##### 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 July 1, 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
    
    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)
LSI Logic Corporation (Former Name)
  þ o
  þ o o
  o þ




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##### 



LSI CORPORATION
Form 10-Q
For the Quarter Ended July 1, 2007
INDEX
 PageNo.PART I. FINANCIAL INFORMATIONItem 1 Financial StatementsCondensed Consolidated Balance Sheets as of July 1, 2007 (unaudited) and December 31, 2006
    
    
    3Condensed Consolidated Statements of Operations for the three months and six months ended July 1, 2007 and July 2, 2006 (unaudited)
    
    
    4Condensed Consolidated Statements of Cash Flows for the six months ended July 1, 2007 and July 2, 2006 (unaudited)
    
    
    5Notes to unaudited Condensed Consolidated Financial Statements
    
    
    6Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    23Item 3 Quantitative and Qualitative Disclosures About Market Risk
    
    
    34Item 4 Controls and Procedures
    
    
    35PART II. OTHER INFORMATIONItem 1 Legal Proceedings
    
    
    35Item 1A Risk Factors
    
    
    35Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    38Item 4 Submission of Matters to a Vote of Security Holders
    
    
    38Item 6 Exhibits
    
    
    39Signatures
    
    
    40Index to Exhibits
    
    
    41EXHIBIT 4.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 LSI CORPORATION
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (UNAUDITED)
 July 1,
    
    
    December 31,2007
    
    
    2006(In thousands, exceptper share amounts)ASSETSCash and cash equivalents
    
    $
    725,470
    
    
    $
    327,800Short-term investments
    
    
    432,809
    
    
    
    681,137Accounts receivable, less allowances of $9,710 and $13,871
    
    
    424,406
    
    
    
    348,638Inventories
    
    
    285,011
    
    
    
    209,470Prepaid expenses and other current assets
    
    
    252,417
    
    
    
    68,692Total current assets
    
    
    2,120,113
    
    
    
    1,635,737Property and equipment, net
    
    
    246,075
    
    
    
    86,045Other intangible assets, net
    
    
    1,714,513
    
    
    
    59,484Goodwill
    
    
    2,517,261
    
    
    
    932,323Other assets
    
    
    227,148
    
    
    
    138,555Total assets
    
    $
    6,825,110
    
    
    $
    2,852,144LIABILITIES AND STOCKHOLDERS EQUITYAccounts payable
    
    $
    236,698
    
    
    $
    200,189Accrued salaries, wages and benefits
    
    
    135,004
    
    
    
    82,292Other accrued liabilities
    
    
    302,775
    
    
    
    155,986Income taxes payable
    
    
    24,931
    
    
    
    88,304Total current liabilities
    
    
    699,408
    
    
    
    526,771Long-term debt
    
    
    719,495
    
    
    
    350,000Pension and postretirement benefits
    
    
    210,217
    
    
    
    Income taxes payable   non-current
    
    
    172,294
    
    
    
    Other non-current liabilities
    
    
    137,231
    
    
    
    79,400Total long-term obligations and other liabilities
    
    
    1,239,237
    
    
    
    429,400Commitments and contingencies (Note 11)Minority interest in subsidiary
    
    
    225
    
    
    
    235Stockholders equity:Preferred stock, $.01 par value: 2,000 shares authorized; none outstanding
    
    
    
    
    
    
    Common stock, $.01 par value: 1,300,000 shares authorized; 728,069 and
403,680 shares outstanding
    
    
    7,281
    
    
    
    4,037Additional paid-in capital
    
    
    6,446,273
    
    
    
    3,102,178Accumulated deficit
    
    
    (1,575,924
    )
    
    
    (1,220,306
    )Accumulated other comprehensive income
    
    
    8,610
    
    
    
    9,829Total stockholders equity
    
    
    4,886,240
    
    
    
    1,895,738Total liabilities and stockholders equity
    
    $
    6,825,110
    
    
    $
    2,852,144
  3




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LSI CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (UNAUDITED)
 Three Months Ended
    
    
    Six Months EndedJuly 1, 2007
    
    
    July 2, 2006
    
    
    July 1, 2007
    
    
    July 2, 2006(In thousands, except per share amounts)Revenues
    
    $
    669,939
    
    
    $
    489,635
    
    
    $
    1,135,354
    
    
    $
    965,519Cost of revenues
    
    
    517,969
    
    
    
    291,229
    
    
    
    788,868
    
    
    
    573,840Gross profit
    
    
    151,970
    
    
    
    198,406
    
    
    
    346,486
    
    
    
