##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended September 30, 2007
 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(State of Incorporation)
    
    94-2712976(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
  þ o o
  o þ




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##### 



LSI CORPORATION
Form 10-Q
For the Quarter Ended September 30, 2007
INDEX
 PageNo.PART I. FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    3Condensed Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006 (unaudited)
    
    
    3Condensed Consolidated Statements of Operations for the three months and nine months ended September 30, 2007 and October 1, 2006 (unaudited)
    
    
    4Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2007 and October 1, 2006 (unaudited)
    
    
    5Notes to unaudited Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    25Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    37Item 4. Controls and Procedures
    
    
    37PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    38Item 1A. Risk Factors
    
    
    38Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    40Item 6. Exhibits
    
    
    41Signatures
    
    
    42Index to Exhibits
    
    
    43EXHIBIT 10.2EXHIBIT 10.3EXHIBIT 10.4EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
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PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 LSI CORPORATION
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (UNAUDITED)
 September 30,
    
    
    December 31,2007
    
    
    2006(In thousands, exceptper share amounts)ASSETSCash and cash equivalents
    
    $
    749,933
    
    
    $
    327,800Short-term investments
    
    
    347,992
    
    
    
    681,137Accounts receivable, less allowances of $10,108 and $13,871
    
    
    436,021
    
    
    
    348,638Inventories
    
    
    218,416
    
    
    
    209,470Assets held for sale
    
    
    581,308
    
    
    
    20,120Prepaid expenses and other current assets
    
    
    126,834
    
    
    
    48,572Total current assets
    
    
    2,460,504
    
    
    
    1,635,737Property and equipment, net
    
    
    236,501
    
    
    
    86,045Other intangible assets, net
    
    
    1,241,979
    
    
    
    59,484Goodwill
    
    
    2,459,419
    
    
    
    932,323Other assets
    
    
    226,013
    
    
    
    138,555Total assets
    
    $
    6,624,416
    
    
    $
    2,852,144LIABILITIES AND STOCKHOLDERS EQUITYAccounts payable
    
    $
    236,036
    
    
    $
    200,189Accrued salaries, wages and benefits
    
    
    135,675
    
    
    
    82,292Other accrued liabilities
    
    
    350,946
    
    
    
    155,986Income taxes payable
    
    
    24,274
    
    
    
    88,304Total current liabilities
    
    
    746,931
    
    
    
    526,771Long-term debt
    
    
    718,725
    
    
    
    350,000Pension and postretirement benefits
    
    
    204,316
    
    
    
    Income taxes payable  non-current
    
    
    171,522
    
    
    
    Other non-current liabilities
    
    
    144,514
    
    
    
    79,400Total long-term obligations and other liabilities
    
    
    1,239,077
    
    
    
    429,400Commitments and contingencies (Note 12)
    
    
    
    
    
    
    Minority interest in subsidiary
    
    
    245
    
    
    
    235Stockholders equity:Preferred stock, $.01 par value: 2,000 shares authorized; none outstanding
    
    
    
    
    
    
    Common stock, $.01 par value: 1,300,000 shares authorized; 709,770 and
403,680 shares outstanding
    
    
    7,098
    
    
    
    4,037Additional paid-in capital
    
    
    6,327,900
    
    
    
    3,102,178Accumulated deficit
    
    
    (1,716,524
    )
    
    
    (1,220,306
    )Accumulated other comprehensive income
    
    
    19,689
    
    
    
    9,829Total stockholders equity
    
    
    4,638,163
    
    
    
    1,895,738Total liabilities and stockholders equity
    
    $
    6,624,416
    
    
    $
    2,852,144
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LSI CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (UNAUDITED)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2007
    
    
    October 1, 2006
    
    
    September 30, 2007
    
    
    October 1, 2006(In thousands, except per share amounts)Revenues
    
    $
    727,415
    
    
    $
    492,978
    
    
    $
    1,862,769
    
    
    $
    1,458,497Cost of revenues
    
    
    479,550
    
    
    
    284,880
    
    
    
    1,268,418
    
    
    
    858,720Gross profit
    
    
    247,865
    
    
    
    208,098
    
    
    
    594,351
    
    
    
    599,777Research and development
    
    
    182,291
    
    
    
    102,533
    
    
    
    488,071
    
    
    
    305,169Selling, general and administrative
    
    
    104,518
    
    
    
    60,276
    
    
    
    280,931
    
    
    
    193,790Restructuring of operations and other items, net
    
    
    101,231
    
    
    
    2,614
    
    
    
    119,071
    
    
    
    (13,384
    )Acquired in-process research and development
    
    
    
    
    
    
    
    
    
    
    182,900
    
    
    
    (Loss)/income from operations
    
    
    (140,175
    )
    
    
    42,675
    
    
    
    (476,622
    )
    
    
    114,202Interest expense
    
    
    (9,033
    )
    
    
    (6,556
    )
    
    
    (21,972
    )
    
    
    (19,314
    )Interest income and other, net
    
    
    11,808
    
    
    
    13,066
    
    
    
    33,129
    
    
    
    32,912(Loss)/income before income taxes
    
    
    (137,400
    )
    
    
    49,185
    
    
    
    (465,465
    )
    
    
    127,800Provision for income taxes
    
    
    3,200
    
    
    
    5,575
    
    
    
    23,156
    
    
    
    17,175Net (loss)/income
    
    $
    (140,600
    )
    
    $
    43,610
    
    
    $
    (488,621
    )
    
    $
    110,625Net (loss)/income per share:Basic
    
    $
    (0.20
    )
    
    $
    0.11
    
    
    $
    (0.78
    )
    
    $
    0.28Diluted
    
    $
    (0.20
    )
    
    $
    0.11
    
    
    $
    (0.78
    )
    
    $
    0.27Shares used in computing per share amounts:Basic
    
    
    715,733
    
    
    
    399,613
    
    
    
    623,692
    
    
    
    397,408Diluted
    
    
    715,733
    
    
    
    403,715
    
    
    
    623,692
    
    
    
    403,779
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LSI CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 Nine Months EndedSeptember 30, 2007
    
    
    October 1, 2006(In thousands)Operating activities:Net (loss)/income
    
    $
    (488,621
    )
    
    $
    110,625Adjustments:Depreciation and amortization
    
    
    216,720
    
    
    
    65,693Stock-based compensation expense
    
    
    55,772
    
    
    
    36,154Non-cash restructuring and other items
    
    
    88,354
    
    
    
    (2,576
    )Acquired in-process research and development
    
    
    182,900
    
    
    
    Gain on sale of intellectual property
    
    
    
    
    
    
    (15,000
    )Gain on sale of Gresham manufacturing facility and associated intellectual property
    
    
    
    
    
    
    (12,553
    )Write-off of intangible assets acquired in a purchase business combination
    
    
    
    
    
    
    3,325Non-cash foreign exchange loss/(gain)
    
    
    3,221
    
    
    
    (472
    )Loss on write-down/(gain) on sale of equity securities
    
    
    2,396
    
    
    
    (1,998
    )Gain on sale of property and equipment
    
    
    (9,513
    )
    
    
    (245
    )Changes in deferred tax assets and liabilities
    
    
    (6,797
    )
    
    
    24Changes in assets and liabilities, net of assets acquired and liabilities assumed
in business combinations:Accounts receivable, net
    
    
    143,998
    
    
    
    3,063Inventories
    
    
    95,148
    
    
    
    7,158Prepaid expenses and other assets
    
    
    35,061
    
    
    
    (13,380
    )Accounts payable
    
    
    (134,621
    )
    
    
    (1,161
    )Accrued and other liabilities
    
    
    658
    
    
    
    17,104Net cash provided by operating activities
    
    
    184,676
    
    
    
