
    
    
    440.3
    
    
    
    1,086.0
    
    
    
    1,016.2Europe and the Middle East
    
    
    168.2
    
    
    
    81.9
    
    
    
    398.3
    
    
    
    222.7Total
    
    $
    714.3
    
    
    $
    727.4
    
    
    $
    2,067.1
    
    
    $
    1,862.8
 
 *
    
    Primarily the United States.**
    
    Including Japan. Three months ended September 28, 2008 compared to the three months ended September 30, 2007:
  Nine months ended September 28, 2008 compared to the nine months ended September 30, 2007:
  24




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##### Table of Contents



Gross Profit Margin
  Three Months Ended
    
    
    Nine Months EndedSeptember 28, 2008
    
    
    September 30, 2007
    
    
    September 28, 2008
    
    
    September 30, 2007(Dollars in millions)Semiconductor segment
    
    $
    216.4
    
    
    $
    175.9
    
    
    $
    597.3
    
    
    $
    396.3Percentage of segment revenues
    
    
    43.2
    %
    
    
    33.2
    %
    
    
    42.0
    %
    
    
    30.8
    %Storage Systems segment
    
    $
    81.0
    
    
    $
    72.0
    
    
    $
    244.6
    
    
    $
    198.1Percentage of segment revenues
    
    
    37.9
    %
    
    
    36.5
    %
    
    
    37.9
    %
    
    
    34.4
    %Consolidated
    
    $
    297.4
    
    
    $
    247.9
    
    
    $
    841.9
    
    
    $
    594.4Percentage of total revenues
    
    
    41.6
    %
    
    
    34.1
    %
    
    
    40.7
    %
    
    
    31.9
    %
 Three months ended September 28, 2008 compared to the three months ended September 30, 2007:
  Semiconductor Segment:
  
    
    A decrease of $19.1 million in the amortization of intangible assets in the third quarter
of 2008;
    
    An $8.0 million charge recorded in the third quarter of 2007 for a wafer supply agreement
with ON Semiconductor resulting from a decline in demand; and
    
    Increased sales of products with higher gross profit margins in the third quarter of
2008.
 Storage Systems Segment:
  Nine months ended September 28, 2008 compared to the nine months ended September 30, 2007:
  Semiconductor Segment:
  
    
    An inventory charge of $47.9 million recorded in the second quarter of 2007 related to
fair valuing the inventory in the acquisition of Agere;
    
    $19.0 million in charges recorded during the nine months ended September 30, 2007 for a
wafer supply agreement with ON Semiconductor resulting from a decline in demand;
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##### Table of Contents




    
    A decrease of $8.5 million in the amortization of intangible assets for the nine months
ended September 28, 2008;
    
    An additional $6.6 million of previously reserved inventory was sold through for the nine
months ended September 28, 2008; and
    
    Increased sales of products with higher gross profit margins for the nine months ended
September 28, 2008.
 Storage Systems Segment:
  Research and Development
  Three Months Ended
    
    
    Nine Months EndedSeptember 28, 2008
    
    
    September 30, 2007
    
    
    September 28, 2008
    
    
    September 30, 2007(Dollars in millions)Semiconductor segment
    
    $
    135.1
    
    
    $
    146.4
    
    
    $
    405.7
    
    
    $
    391.1Percentage of segment revenues
    
    
    27.0
    %
    
    
    27.6
    %
    
    
    28.5
    %
    
    
    30.4
    %Storage Systems segment
    
    $
    34.5
    
    
    $
    35.9
    
    
    $
    103.7
    
    
    $
    97.0Percentage of segment revenues
    
    
    16.1
    %
    
    
    18.2
    %
    
    
    16.1
    %
    
    
    16.9
    %Consolidated
    
    $
    169.6
    
    
    $
    182.3
    
    
    $
    509.4
    
    
    $
    488.1Percentage of total revenues
    
    
    23.7
    %
    
    
    25.1
    %
    
    
    24.6
    %
    
    
    26.2
    %
 Three months ended September 28, 2008 compared to the three months ended September 30, 2007:
  Semiconductor Segment:
  Storage Systems Segment:
  Nine months ended September 28, 2008 compared to the nine months ended September 30, 2007:
  26




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##### Table of Contents



Semiconductor Segment:
  Storage Systems Segment:
  Selling, General and Administrative
  Three Months Ended
    