    391,679Research and development
    
    
    201,933
    
    
    
    100,362
    
    
    
    305,780
    
    
    
    202,636Selling, general and administrative
    
    
    114,803
    
    
    
    64,636
    
    
    
    176,413
    
    
    
    133,514Restructuring of operations and other items, net
    
    
    25,920
    
    
    
    (21,648
    )
    
    
    17,840
    
    
    
    (15,998
    )Acquired in-process research and development
    
    
    176,400
    
    
    
    
    
    
    
    182,900
    
    
    
    (Loss)/income from operations
    
    
    (367,086
    )
    
    
    55,056
    
    
    
    (336,447
    )
    
    
    71,527Interest expense
    
    
    (9,049
    )
    
    
    (6,428
    )
    
    
    (12,939
    )
    
    
    (12,758
    )Interest income and other, net
    
    
    10,790
    
    
    
    10,319
    
    
    
    21,321
    
    
    
    19,846(Loss)/income before income taxes
    
    
    (365,345
    )
    
    
    58,947
    
    
    
    (328,065
    )
    
    
    78,615Provision for income taxes
    
    
    12,500
    
    
    
    5,100
    
    
    
    19,956
    
    
    
    11,600Net (loss)/income
    
    $
    (377,845
    )
    
    $
    53,847
    
    
    $
    (348,021
    )
    
    $
    67,015Net (loss)/income per share:Basic
    
    $
    (0.50
    )
    
    $
    0.14
    
    
    $
    (0.60
    )
    
    $
    0.17Diluted
    
    $
    (0.50
    )
    
    $
    0.13
    
    
    $
    (0.60
    )
    
    $
    0.17Shares used in computing per share amounts:Basic
    
    
    751,114
    
    
    
    397,790
    
    
    
    577,672
    
    
    
    396,312Diluted
    
    
    751,114
    
    
    
    405,613
    
    
    
    577,672
    
    
    
    404,213
  4




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LSI CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 Six Months EndedJuly 1, 2007
    
    
    July 2, 2006(In thousands)Operating activities:Net (loss)/income
    
    $
    (348,021
    )
    
    $
    67,015Adjustments:Depreciation and amortization
    
    
    120,175
    
    
    
    48,166Stock-based compensation expense
    
    
    33,997
    
    
    
    25,129Non-cash restructuring and other items
    
    
    199
    
    
    
    (2,749
    )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 (gain)/loss
    
    
    (3,888
    )
    
    
    469Loss/(gain) on sale/write-down of equity securities
    
    
    2,396
    
    
    
    (1,211
    )Gain on sale of property and equipment
    
    
    (9,502
    )
    
    
    (5
    )Changes in deferred tax assets and liabilities
    
    
    (5,470
    )
    
    
    20Changes in assets and liabilities, net of assets acquired and liabilities assumed in business combinations:Accounts receivable, net
    
    
    150,165
    
    
    
    12,523Inventories
    
    
    45,242
    
    
    
    17,306Prepaid expenses and other assets
    
    
    33,864
    
    
    
    (5,977
    )Accounts payable
    
    
    (131,054
    )
    
    
    8,743Accrued and other liabilities
    
    
    14,860
    
    
    
    3,801Net cash provided by operating activities
    
    
    85,863
    
    
    
    149,002Investing activities:Purchase of debt securities available-for-sale
    
    
    (122,236
    )
    
    
    (382,212
    )Proceeds from maturities and sales of debt securities available-for-sale
    
    
    374,132
    
    
    
    205,913Purchases of convertible notes/equity securities
    
    
    (3,000
    )
    
    
    (5,150
    )Proceeds from sale of equity securities
    
    
    
    
    
    
    3,581Purchases of property, equipment and software
    
    
    (40,714
    )
    
    
    (28,657
    )Proceeds from sale of property and equipment
    
    
    13,785
    
    
    
    40Proceeds from sale of intellectual property
    
    
    
    
    
    
    15,000Proceeds from sale of Fort Collins facility
    
    
    
    
    
    
    10,998Proceeds from sale of Colorado Springs facility
    
    
    
    
    
    
    7,029Proceeds from sale of Gresham manufacturing facility
    
    
    
    
    
    
    81,426Proceeds from sale of intellectual property 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
    
    
    
    Net cash provided by/(used in) investing activities
    
    
    690,042
    
    
    
    (86,932
    )Financing activities:Issuance of common stock
    
    
    21,917
    
    
    
    32,137Purchase of common stock under repurchase program
    

    (400,355
    )
    