    195,761Investing activities:Purchase of debt securities available-for-sale
    
    
    (154,087
    )
    
    
    (498,408
    )Proceeds from maturities and sales of debt securities available-for-sale
    
    
    493,029
    
    
    
    302,407Purchases of convertible notes/equity securities
    
    
    (10,500
    )
    
    
    (8,150
    )Proceeds from sale of equity securities
    
    
    
    
    
    
    6,092Purchases of property, equipment and software
    
    
    (76,986
    )
    
    
    (44,244
    )Proceeds from sale of property and equipment
    
    
    13,790
    
    
    
    89Proceeds from sale of Consumer group
    
    
    22,555
    
    
    
    Proceeds from sale of intellectual property
    
    
    
    
    
    
    22,670Proceeds from sale of Fort Collins facility
    
    
    
    
    
    
    10,998Proceeds from sale of Colorado Springs facility
    
    
    
    
    
    
    7,029Proceeds from sale of Gresham manufacturing facility
    
    
    
    
    
    
    96,426Proceeds from sale of intellectual property associated with the Gresham manufacturing
facility
    
    
    
    
    
    
    5,100Cash acquired from acquisition of Agere, net of acquisition costs
    
    
    517,712
    
    
    
    Acquisition of SiliconStor, net of cash acquired and transaction costs
    
    
    (52,079
    )
    
    
    Adjustment to goodwill acquired in a prior year for resolution of a pre-acquisition
income tax contingency
    
    
    2,442
    
    
    
    1,373Net cash provided by/(used in) investing activities
    
    
    755,876
    
    
    
    (98,618
    )Financing activities:Issuance of common stock
    
    
    28,994
    
    
    
    36,005Purchase of common stock under repurchase programs
    
    
    (549,113
    )
    
    
    Net cash (used in)/provided by financing activities
    
    
    (520,119
    )
    
    
    36,005Effect of exchange rate changes on cash and cash equivalents
    
    
    1,700
    
    
    
    613Increase in cash and cash equivalents
    
    
    422,133
    
    
    
    133,761Cash and cash equivalents at beginning of year
    
    
    327,800
    
    
    
    264,649Cash and cash equivalents at end of period
    
    $
    749,933
    
    
    $
    398,410Non-cash information:Issuance of common stock in consideration for acquired assets and liabilities of Agere
    
    $
    3,647,021
    
    
    $
    
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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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Accumulated deficit as of December 31, 2006
    
    $
    (1,220,306
    )Impact of adoption of FIN 48
    
    
    (3,393
    )Impact of adoption of EITF 06-02
    
    
    (4,204
    )Accumulated deficit as of January 1, 2007
    
    $
    (1,227,903
    )
   7




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NOTE 2  STOCK-BASED COMPENSATION
   Three Months Ended
    
    
    Nine Months EndedStock-Based Compensation Expense Included In:
    
    September 30, 2007
    
    
    October 1, 2006
    
    
    September 30, 2007
    
    
    October 1, 2006(In thousands)Cost of revenues
    
    $
    2,824
    
    
    $
    1,719
    
    
    $
    7,916
    
    
    $
    5,702Research and development
    
    
    8,916
    
    
    
    3,908
    
    
    
    22,611
    
    
    
    13,073Selling, general and administrative
    
    
    10,035
    
    
    
    5,398
    
    
    
    25,245
    
    
    
    17,379Total stock-based compensation expense
    
    $
    21,775
    
    
    $
    11,025
    
    
    $
    55,772
    
    
    $
    36,154
 Stock Options
  Three Months Ended
    
    Nine Months EndedSeptember 30, 2007
    
    October 1, 2006
    
    September 30, 2007
    
    October 1, 2006Weighted average estimated grant date fair value
    
    $
    2.54
    
    
    $
    2.97
    
    
    $
    3.31
    
    
    $
    3.30Weighted average assumptions in calculation:Expected life (years)
    
    
    4.36
    
    
    
    4.36
    
    
    
    4.35
    
    
    
    4.32Risk-free interest rate
    
    
    4
    %
    
    
    5
    %
    
    
    5
    %
    
    
    5
    %Volatility
    
    
    49
    %
    
    
    48
    %
    
    
    46
    %
    
    
    48
    %
     8




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Weighed Average Exercise
    
    
    Weighted Average
 Remaining
    
    
    AggregateNumber of
    
    
    Price Per
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Shares
    
    
    Term
    
    
    Value(In thousands)
    
    
    
    
    
    (In years)
    
    
    (In thousands)Options outstanding at December 31, 2006
    
    
    56,750
    
    
    $
    11.92
    
    
    
    
    
    
    
    Options assumed in Agere merger
    
    
    48,884
    
    
    
    22.41
    
    
    
    
    
    
    
    Options granted
    
    
    10,766
    
    
    
    9.26
    
    
    
    
    
    
    
    Options exercised
    
    
    (2,821
    )
    
    
    (6.10
    )
    
    
    
    
    
    
    Options canceled
    
    
    (9,344
    )
    
    
    (15.13
    )
    
    
    
    
    
    
    Options outstanding at September 30, 2007
    
    
    104,235
    
    
    $
    16.43
    
    
    
    3.68
    
    
    $
    41,417Options exercisable at September 30, 2007
    
    
    70,336
    
    
    $
    20.47
    
    
    
    2.75
    
    
    $
    27,722
   Employee Stock Purchase Plans
  Three Months EndedJuly 1, 2007
    
    July 2, 2006Weighted average estimated grant date fair value
    
    $
    2.37
    
    
    $
    3.05Weighted average assumptions in calculation:Expected life (years)
    
    
    0.8
    
    
    
    0.8Risk-free interest rate
    
    
    5
    %
    
    
    5
    %Volatility
    
    
    38
    %
    
    
    39
    %
 Restricted Stock Awards
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Number ofShares(In thousands)Non-vested shares at December 31, 2006
    
    
    1,910Assumed in Agere merger
    
    
    9,141Granted
    
    
    2,282Vested
    
    
    (1,473
    )Forfeited
    
    
    (544
    )Non-vested shares at September 30, 2007
    
    
    11,316
  NOTE 3  BUSINESS COMBINATIONS
  Merger with Agere
     Fair value of LSI common shares issued
    
    $
    3,647,021(a) Fair value of stock awards assumed
    
    
    218,713(b) Fair value of unvested stock awards assumed
    
    
    (168,555
    )(a)-(b) Fair value of the vested options assumed
    
    
    50,158Direct transaction costs
    
    
    22,970Total estimated purchase price
    
    $
    3,720,149
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Purchase Price Allocation:
  Cash
    
    $
    540,140Accounts receivable
    
    
    222,169Inventory
    
    
    120,848Assets held for sale
    
    
    122,756Property and equipment
    
    
    162,047Accounts payable
    
    
    (167,947
    )Pension and postretirement liabilities
    
    
    (214,607
    )Convertible Notes
    
    
    (370,249
    )Other liabilities
    
    
    (183,359
    )Net assets acquired
    
    
    231,798Identifiable intangible assets
    
    
    1,727,700In-process research and development
    
    
    176,400Goodwill
    
    
    1,584,251Total estimated purchase price
    
    $
    3,720,149
   Weighted AverageIdentifiable Intangible Assets
    
    Fair Value
    
    
    Useful Life(In thousands)
    
    
    (In years)Current technology
    
    $
    844,500
    
    
    
    8.5Customer base
    
    
    513,000
    
    
    
    10Patent licensing
    
    
    317,200
    
    
    
    10Order backlog
    
    
    53,000
    
    
    
    0.5Total acquired identifiable intangible assets
    
    $
    1,727,700
 Acquired In-Process Research and Development:
  11




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Revenueprojections byEstimated cost
    
    Discount
    
    project extendIPR&D
    
    to complete
    
    rate
    
    throughProject
    
    (In millions)
    