    
    Nine Months EndedSeptember 28, 2008
    
    
    September 30, 2007
    
    
    September 28, 2008
    
    
    September 30, 2007(Dollars in millions)Semiconductor segment
    
    $
    70.8
    
    
    $
    75.9
    
    
    $
    212.4
    
    
    $
    193.4Percentage of segment revenues
    
    
    14.1
    %
    
    
    14.3
    %
    
    
    14.9
    %
    
    
    15.0
    %Storage Systems segment
    
    $
    32.9
    
    
    $
    28.6
    
    
    $
    94.9
    
    
    $
    87.5Percentage of segment revenues
    
    
    15.4
    %
    
    
    14.5
    %
    
    
    14.7
    %
    
    
    15.2
    %Consolidated
    
    $
    103.7
    
    
    $
    104.5
    
    
    $
    307.3
    
    
    $
    280.9Percentage of total revenues
    
    
    14.5
    %
    
    
    14.4
    %
    
    
    14.9
    %
    
    
    15.1
    %
 Three months ended September 28, 2008 compared to the three months ended September 30, 2007:
  Semiconductor Segment:
  Storage Systems Segment:
  Nine months ended September 28, 2008 compared to the nine months ended September 30, 2007:
  27




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Semiconductor Segment:
  Storage Systems Segment:
  Restructuring of Operations and Other Items
      Interest Expense
  Interest Income and Other
   28




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##### Table of Contents



Provision for Income Taxes
    FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
  Working Capital
  
    
    Cash, cash equivalents and short-term investments decreased by $223.7 million;
    
    Inventories decreased by $30.9 million primarily as the result of a shift to progress billing for one of
our customers and a reduction in buffer stocks
established to facilitate our manufacturing transition to contract manufacturers;
    
    Accrued salaries, wages and benefits increased by $22.3 million primarily attributable to
the timing of payments;
    
    Income taxes payable increased by $9.0 million as a result of an increase in the tax
provision offset by tax payments; and
    
    Accounts receivable decreased by $5.2 million as a result of lower
revenues and higher days sales outstanding
in the third quarter of 2008 compared to the fourth quarter of 2007.
  
    
    Accounts payable decreased by $92.0 million due to the timing of invoice receipt and
payments;
    
    Other accrued liabilities decreased by $68.5 million primarily as a result of utilization
of restructuring reserves and pension contributions, partially offset by an increase in
accrued interest on the convertible notes; and
    
    Prepaid expenses and other current assets increased by $26.8 million primarily due to
increases in other receivables and prepaid taxes offset by a decrease in assets held for
sale.
 29




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##### Table of Contents



Cash provided by operating activities
  
    
    A net loss adjusted for non-cash transactions. The non-cash items and other non-operating
adjustments are quantified in the Consolidated Statements of Cash Flows included in Item 1;
and
    
    A net decrease in assets and liabilities, including changes in working capital components
from December 31, 2007 to September 28, 2008, as discussed above.
 Cash and cash equivalents used in investing activities
  
    
    Acquisition of businesses, net of cash acquired;
    
    Purchases of property, equipment and software, net of sales;
    
    Purchase of available for sale debt securities and equity securities, net of proceeds
from maturities and sales;
    
    An increase in a non-current deposit; and
    
    Proceeds received from the resolution of a pre-acquisition
income tax contingency.
  Cash and cash equivalents used in financing activities
    30




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##### Table of Contents



CONTRACTUAL OBLIGATIONS
  Payments Due by PeriodLess Than 1 Year
    
    
    1-3 Years
    
    
    4-5 Years
    
    
    After 5 Years
    
    
    Total(In millions)Convertible Subordinated Notes
    
    $
    
    
    
    $
    711.6
    
    
    $
    
    
    
    $
    
    
    
    $
    711.6Operating lease obligations
    
    
    94.4
    
    
    
    106.5
    
    
    
    25.1
    
    
    
    4.2
    
    
    
    230.2Purchase commitments
    
    
    273.0
    
    
    
    311.5
    
    
    
    
    
    
    
    
    
    
    
    584.5Pension and post-retirement contributions
    
    
    28.5
    
    
    
    *
    
    
    
    *
    
    
    
    *
    
    
    
    28.5Total
    
    $
    395.9
    
    
    $
    1,129.6
    
    
    $
    25.1
    
    
    $
    4.2
    
    
    $
    1,554.8
 
 *
    
    We have pension plans covering substantially all former Agere U.S. employees, excluding
management employees hired after June 30, 2003. We also have pension plans covering certain
international employees. Although additional future contributions will be required, the amount and
timing of these contributions will be impacted by actuarial assumptions, the actual rate of return
on plan assets, the level of market interest rates, and the amount of voluntary contributions to
the plans. If current macroeconomic conditions continue, the additional contributions in the years
2009 and 2010 would likely be higher than 2008. Convertible Subordinated Notes
    Operating Lease Obligations
  Purchase Commitments
  FIN 48 Tax Liabilities
   31




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##### Table of Contents



Standby Letters of Credit
  CRITICAL ACCOUNTING POLICIES
  RECENT ACCOUNTING PRONOUNCEMENTS
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
  Credit and Market Liquidity Risks
     
 Item 4. Controls and Procedures
 EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
  32




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##### Table of Contents



CHANGES IN INTERNAL CONTROL
  
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
    
    We depend on a small number of customers. The loss of, or a significant reduction in
revenue from, any of these customers would harm our results of operations.
    