    
    Net cash (used in)/provided by financing activities
    
    
    (378,438
    )
    
    
    32,137Effect of exchange rate changes on cash and cash equivalents
    
    
    203
    
    
    
    598Increase in cash and cash equivalents
    
    
    397,670
    
    
    
    94,805Cash and cash equivalents at beginning of year
    
    
    327,800
    
    
    
    264,649Cash and cash equivalents at end of period
    
    $
    725,470
    
    
    $
    359,454Non-cash information:Issuance of common stock in consideration for acquired assets and liabilities of Agere
    
    $
    3,647,021
    
    
    $
    
  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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Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43 (FAS
43), Accounting for Compensated Absences
  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
    )
 Fair Value Measurements
 Employers Accounting for Defined
Benefit Pension and Other Postretirement Plans Employers
Accounting for Pensions Employers Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits Employers Accounting
for Postretirement Benefits Other than Pensions Employers Disclosure about
Pensions and Other Postretirement Benefits  an amendment of FASB Statements No. 87, 88 and 106
 The Fair Value Option for Financial
Assets and Financial Liabilities
 7




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NOTE 2  STOCK-BASED COMPENSATION
   Three months ended
    
    
    Six months endedStock-based compensation expense included in:
    
    July 1, 2007
    
    
    July 2, 2006
    
    
    July 1, 2007
    
    
    July 2, 2006Cost of revenues
    
    $
    3,148
    
    
    $
    2,458
    
    
    $
    5,092
    
    
    $
    3,983Research and development
    
    
    8,978
    
    
    
    4,643
    
    
    
    13,695
    
    
    
    9,165Selling, general and administrative
    
    
    10,687
    
    
    
    6,197
    
    
    
    15,210
    
    
    
    11,981Total stock-based compensation expense
    
    $
    22,813
    
    
    $
    13,298
    
    
    $
    33,997
    
    
    $
    25,129
 Stock Options
  Three months ended
    
    Six months endedEmployee Stock Options Granted
    
    July 1, 2007
    
    July 2, 2006
    
    July 1, 2007
    
    July 2, 2006Weighted average estimated grant date fair value
    
    $
    3.45
    
    
    $
    3.95
    
    
    $
    3.36
    
    
    $
    3.59Weighted average assumptions in calculation:Expected life (years)
    
    
    4.44
    
    
    
    4.35
    
    
    
    4.35
    
    
    
    4.29Risk-free interest rate
    
    
    5
    %
    
    
    5
    %
    
    
    5
    %
    
    
    5
    %Volatility
    
    
    46
    %
    
    
    48
    %
    
    
    46
    %
    
    
    48
    %
      8




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Weighted
    
    
    WeightedAverage
    
    
    Average
    
    
    AggregateNumber of
    
    
    Exercise
    
    
    Remaining
    
    
    IntrinsicShares
    
    
    Price Per
    
    
    Contractual
    
    
    Value(In thousands)
    
    
    Share
    
    
    Term (In years)
    
    
    (In thousands)Options outstanding at December 31, 2006
    
    
    56,750
    
    
    $
    11.92
    
    
    
    
    
    
    
    Options assumed in Agere merger
    
    
    48,884
    
    
    
    22.41Options granted
    
    
    10,198
    
    
    
    9.38
    
    
    
    
    
    
    
    Options exercised
    
    
    (1,614
    )
    
    
    (6.27
    )
    
    
    
    
    
    
    Options canceled
    
    
    (3,174
    )
    
    
    (15.95
    )
    
    
    
    
    
    
    Options outstanding at July 1, 2007
    
    
    111,044
    
    
    $
    14.55
    
    
    
    4.12
    
    
    $
    46,670Options exercisable at July 1, 2007
    
    
    70,769
    
    
    $
    20.93
    
    
    
    3.15
    
    
    $
    29,024
   Employee Stock Purchase Plans
  Three months ended
    
    Three months endedEmployee Stock Purchase Plans Granted
    
    July 2, 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
    %Dividend yield
    
    
    
    
    
    
    
 Restricted Stock Awards
  9




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Number ofSharesNon-vested shares at December 31, 2006
    
    
    1,910Assumed in Agere merger
    
    
    9,141Granted
    
    
    2,164Vested
    
    
    (951
    )Forfeited
    
    
    (171
    )Non-vested shares at July 1, 2007
    
    
    12,093
  NOTE 3  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 certain
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:
   10




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
    
    An expense of $24.1 million was recorded for severance and termination benefits for
employees as a result of the actions announced in the second quarter of 2007  $11.9
million is related to the Consumer business action, $2.5 million is related to the
transition of Wichita manufacturing operations to manufacturing partners and $9.7 million
is related to the workforce reduction action announced June 27, 2007 as mentioned above.
    