    (In millions)Storage  read channel and preamps
    
    $
    36.2
    
    
    $
    17.8
    
    
    
    13.8
    %
    
    
    2016Mobility  HSPDA for 3G
    
    $
    31.2
    
    
    $
    144.2
    
    
    
    13.8
    %
    
    
    2016Networkingmodems, Firewire, serdes, media gateway, VoIP, network processors, Ethernet, mappers and framers
    
    $
    109.0
    
    
    $
    68.0
    
    
    
    13.8
    %
    
    
    2021
  Pro Forma Results:
   Three Months Ended
    
    Nine Months EndedOctober 1, 2006
    
    September 30, 2007
    
    October 1, 2006($ in thousands except per share amounts)Revenues
    
    $
    849,410
    
    
    $
    2,197,613
    
    
    $
    2,533,113Net loss
    
    $
    (5,599
    )
    
    $
    (309,374
    )
    
    $
    (120,648
    )Basic loss per share
    
    $
    (0.01
    )
    
    $
    (0.41
    )
    
    $
    (0.16
    )Diluted loss per share
    
    $
    (0.01
    )
    
    $
    (0.41
    )
    
    $
    (0.16
    )
 Acquisition of SiliconStor, Inc.
  Fair Value ofEntity Name;
    
    
    
    
    
    
    
    
    
    
    
    
    
    Tangible NetSegment Included in;
    
    
    
    
    
    Total
    
    
    
    
    
    
    Assets/
    
    
    
    
    
    
    
    
    
    
    In-ProcessDescription of
    
    
    
    
    
    Purchase
    
    
    Type of
    
    
    (Liabilities)
    
    
    
    
    
    
    Amortizable
    
    
    Research andAcquired Business
    
    Acquisition Date
    
    
    Price
    
    
    Consideration
    
    
    Acquired
    
    
    Goodwill
    
    
    Intangible Assets
    
    
    DevelopmentSiliconStor, Inc.;Semiconductor
segment;Silicon
solutions for
enterprise
storage based on
SAS and FC-SATA
    
    March 13, 2007
    
    $
    56.4
    
    
    $56.4 cash
    
    $
    1.5
    
    
    $
    37.8
    
    
    $
    10.6
    
    
    $
    6.5
  12




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NOTE 4  RESTRUCTURING AND OTHER ITEMS
  Restructuring and Impairment of Long-Lived Assets
 First Quarter of 2007:
  
    
    $10.4 million net gain was recorded for the sale of land in Colorado, which had a net
book value of $2.0 million. Total proceeds from the sale were $12.4 million. The gain was
offset in part by a charge of $0.2 million associated with certain other asset write-offs;
    
    A credit of $0.5 million was recorded for changes in sublease assumptions for previously
accrued facility lease exit costs;
    
    An expense of $0.7 million was recorded to reflect the change in time value of accruals
for facility lease exit costs; and
    
    An expense of $1.9 million was recorded for severance and termination benefits for
employees.
 Second
Quarter of 2007:
    
    
    An expense of $24.1 million was recorded for severance and termination benefits for
employees as a result of the actions discussed above  $11.9 million was related to the
Consumer restructuring action, $9.7 million related to the workforce
reduction announced on June 27, 2007, and $2.5 million related to the transition of Wichita
manufacturing operations to manufacturing partners;
 13




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##### Table of Contents




    
    An expense of $0.3 million was recorded for changes in sublease assumptions for
previously accrued facility lease exit costs;
    
    An expense of $0.7 million was recorded to reflect the change in time value of accruals
for facility lease exit costs; and
    
    An expense of $0.8 million was recorded for certain asset write-offs and merger related
costs.
 Third
Quarter of 2007:
   
    
    A $93.6 million charge was recorded related to the sale of MPG to Infineon. The
components of this charge are as follows:
 o
    
    A charge of $15.1 million for the difference between the proceeds of $450
million received at closing and the $465.1 million net book value of MPG as of
September 30, 2007;o
    
    A charge of $27.5 million for future credits Infineon will receive from
the Company on purchases of finished goods inventory;o
    
    A charge of $21.8 million for future inventory pricing benefits Infineon
will receive for products manufactured at Silicon Manufacturing Partners Pte. Ltd.
(SMP), a joint venture LSI has with Chartered Semiconductor Manufacturing Ltd.
(Chartered Semiconductor). See Note 12.o
    
    A charge of $15.5 million for the acceleration of stock awards previously
granted to MPG employees whose positions will be eliminated as part of the sale of
MPG to Infineon;o
    
    A charge of $4.5 million for MPG-related lease termination costs not
assumed by Infineon, a $4.5 million charge for estimated transaction costs, a $2.9
million charge for severance and termination benefits for employees and a charge of
$1.8 million for the write-off of Mobility fixed assets not acquired by Infineon.
 
    
    A charge of $3.0 million related to the sale of Thailand assets to STATS ChipPAC Ltd. to
adjust the carrying value of the assets held for sale to fair market value;
    
    A charge of $2.1 million related to the sale of the Consumer group. The components of
this charge are as follows:
 o
    
    A credit of $1.3 million for the difference between the $22.6 million
received and the $21.3 million net book value of the assets as of the date the
transaction closed;o
    
    A  $2.5 million charge related to facility lease termination costs not
assumed by Magnum; ando
    
    A $0.9 million charge recorded for severance and termination benefits for
employees due to a change in estimates.
 
    
    A charge of $1.7 million was recorded for the change in assumptions and time value of
accruals for previously recorded facility lease exit costs;
    
    A charge of $0.8 million was recorded for severance and termination benefits for
employees of which $0.3 million related to the transition of Kansas manufacturing operations
to manufacturing partners and $0.5 million related to the general workforce reduction action
announced June 27, 2007.
 14




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##### Table of Contents



Balance at
    
    
    Restructuring
    
    
    Utilized
    
    
    Balance at
    
    
    Restructuring
    
    
    Utilized
    
    
    Balance at
    
    
    Restructuring
    
    
    Utilized
    
    
    Balance atDecember 31,
    
    
    Expense
    
    
    during Q1
    
    
    April 1,
    
    
    Expense
    
    
    during Q2
    
    
    July 1,
    
    
    Expense
    
    
    during Q3
    
    
    September 30,2006
    
    
    Q1 2007
    
    
    2007
    
    
    2007
    
    
    Q2 2007
    
    
    2007
    
    
    2007
    
    
    Q3 2007
    
    
    2007
    
    
    2007(In thousands)Write-down of
excess assets and
other liabilities
(a)
    
    $
    
    
    
    $
    (10,143
    )
    
    $
    10,143
    
    
    $
    
    
    
    $
    785
    
    
    $
    (323
    )
    
    $
    462
    
    
    $
    72,646
    
    
    $
    (72,883
    )
    
    $
    225Lease terminations
(b)
    
    
    23,169
    
    
    
    189
    
    
    
    (2,952
    )
    
    
    20,406
    
    
    
    1,027
    
    
    
    (2,082
    )
    
    
    19,351
    
    
    
    8,526
    
    
    
    (2,387
    )
    
    
    25,490Payments to
employees for
severance (c)
    
    
    342
    
    
    
    1,874
    
    
    
    (449
    )
    
    
    1,767
    
    
    
    24,108
    
    
    
    (1,917
    )
    
    
    23,958
    
    
    
    20,059
    
    
    
    (19,740
    )
    
    
    24,277Total
    
    $
    23,511
    
    
    $
    (8,080
    )
    
    $
    6,742
    
    
    $
    22,173
    
    
    $
    25,920
    
    
    $
    (4,322
    )
    
    $
    43,771
    
    
    $
    101,231
    
    
    $
    (95,010
    )
    