    If we fail to keep pace with technological advances, or if we pursue technologies that do
not become commercially accepted, customers may not buy our products and our results of
operations may be harmed.
    
    We operate in intensely competitive markets, and our failure to compete effectively would
harm our results of operations.
    
    We may fail to realize benefits expected from our merger with Agere Systems, which could
harm our stock price.
    
    Customer orders and ordering patterns can change quickly, making it difficult for us to
predict our revenues and making it possible that our actual revenues may vary materially
from our expectations, which could harm our results of operations and stock price.
    
    We depend increasingly on outside suppliers to manufacture, assemble, package and test
our products; accordingly, any failure to transition successfully our manufacturing,
assembly, packaging and test operations to suppliers, to secure and maintain sufficient
manufacturing capacity or to maintain the quality of our products could harm our business
and results of operations.
    
    Failure to qualify our semiconductor products or our suppliers manufacturing lines with
key customers could harm our business and results of operations.
    
    Any defects in our products could harm our reputation, customer relationships and results
of operations.
    
    As part of our integration efforts with Agere, we intend to transition Ageres operation
to our enterprise resource planning system. Any issues that may arise with this transition
could interfere with our business and harm our operating results or our ability to produce
accurate and timely financial statements.
    
    We may be subject to intellectual property infringement claims and litigation, which
could cause us to incur significant expenses or prevent us from selling our products.
    
    If we are unable to protect or assert our intellectual property rights, our business and
results of operations may be harmed.
    
    A decline in the revenue that we derive from the licensing of intellectual property could
have a significant impact on our net income.
    
    We are exposed to legal, business, political and economic risks associated with our
international operations.
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##### Table of Contents




    
    We use indirect channels of product distribution over
which we have limited control.
    
    Our failure to attract, retain and motivate key employees
could harm our business.
    
    We may engage in acquisitions and strategic alliances, which may not be successful and
could harm our business and operating results.
    
    The semiconductor industry is highly cyclical, which may cause our operating results to
fluctuate.
    
    Our operations and our suppliers operations are subject to natural disasters and other
events outside of our control that may disrupt our business and harm
our operating results.
    
    We are subject to various environmental laws and regulations that could impose
substantial costs on us and may harm our business.
    
    Our stockholder rights plan and Delaware law contain provisions that may inhibit
potential acquisition bids, which may harm our stock price, discourage merger offers or
prevent changes in our management.
    
    Class action litigation due to stock price volatility or other factors could cause us to
incur substantial costs and divert our managements attention
and resources.
    
    A prolonged economic downturn could have a material negative impact on our results of operations or financial condition.Recently, we have seen reports
of significant declines in economic activity and reduced availability
of credit in the United States and other countries around the world.
We have also seen significant declines in prices of securities
generally in equity and debt markets. If these declines persist, they
could negatively affect our business in several ways, in addition to resulting in lower demand for our products.We have defined benefit pension plans under which we are obligated to make future payments to participants. We have set aside funds to meet our anticipated obligations under these plans. These funds are invested in equity and fixed income securities. Recently, market prices of these types of securities have declined significantly. Under U.S. law, if the value of our assets falls below a specified percentage of the present value of our anticipated benefit obligation, we will be required to contribute additional funds to the plans. The value of any required contributions will depend on a number of factors, including the level of funding when a valuation is completed, changes in laws and changes in assumptions, including interest rates, used in calculating the anticipated benefit obligation. If current conditions continue until we perform our next valuation, it is likely that we will be required to make contributions to our pension plans in 2009 that exceed the amounts we will contribute in 2008.In addition, at September 30, 2008, we had $537.5 million of goodwill. We test our goodwill annually for impairment in the fourth quarter of our fiscal year. During the year ended December 31, 2007, we determined that based on then current market conditions in the semiconductor industry, the carrying amount of our goodwill was no longer recoverable, and recorded an impairment charge of $2,019.9 million. If current market conditions worsen, it is possible that we could recognize an additional goodwill impairment.Our foundry partners often require significant amounts of financing in order to build wafer fabrication facilities. If they are unable to obtain financing and anticipated capacity is not completed, we may experience a shortage of capacity, which could increase our costs or reduce our ability to meet customer demand.
 
 Item 6. Exhibits
  34




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SIGNATURES
  LSI CORPORATION
(Registrant)Date:  November 7, 2008
    By
    /s/ Bryon LookBryon LookExecutive Vice President &  Chief Financial Officer 35




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##### Table of Contents



EXHIBIT INDEX
 3.1
    
    By-laws (Incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K, filed August 25, 2008)10.1
    
    Extension of International Assignment Agreement with Andrew Micallef (Incorporated by reference to
Exhibit 10.1 to our Current Report on Form 8-K, filed August 25, 2008)31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a)31.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a)32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. 135032.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350
 36