    $
    49,992
 
 (a)
    
    The credit in the first quarter of 2007 includes the gain from the sale of land in
Colorado. Utilization in the third quarter of 2007 reflects the reclassification of $53.8
million to other liability accounts and $19.1 million of asset write-downs that were
recorded as the reduction of assets not resulting in a liability.(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 represent cash severance payments to employees. The balance remaining
for severance is expected to be paid by the end of 2008.  Restructuring Actions Associated with the Agere Merger
  The reserves established as of April 2, 2007 included the following:
 
    
    A reserve of $50 million for severance and termination benefits for employees as a result
of the restructuring actions related to the Thailand and Singapore assembly and test
facilities mentioned above;
 15




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##### Table of Contents




    
    A reserve of $14 million for facility lease exit costs, primarily in Singapore and
Europe;
    
    A reserve of $29 million for stock related compensation for employees whose positions
were eliminated.
 Third Quarter of 2007:
  
    
    A net credit of $1.4 million was recorded for changes in estimated payments to employees
for severance previously recorded for Thailand and other restructuring actions;
    
    A net credit of $0.5 million was recorded, which included a $1.5 million credit relating
to changes in assumptions for Singapore lease termination costs offset by an expense of $0.5
million related to contract termination costs and an expense of $0.5 million which was
recorded to reflect the change in time value of accruals for facility lease termination
costs;
    
    $0.9 million recorded for additional stock compensation charges for employees whose
positions were eliminated.
   Balance at
    
    
    Utilized
    
    
    Balance at
    
    
    Changes in
    
    
    Utilized
    
    
    Balance atApril 2,
    
    
    during Q2
    
    
    July 1,
    
    
    estimates
    
    
    during Q3
    
    
    September 30,2007
    
    
    2007
    
    
    2007
    
    
    Q3 2007
    
    
    2007
    
    
    2007(in thousands)Lease
terminations (a)
    
    $
    14,464
    
    
    $
    
    
    
    $
    14,464
    
    
    $
    (533
    )
    
    $
    (547
    )
    
    $
    13,384Payments to employees for severance (b)
    
    
    50,087
    
    
    
    (4,070
    )
    
    
    46,017
    
    
    
    (1,428
    )
    
    
    (12,252
    )
    
    
    32,337Stock compensation charges in
accordance with FAS 123R (c)
    
    
    28,841
    
    
    
    
    
    
    
    28,841
    
    
    
    951
    
    
    
    (2,276
    )
    
    
    27,516Total
    
    $
    93,392
    
    
    $
    (4,070
    )
    
    $
    89,322
    
    
    $
    (1,010
    )
    
    $
    (15,075
    )
    
    $
    73,237
 
 (a)
    
    Amount utilized represents cash payments. The balance remaining for real estate lease
terminations is expected to be paid during the remaining terms of these contracts, which
extend through 2013.(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)
    
    Amount utilized represents stock grants exercised. Amounts accrued represent the value of
stock options and restricted units LSI expects to accelerate upon termination of the
holders employment awarded to employees whose positions are to be eliminated. The balance
is expected to be utilized by the end of 2009. NOTE 5  BENEFIT OBLIGATIONS
  16




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##### Table of Contents



Net Periodic Benefit Cost
 Three months ended
    
    
    Nine months endedSeptember 30, 2007
    
    
    September 30, 2007Postretirement
    
    
    
    
    
    
    PostretirementPension Benefits
    
    
    Benefits
    
    
    Pension Benefits
    
    
    Benefits(In thousands)Service cost
    
    $
    1,867
    
    
    $
    41
    
    
    $
    3,734
    
    
    $
    82Interest cost
    
    
    18,395
    
    
    
    932
    
    
    
    36,791
    
    
    
    1,863Expected return on plan assets
    
    
    (21,026
    )
    
    
    (1,235
    )
    
    
    (41,885
    )
    
    
    (2,429
    )Amortization of prior service cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Recognized net actuarial loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net periodic benefit cost
    
    
    (764
    )
    
    
    (262
    )
    
    
    (1,360
    )
    
    
    (484
    )Curtailment gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Settlement charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total benefit cost
    
    $
    (764
    )
    
    $
    (262
    )
    
    $
    (1,360
    )
    
    $
    (484
    )
  September 30, 2007PostretirementPension Benefits
    
    
    Benefits(In thousands)Accrued benefit liability
    
    $
    (196,363
    )
    
    $
    (1,465
    )Accumulated other comprehensive loss
    
    
    
    
    
    
    Net amount realized
    
    $
    (196,363
    )
    
    $
    (1,465
    )
   Pension
    
    Postretirement
    
    PostretirementBenefits
    
    Health Benefits
    
    Life BenefitsDiscount rate to determine net periodic cost
    
    
    6.0
    %
    
    
    6.0
    %
    
    
    6.0
    %Discount rate to determine the benefit obligation as of April 2, 2007
    
    
    6.0
    %
    
    
    6.0
    %
    
    
    6.0
    %Rate of compensation increase
    
    
    4.0
    %
    
    
    N/A
    
    
    
    4.0
    %Expected average rate of return on plan assets
    
    
    8.25% / 8.0
    %*
    
    
    N/A
    
    
    
    7.75
    %
 
 *
    
    Rates vary by plan  Allocation as of April 2, 2007Pension
    
    PostretirementBenefits
    
    BenefitsEquity Securities
    
    
    54
    %
    
    
    40
    %Debt Securities
    
    
    46
    %
    
    
    60
    %
 17




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##### Table of Contents



Benefit Payments
  Pension
    
    PostretirementBenefits
    
    Benefits(In thousands)April 2 through December 31, 2007
    
    $
    65,774
    
    
    $
    16,335Year ended December 31, 2008
    
    $
    89,261
    
    
    $
    17,929Year ended December 31, 2009
    
    $
    86,048
    
    
    $
    1,355Year ended December 31, 2010
    
    $
    85,954
    
    
    $
    1,472Year ended December 31, 2011
    
    $
    85,817
    
    
    $
    1,591Years ended December 31, 2012 through December 31, 2016
    
    $
    433,612
    
    
    $
    10,002
  NOTE 6  INTANGIBLE ASSETS AND GOODWILL
 Intangible Assets
 September 30,
    
    
    December 31,2007
    
    
    2006(In thousands)Semiconductor segment
    
    $
    1,205,149
    
    
    $
    16,701Storage Systems segment
    
    
    36,830
    
    
    
    42,783Total intangible assets, net of accumulated amortization
    
    $
    1,241,979
    
    
    $
    59,484
   September 30, 2007
    
    
    December 31, 2006Gross
    
    
    Accumulated
    
    
    Gross
    
    
    AccumulatedCarrying Amount
    
    
    Amortization
    
    
    Carrying Amount
    
    
    Amortization(In thousands)Semiconductor:Current technology
    
    $
    833,358
    
    
    $
    (276,773
    )
    
    $
    240,458
    
    
    $
    (232,716
    )Trademarks
    
    
    26,785
    
    
    
    (26,255
    )
    
    
    26,285
    
    
    
    (25,446
    )Customer base
    
    
    363,488
    
    
    
    (15,318
    )
    
    
    8,788
    
    
    
    (4,394
    )Non-compete agreements
    
    
    1,949
    
    
    
    (1,007
    )
    
    
    849
    
    
    
    (625
    )Existing purchase orders
    
    
    200
    
    
    
    (200
    )
    
    
    200
    
    
    
    (200
    )Supply agreement
    
    
    100
    
    
    
    (100
    )
    
    
    
    
    
    
    Patent licensing
    
    
    314,126
    
    
    
    (18,259
    )
    
    
    
    
    
    
    Order backlog
    
    
    41,300
    
    
    
    (41,300
    )
    
    
    
    
    
    
    Workforce
    
    
    3,567
    
    
    
    (512
    )
    
    
    3,567
    
    
    
    (65
    )Subtotal
    
    
    1,584,873
    
    
    
    (379,724
    )
    
    
    280,147
    
    
    
    (263,446
    )Storage Systems:Current technology
    
    
    164,339
    
    
    
    (128,925
    )
    
    
    164,339
    
    
    
    (124,618
    )Trademarks
    
    
    7,150
    
    
    
    (7,150
    )
    
    
    7,150
    
    
    
    (7,120
    )Customer base
    
    
    5,010
    
    
    
    (5,010
    )
    
    
    5,010
    
    
    
    (5,010
    )Non-compete agreements
    
    
    1,600
    
    
    
    (889
    )
    
    
    1,600
    
    
    
    (33
    )Supply agreement
    
    
    8,147
    
    
    
    (8,147
    )
    
    
    8,147
    
    
    
    (7,472
    )Trade names
    
    
    800
    
    
    
    (95
    )
    
    
    800
    
    
    
    (10
    )Subtotal
    
    
    187,046
    
    
    
    (150,216
    )
    
    
    187,046
    
    
    
    (144,263
    )Total intangible assets
    
    $
    1,771,919
    
    
    $
    (529,940
    )
    
    $
    467,193
    
    
    $
    (407,709
    )
 18




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##### Table of Contents



Nine Months Ended
    
    
    Year EndedWeighted
    
    
    September 30,
    
    
    December 31,Average Lives
    
    
    2007
    
    
    2006
    
    
    2005(In months)
    
    
    (In thousands)Current technology
    
    
    58
    
    
    $
    65,392
    
    
    $
    25,129
    
    
    $
    53,185Trademarks
    
    
    83
    
    
    
    839
    
    
    
    4,119
    
    
    
    5,001Customer base
    
    
    44
    
    
    
    13,809
    
    
    
    2,359
    
    
    
    2,427Non-compete agreements
    
    
    27
    
    
    
    1,238
    
    
    
    182
    
    
    
    281Supply agreement
    
    
    32
    
    
    
    775
    
    
    
    225
    
    
    
    1,590Patent licensing
    
    
    36
    
    
    
    18,259
    
    
    
    
    
    
    
    Order backlog
    
    
    2
    
    
    
    53,000
    
    
    
    
    
    
    
    Workforce
    
    
    72
    
    
    
    447
    
    
    
    65
    
    
    
    Trade names
    
    
    84
    
    
    
    86
    
    
    
    10
    
    
    
    Total
    
    
    50
    
    
    $
    153,845
    
    
    $
    32,089
    
    
    $
    62,484
  Fiscal Year:
    
    Amount:(In thousands)2007 (October 1, 2007 through December 31, 2007)
    
    $
    37,3612008
    
    
    218,2852009
    
    
    210,2132010
    
    
    169,2682011 and thereafter
    
    
    606,852Total
    
    $
    1,241,979
  Semiconductor
    
    
    Storage Systemssegment
    
    
    segment
    
    
    Total(In thousands)Balance as of January 1, 2007
    
    $
    756,699
    
    
    $
    175,624
    
    
    $
    932,323Goodwill acquired during the year*
    
    
    1,622,041
    
    
    
    
    
    
    
    1,622,041Adjustment to goodwill acquired in a prior year for the
resolution of a pre-acquisition income tax contingency
    
    
    (2,442
    )
    
    
    
    
    
    
    (2,442
    )Reduction in goodwill associated with the sale of Mobility
    
    
    (53,300
    )
    
    
    
    
    
    
    (53,300
    )Adjustment to goodwill related to changes in estimates of
EITF 95-3 liabilities initially recorded as of April 2,
2007 and fair value adjustments
    
    
    (3,381
    )
    
    
    
    
    
    
    (3,381
    )Adjustment to goodwill related to FIN 48
    
    
    (35,822
    )
    
    
    
    
    
    
    (35,822
    )Balance as of September 30, 2007
    
    $
    2,283,795
    
    
    $
    175,624
    
    
    $
    2,459,419
 
 *
    
    During the nine months ended September 30, 2007, the Company recorded $37.8 million and
$1,584.3 million of goodwill in connection with the acquisition of SiliconStor and Agere,
respectively, in the Semiconductor segment.  19




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##### Table of Contents



NOTE 7  OTHER BALANCE SHEET DETAILS
 September 30,
    
    
    December 31,2007
    
    
    2006(In thousands)Cash and cash equivalents:Cash in financial institutions
    
    $
    74,966
    
    
    $
    50,478Cash equivalents
    
    
    674,967
    
    
    
    277,322Total cash and cash equivalents
    
    $
    749,933
    
    
    $
    327,800Available-for-sale debt securities:Asset and mortgage-backed securities
    
    $
    209,109
    
    
    $
    363,723U.S. government and agency securities
    
    
    104,958
    
    
    
    272,287Corporate and municipal debt securities
    
    
    33,925
    
    
    
    45,127Total short-term investments
    
    $
    347,992
    
    
    $
    681,137Long-term investments in equity securities:Marketable equity securities available-for-sale
    
    $
    2,353
    
    
    $
    2,827Non-marketable equity securities
    
    
    18,080
    
    
    
    12,973Total long-term investments in equity securities
    
    $
    20,433
    
    
    $
    15,800Inventories:Raw materials
    
    $
    26,712
    
    
    $
    44,151Work-in-process
    
    
    83,235
    
    
    
    52,497Finished goods
    
    
    108,469
    
    
    
    112,822Total inventories
    
    $
    218,416
    
    
    $
    209,470
 Interest
    
    
    Conversion
    
    
    September 30,
    
    
    December 31,Maturity
    
    
    Rate
    
    
    Price
    
    
    2007
    
    
    2006(In thousands)Long-term debt:2003 Convertible Subordinated Notes
    
    May 2010
    
    
    4.0
    %
    
    $
    13.42
    
    
    $
    350,000
    
    
    $
    350,0002002 Convertible Subordinated Notes
    
    December 2009
    
    
    6.5
    %
    
    $
    15.31
    
    
    
    361,660
    
    
    
    Accrued debt premium *
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,589
    
    
    
    $
    720,249
    
    
    $
    350,000Amortization of accrued debt premium
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,524
    )
    
    
    Total long-term debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    718,725
    
    
    $
    350,000
 
 *
    
    Upon the completion of merger with Agere, the Company guaranteed Ageres 2002 Convertible
Subordinated Notes. The face value of these Notes was adjusted to the fair value of
approximately $370 million as of April 2, 2007, the purchase date. The accrued debt premium
will be fully amortized by December 2009. NOTE 8  RECONCILIATION OF BASIC AND DILUTED (LOSS)/INCOME PER SHARE
  Three Months EndedSeptember 30, 2007
    
    
    October 1, 2006Per-Share
    
    
    
    
    
    
    
    
    
    
    Per-ShareLoss*
    
    
    Shares+
    
    
    Amount
    
    
    Income*
    
    
    Shares+
    
    
    Amount(In thousands except per share amounts)Basic EPS:Net (loss)/income available to common stockholders
    
    $
    (140,600
    )
    
    
    715,733
    
    
    $
    (0.20
    )
    
    $
    43,610
    
    
    
    399,613
    
    
    $
    0.11Stock options, employee stock purchase rights and
restricted stock unit awards
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,102
    
    
    
    Diluted EPS:Net (loss)/income available to common stockholders
    
    $
    (140,600
    )
    
    
    715,733
    
    
    $
    (0.20
    )
    
    $
    43,610
    
    
    
    403,715
    
    
    $
    0.11
 Nine Months EndedSeptember 30, 2007
    
    
    October 1, 2006(In thousands except per share amounts)Per-Share
    
    
    
    
    
    
    
    
    
    
    Per-ShareLoss*
    
    
    Shares+
    
    
    Amount
    
    
    Income*
    
    
    Shares+
    
    
    AmountBasic EPS:Net (loss)/income available to common stockholders
    
    $
    (488,621
    )
    
    
    623,692
    
    
    $
    (0.78
    )
    
    $
    110,625
    
    
    
    397,408
    
    
    $
    0.28Stock options, employee stock purchase rights and
restricted stock unit awards
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,371
    
    
    
    Diluted EPS:Net (loss)/income available to common stockholders
    
    $
    (488,621
    )
    
    
    623,692
    
    
    $
    (0.78
    )
    
    $
    110,625
    
    
    
    403,779
    
    
    $
    0.27
 
 *
    
    Numerator+
    
    Denominator 20




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##### Table of Contents



NOTE 9  SEGMENT REPORTING
   Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2007
    
    
    October 1, 2006
    
    
    September 30, 2007
    
    
    October 1, 2006(In thousands)Revenues:Semiconductor
    
    $
    530,013
    
    
    $
    313,273
    
    
    $
    1,287,227
    
    
    $
    919,038Storage Systems
    
    
    197,402
    
    
    
    179,705
    
    
    
    575,542
    
    
    
    539,459Total
    
    $
    727,415
    
    
    $
    492,978
    
    
    $
    1,862,769
    
    
    $
    1,458,497(Loss)/income from operations:Semiconductor
    
    $
    (147,344
    )
    
    $
    26,276
    
    
    $
    (485,996
    )
    
    $
    72,177Storage Systems
    
    
    7,169
    
    
    
    16,399
    
    
    
    9,374
    
    
    
    42,025Total
    
    $
    (140,175
    )
    
    $
    42,675
    
    
    $
    (476,622
    )
    
    $
    114,202
   21




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##### Table of Contents



Significant Customers
  Three Months Ended
    
    Nine Months EndedSeptember 30, 2007
    
    October 1, 2006
    
    September 30, 2007
    
    October 1, 2006Semiconductor segment:Number of significant customers
    
    2
    
    1
    
    2
    
    1Percentage of segment revenues
    
    29%, 17%
    
    19%
    
    26%, 14%
    
    19%Storage Systems segment:Number of significant customers
    
    3
    
    3
    
    2
    
    2Percentage of segment revenues
    
    46%, 15%, 11%
    
    45%, 15%, 10%
    
    46%, 18%
    
    45%, 15%Consolidated:Number of significant customers
    
    3
    
    2
    
    2
    
    2Percentage of consolidated revenues
    
    21%, 13%,12%
    
    17%, 12%
    
    18%, 15%
    
    18%, 12%
   NOTE 10  COMPREHENSIVE (LOSS)/INCOME
  Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2007
    
    
    October 1, 2006
    
    
    September 30, 2007
    
    
    October 1, 2006(In thousands)Net (loss)/income
    
    $
    (140,600
    )
    
    $
    43,610
    
    
    $
    (488,621
    )
    
    $
    110,625Change in unrealized gain/(loss) on available-for-sale securities
    
    
    2,217
    
    
    
    3,867
    
    
    
    4,354
    
    
    
    (4,893
    )Change in foreign currency translation adjustments
    
    
    8,862
    
    
    
    (916
    )
    
    
    5,506
    
    
    
    180Comprehensive (loss)/income
    
    $
    (129,521
    )
    
    $
    46,561
    
    
    $
    (478,761
    )
    
    $
    105,912
 NOTE 11  RELATED PARTY TRANSACTIONS
    22




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##### Table of Contents



NOTE 12  COMMITMENTS, CONTINGENCIES AND LEGAL MATTERS
  Purchase Commitments
   Guarantees
 Product Warranties:
   Balance as of December 31, 2006
    
    $
    11,325Accruals for warranties issued during the period
    
    
    11,490Accruals related to pre-existing warranties (including changes in estimates)
    
    
    (266
    )Accruals assumed in Agere merger
    
    
    1,819Settlements made during the period (in cash or in kind)
    
    
    (10,060
    )Balance as of September 30, 2007
    
    $
    14,308
 Standby Letters of Credit:
  23




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##### Table of Contents



Legal Matters
   NOTE 13  SUBSEQUENT EVENTS
    24




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  OVERVIEW
          25




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##### Table of Contents



RESULTS OF OPERATIONS
  Revenues
  Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2007
    
    
    October 1, 2006
    
    
    September 30, 2007
    
    
    October 1, 2006(In millions)Semiconductor segment
    
    $
    530.0
    
    
    $
    313.3
    
    
    $
    1,287.2
    
    
    $
    919.1Storage Systems segment
    
    
    197.4
    
    
    
    179.7
    
    
    
    575.6
    
    
    
    539.4Consolidated
    
    $
    727.4
    
    
    $
    493.0
    
    
    $
    1,862.8
    
    
    $
    1,458.5
  Three
months ended September 30, 2007 compared to the three months
ended October 1, 2006:
  Semiconductor
Segment:
   
    
    A decrease in revenues from consumer products due to the sale of the product line;
    
    A decrease in demand for semiconductors used in consumer product applications such as
digital audio players where our customers solution was not included in the new generation
of its customers products;
    
    A decline in demand for semiconductors used in storage interface connect products; and
    
    A decrease in demand for semiconductors used in communication products such as
telecommunications and printing.
 26




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##### Table of Contents



Storage Systems Segment:
  
    
    Increased demand from the ramp of our entry level SAS storage products, which were
introduced in the fourth quarter of 2006; and
    
    Increased demand for our premium software features.
  Nine
months ended September 30, 2007 compared to the nine months
ended October 1, 2006:
  Semiconductor Segment:
   
    
    A decrease in revenues from consumer products due to the sale of the product line;
    
    Decreased demand for semiconductors used in consumer product applications such as digital
audio players where our customers solution was not included in the new generation of its
customers products, and a decrease in demand for semiconductors used in DVD products and
cable set-top box solutions;
    
    A decline in demand for semiconductors used in storage interface connect products; and
    
    A decrease in demand for semiconductors used in communication product applications such
as telecommunications and printing.
 Storage Systems Segment:
  
    
    Increased demand from the ramp of our entry level SAS storage products, which were
introduced in the fourth quarter of 2006; and
    
    Increased demand for our premium software features.
   27




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##### Table of Contents



Revenues by Geography
  Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2007
    
    
    October 1, 2006
    
    
    September 30, 2007
    
    
    October 1, 2006(In millions)North America
    
    $
    205.2
    
    
    $
    219.9
    
    
    $
    623.9
    
    
    $
    692.4Asia, including Japan
    
    
    440.3
    
    
    
    224.3
    
    
    
    1,016.2
    
    
    
    605.3Europe and Middle East (EMEA)
    
    
    81.9
    
    
    
    48.8
    
    
    
    222.7
    
    
    
    160.8Total
    
    $
    727.4
    
    
    $
    493.0
    
    
    $
    1,862.8
    
    
    $
    1,458.5
 Three
months ended September 30, 2007 compared to the three months
ended October 1, 2006:
  Asia including Japan:
  Nine
months ended September 30, 2007 compared to the nine months
ended October 1, 2006:
    28




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##### Table of Contents



Gross Profit Margin, Operating Costs and Expenses
  Gross
Profit Margin:
 Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2007
    
    
    October 1, 2006
    
    
    September 30, 2007
    
    
    October 1, 2006(Dollars in millions)Semiconductor segment
    
    $
    175.9
    
    
    $
    144.1
    
    
    $
    396.3
    
    
    $
    415.4Percentage of revenues
    
    
    33.2
    %
    
    
    46.0
    %
    
    
    30.8
    %
    
    
    45.2
    %Storage Systems segment
    
    $
    72.0
    
    
    $
    64.0
    
    
    $
    198.1
    
    
    $
    184.4Percentage of revenues
    
    
    36.5
    %
    
    
    35.6
    %
    
    
    34.4
    %
    
    
    34.2
    %Consolidated
    
    $
    247.9
    
    
    $
    208.1
    
    
    $
    594.4
    
    
    $
    599.8Percentage of revenues
    
    
    34.1
    %
    
    
    42.2
    %
    
    
    31.9
    %
    
    
    41.1
    %
  Three
months ended September 30, 2007 compared to the three months
ended October 1, 2006:
  Semiconductor Segment:
  
    
    An increase in the amortization of intangible assets primarily related to the acquisition
of Agere; and
    
    $8 million in charges recorded for a wafer supply agreement with ON Semiconductor
resulting from a decline in demand in the third quarter of 2007.
 Storage Systems Segment:
  Nine
months ended September 30, 2007 compared to the nine months
ended October 1, 2006:
  Semiconductor Segment:
  
    
    An increase in the amortization of intangible assets primarily related to the acquisition
of Agere;
    
    Inventory charges of $47.9 million related to fair valuing the inventory acquired from
Agere; and
    
    $19.0 million in charges related to a wafer supply agreement with ON Semiconductor
resulting from a decline in demand during the nine months ended September 30, 2007.
 29




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##### Table of Contents



Storage Systems Segment:
  Research
and Development:
 Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2007
    
    
    October 1, 2006
    
    
    September 30, 2007
    
    
    October 1, 2006(Dollar in millions)Semiconductor segment
    
    $
    146.4
    
    
    $
    77.0
    
    
    $
    391.1
    
    
    $
    236.3Percentage of revenues
    
    
    27.6
    %
    
    
    24.6
    %
    
    
    30.4
    %
    
    
    25.7
    %Storage Systems segment
    
    $
    35.9
    
    
    $
    25.5
    
    
    $
    97.0
    
    
    $
    68.9Percentage of revenues
    
    
    18.2
    %
    
    
    14.2
    %
    
    
    16.9
    %
    
    
    12.8
    %Consolidated
    
    $
    182.3
    
    
    $
    102.5
    
    
    $
    488.1
    
    
    $
    305.2Percentage of revenues
    
    
    25.1
    %
    
    
    20.8
    %
    
    
    26.2
    %
    
    
    20.9
    %
 Three
months ended September 30, 2007 compared to the three months
ended October 1, 2006:
  Semiconductor Segment:
  Storage Systems Segment:
  Nine
months ended September 30, 2007 compared to the nine months
ended October 1, 2006:
  Semiconductor Segment:
  Storage Systems Segment:
  30




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##### Table of Contents



Selling,
General and Administrative:
 Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2007
    
    
    October 1, 2006
    
    
    September 30, 2007
    
    
    October 1, 2006(Dollar in millions)Semiconductor segment
    
    $
    75.9
    
    
    $
    38.1
    
    
    $
    193.4
    
    
    $
    121.6Percentage of revenues
    
    
    14.3
    %
    
    
    12.2
    %
    
    
    15.0
    %
    
    
    13.2
    %Storage Systems segment
    
    $
    28.6
    
    
    $
    22.2
    
    
    $
    87.5
    
    
    $
    72.2Percentage of revenues
    
    
    14.5
    %
    
    
    12.4
    %
    
    
    15.2
    %
    
    
    13.4
    %Consolidated
    
    $
    104.5
    
    
    $
    60.3
    
    
    $
    280.9
    
    
    $
    193.8Percentage of revenues
    
    
    14.4
    %
    
    
    12.2
    %
    
    
    15.1
    %
    
    
    13.3
    %
 Three
months ended September 30, 2007 compared to the three months
ended October 1, 2006:
  Semiconductor Segment:
  Storage Systems Segment:
  Nine
months ended September 30, 2007 compared to the nine months
ended October 1, 2006:
  Semiconductor Segment:
  Storage Systems Segment:
  Restructuring
of operations and other items:
    31




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##### Table of Contents



Acquired
in-process research and development:
    RevenueAcquisition
    
    
    
    
    
    Discount
    
    projectionsCompany
    
    Date
    
    Projects
    
    IPR&D
    
    rate
    
    extend throughSiliconStor
    
    March 2007
    
    Storage  SATA/SAS multiplexers
    
    $6.5 million
    
    
    27
    %
    
    
    2017Agere
    
    April 2007
    
    Storage  read channel and
preamps; Mobility  HSPDA for
3G; Networking  modems,
Firewire, serdes, media
gateway, VoIP, network
processors, Ethernet, mappers
and framers
    
    $176.4 million
    
    
    13.8
    %
    
    
    2021
 Interest expense:
  Interest income and other, net:
  32




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##### Table of Contents



Provision for income taxes:
    FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
  Working capital
  
    
    Assets held for sale and prepaid expenses and other current assets increased by $639.5
million. The increase is primarily attributable to the increase in assets held for sale of
$561.2 million, primarily a result of our decision to hold the Mobility group and our
Thailand and Singapore facilities for sale; $12.1 million in prepaid software, rent and
other, $9.2 million in other receivables and $9.9 million in other current assets. In
addition, current deferred tax assets increased $47.1 million due to a reallocation of
deferred taxes in connection with the merger of Agere.
    
    Cash, cash equivalents and short-term investments increased by $89.0 million.
    
    Accounts receivable increased $87.4 million due to the Agere acquisition balance of
$166.9 million in April 2007, offset in part by a decrease of $79.5 million due to improved
collections.
    
    Income taxes payable decreased by $64.0 million due to the adoption of FIN 48 in the
first quarter of 2007, offset in part by an increase in the tax provision less tax payments.
    
    Inventories increased $8.9 million. The addition of Ageres inventory has been offset in
part by the sale of the Consumer group.
  
    
    Other accrued liabilities increased by $195.0 million primarily due to balance increases
associated with the acquisition of Agere, increases in our restructuring reserves, increases
in accruals for interest on the convertible notes as the interest payment date approaches,
increases in liabilities with third party manufacturers and increases in other current
liabilities.
    
    Accrued salaries, wages and benefits increased $53.4 million primarily due to the
acquisition of Agere, slightly offset by timing differences in payment of salaries, benefits
and performance-based compensation.
    
    Accounts payable increased $35.8 million due to the Agere acquisition balance of $114.8
million, offset in part by a decrease of $79.0 million due to the timing of invoice receipts
and payments.
 33




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##### Table of Contents



Cash generated from operating activities
  
    
    A net loss adjusted for non-cash transactions. The non-cash items and other non-operating
adjustments are quantified in our Condensed Consolidated Statements of Cash Flows included
in this Form 10-Q; and
    
    A net increase in assets and liabilities, including changes in working capital components
from December 31, 2006 to September 30, 2007, as discussed above.
 Cash and cash equivalents provided by/ (used in) investing activities
  
    
    Proceeds from maturities and sales of debt securities available for sale, net of
purchases;
    
    Purchases of property, equipment and software;
    
    Proceeds from the sale of property and equipment;
    
    Proceeds from the sale of the Consumer group;
    
    Cash acquired from the acquisition of Agere, net of acquisition costs; and
    
    Cash acquired from SiliconStor, net of transaction costs.
  Cash and cash equivalents (used in)/provided by financing activities
   34




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##### Table of Contents



Contractual Obligations
  Payments due by periodLess than
    
    
    1  3
    
    
    4  5
    
    
    After 51 year
    
    
    years
    
    
    years
    
    
    years
    
    
    Total(In millions)Convertible Subordinated Notes
    
    $
    
    
    
    $
    718.7
    
    
    $
    
    
    
    $
    
    
    
    $
    718.7Operating lease obligations
    
    
    102.0
    
    
    
    149.9
    
    
    
    39.3
    
    
    
    10.0
    
    
    
    301.2Purchase commitments
    
    
    282.2
    
    
    
    3.3
    
    
    
    1.2
    
    
    
    
    
    
    
    286.7Total
    
    $
    384.2
    
    
    $
    871.9
    
    
    $
    40.5
    
    
    $
    10.0
    
    
    $
    1,306.6
 Convertible Subordinated Notes:
    Operating lease obligations:
  Purchase commitments:
    35




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##### Table of Contents



Other commitments:
  CRITICAL ACCOUNTING POLICIES
  Retirement
Benefits
       36




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##### Table of Contents



RECENT ACCOUNTING PRONOUNCEMENTS
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
  Interest Rate Sensitivity
    Foreign
currency exchange risk.
  Equity
price risk.
  
 Item 4. Controls and Procedures
 EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES
  37




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##### Table of Contents



CHANGES IN INTERNAL CONTROLS
    
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
   
    
    We may fail to realize the benefits expected from our recent merger with Agere Systems,
which could adversely affect the value of our common stock.
    
    If we fail to successfully transition our semiconductor assembly and test and storage
systems manufacturing operations to third-party contract manufacturers, our customer
relationships and results of operations could be adversely affected.
  
    
    We must attract and retain key employees in a highly competitive environment;
uncertainties associated with the Agere merger may cause a loss of employees and may
otherwise materially adversely affect our business.
 38




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##### Table of Contents




    
    The industries in which we operate are highly cyclical, and our operating results may
fluctuate.
    
    General economic weakness and geopolitical factors may harm our operating results and
financial condition.
    
    We are dependent on a limited number of customers.
    
    We depend to a large extent on independent foundry subcontractors to manufacture our
semiconductor products; accordingly, any failure to secure and maintain sufficient foundry
capacity could materially and adversely affect our business.
    
    We depend in part, and will depend increasingly, upon third-party subcontractors to
assemble, obtain packaging materials for, and test certain products and will depend on
third-party subcontractors to assemble our storage systems products.
    
    
    We operate in intensely competitive markets.
    
    Our target markets are characterized by rapid technological change.
    
    Order or shipment cancellations or deferrals could cause our revenue to decline.
    
    We design and develop highly complex products that require significant investments.
    
    Our products may contain defects.
    
    Our manufacturing facilities have high fixed costs and involve highly complex and precise
processes.
  39




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##### Table of Contents




    
    Failure to qualify our products or our suppliers manufacturing lines may adversely
affect our results of operations.
    
    A widespread outbreak of an illness or other health issue could negatively affect our
manufacturing, assembly and test, design or other operations.
    
    We procure parts and raw materials from a limited number of domestic and foreign sources.
    
    If our new product development and expansion efforts are not successful, our results of
operations may be adversely affected.
    
    We may engage in acquisitions and alliances giving rise to financial and technological
risks.
    
    The semiconductor industry is prone to intellectual property litigation.
    
    We may not be able to adequately protect or enforce our intellectual property rights,
which could harm our competitive position.
    
    A decline in the revenue that we derive from the licensing of intellectual property could
have a significant impact on net income.
    
    We conduct a significant amount of activity outside of the United States, and are exposed
to legal, business, political and economic risks associated with our international
operations.
    
    We may rely on the capital markets and/or bank markets to provide financing.
    
    We utilize indirect channels of distribution over which we will have limited control.
    
    The price of our securities may be subject to wide fluctuations.
    
    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.
    
    Internal control deficiencies or weaknesses that are not yet identified could emerge.
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  Issuer Purchases of Equity Securities
 Maximum Number (orTotal Number of
    
    
    Approximate DollarShares (or Units)
    
    
    Value) of Shares (orAverage Price
    
    
    Purchased as Part of
    
    
    Units) that May YetTotal Number of Shares
    
    
    Paid per Share
    
    
    Publicly Announced
    
    
    Be Purchased UnderPeriod
    
    (or Units) Purchased
    
    
    (or Unit)
    
    
    Plans or Programs
    
    
    the Plans or ProgramsJuly 2, 2007-August 1, 2007
    
    
    10,590,400
    
    
    $
    7.80
    
    
    
    10,590,400
    
    
    $
    August 2, 2007-September 1, 2007
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    500,000,000September 2, 2007-September 30, 2007
    
    
    7,000,000
    
    
    $
    7.02
    
    
    
    7,000,000
    
    
    $
    450,839,400Total
    
    
    17,590,400
    
    
    $
    7.49
    
    
    
    17,590,400
 40




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##### Table of Contents



Item 6. Exhibits
 2.1
    
    Asset Purchase Agreement, dated as of July 25, 2007, among STATS
ChipPAC (Thailand) Limited and STATS ChipPAC Ltd. and LSI (Thai)
Ltd. and LSI Corporation (Incorporated by reference to Exhibit 2.1
to our Current Report on Form 8-K, filed October 9, 2007)2.2
    
    Amendment No. 1 to Asset Purchase Agreement, among STATS ChipPAC
(Thailand) Limited and STATS ChipPAC Ltd. and LSI (Thai) Ltd. and
LSI Corporation (Incorporated by reference to Exhibit 2.2 to our
Current Report on Form 8-K, filed October 9, 2007)2.3
    
    Asset Purchase Agreement, dated as of August 20, 2007, by and
between LSI Corporation and Infineon Technologies AG (Incorporated
by reference to Exhibit 2.1 to our Current Report on Form 8-K, filed
October 30, 2007)10.1
    
    Retention Agreement with Umesh Padval (Incorporated by reference to
Exhibit 10.1 to our Current Report on Form 8-K, filed July 10, 2007)10.2
    
    Confidential Separation Agreement and General Release, dated August
31, 2007, between Umesh Padval and LSI Corporation10.3
    
    Amendment No. 1 to Confidential Separation Agreement and General
Release between Umesh Padval and LSI Corporation10.4
    
    LSI Corporation Director Fees31.1
    
    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
 41




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##### Table of Contents



SIGNATURES
  LSI CORPORATION
(Registrant)Date: November 09, 2007
    
    By
    
    /s/ Bryon Look

Bryon LookExecutive Vice President & Chief Financial Officer
 
 42




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##### Table of Contents



INDEX TO EXHIBITS
 2.1
    
    Asset Purchase Agreement, dated as of July 25, 2007, among STATS
ChipPAC (Thailand) Limited and STATS ChipPAC Ltd. and LSI (Thai)
Ltd. and LSI Corporation (Incorporated by reference to Exhibit 2.1
to our Current Report on Form 8-K, filed October 9, 2007)2.2
    
    Amendment No. 1 to Asset Purchase Agreement, among STATS ChipPAC
(Thailand) Limited and STATS ChipPAC Ltd. and LSI (Thai) Ltd. and
LSI Corporation (Incorporated by reference to Exhibit 2.2 to our
Current Report on Form 8-K, filed October 9, 2007)2.3
    
    Asset Purchase Agreement, dated as of August 20, 2007, by and
between LSI Corporation and Infineon Technologies AG (Incorporated
by reference to Exhibit 2.1 to our Current Report on Form 8-K, filed
October 30, 2007)10.1
    
    Retention Agreement with Umesh Padval (Incorporated by reference to
Exhibit 10.1 to our Current Report on Form 8-K, filed July 10, 2007)10.2
    
    Confidential Separation Agreement and General Release, dated August
31, 2007, between Umesh Padval and LSI Corporation10.3
    
    Amendment No. 1 to Confidential Separation Agreement and General
Release between Umesh Padval and LSI Corporation10.4
    
    LSI Corporation Director Fees31.1
    
    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
 43