    An expense of $0.3 million was recorded for changes in sublease assumptions for certain
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.
   Balance at
    
    
    Restructuring
    
    
    Utilized
    
    
    Balance at
    
    
    Restructuring
    
    
    Utilized
    
    
    Balance atDecember 31,
    
    
    Expense
    
    
    during Q1
    
    
    April 1,
    
    
    Expense
    
    
    during Q2
    
    
    July 1,2006
    
    
    Q1 2007
    
    
    2007
    
    
    2007
    
    
    Q2 2007
    
    
    2007
    
    
    2007Write-down of excess assets (a)
    
    $
    
    
    
    $
    (10,143
    )
    
    $
    10,143
    
    
    $
    
    
    
    $
    785
    
    
    $
    (323
    )
    
    $
    462Lease terminations (b)
    
    
    23,169
    
    
    
    189
    
    
    
    (2,952
    )
    
    
    20,406
    
    
    
    1,027
    
    
    
    (2,082
    )
    
    
    19,351Payments to employees for severance (c)
    
    
    342
    
    
    
    1,874
    
    
    
    (449
    )
    
    
    1,767
    
    
    
    24,108
    
    
    
    (1,917
    )
    
    
    23,958Total
    
    $
    23,511
    
    
    $
    (8,080
    )
    
    $
    6,742
    
    
    $
    22,173
    
    
    $
    25,920
    
    
    $
    (4,322
    )
    
    $
    43,771
 
 (a)
    
    The credit in Q1 2007 includes the gain from the sale of the land in Colorado, offset in
part by a charge of $0.2 million associated with certain asset write-offs.(b)
    
    Amounts utilized represent 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 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 Agere:
  11




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
    
    A reserve of $50 million for severance and termination benefits for employees as a
result of the actions announced in the second quarter of 2007.
    
    A reserve of $14 million for facility lease exit costs primarily in Singapore and Europe; and
    
    A reserve of $29 million for stock related compensation for employees terminated.
 Balance at
    
    
    Utilized
    
    
    Balance atApril 2,
    
    
    during Q2
    
    
    July 1,(in thousands):
    
    2007
    
    
    2007
    
    
    2007Lease terminations (a)
    
    $
    14,464
    
    
    $
    
    
    
    $
    14,464Payments to employees for severance (b)
    
    
    50,087
    
    
    
    (4,070
    )
    
    
    46,017Stock compensation charges in accordance with FAS 123R (c)
    
    
    28,841
    
    
    
    
    
    
    
    28,841Total
    
    $
    93,392
    
    
    $
    (4,070
    )
    
    $
    89,322
 
 (a)
    
    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)
    
    Amounts represent stock options and restricted units awarded to employees to be
terminated which will accelerate upon their employment terminations. The balance is expected
to be utilized by the end of 2009. NOTE 4  BUSINESS COMBINATIONS
  Merger with Agere
   12




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AmountsFair 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
 Purchase price allocation:
  As ofApril 2,2007Cash
    
    $
    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
   WeightedAverageUseful LifeFair Value
    
    
    (in Years)Current technology
    
    $
    844,500
    
    
    
    8.5Customer base
    
    
    513,000
    
    
    
    10Patent licensing
    
    
    317,200
    
    
    
    10Order Backlog
    
    
    53,000
    
    
    
    .5Total acquired identifiable intangible assets
    
    $
    1,727,700
 13




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##### Table of Contents



Acquired in-process research and development:
  Estimated
    
    
    
    
    
    Revenuecost to
    
    
    
    
    
    projections byAcquisition
    
    
    
    IPR&D
    
    complete
    
    Discount
    
    projects extendCompany
    
    Date
    
    Projects
    
    $ millions
    
    $ millions
    
    rate
    
    throughAgere
    
    April 2007
    
    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:
   (dollars in thousands except per share amounts)
    
    Six months endedJuly 1, 2007
    
    
    July 2, 2006Revenues
    
    $
    1,470,498
    
    
    $
    1,683,703Net loss
    
    
    (195,274
    )
    
    
    (115,049
    )Basic income per share
    
    $
    (0.26
    )
    
    $
    (0.15
    )Diluted income per share
    
    $
    (0.26
    )
    
    $
    (0.15
    )
 14




---



##### Table of Contents



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
  NOTE 5  BENEFIT OBLIGATIONS
  Net Periodic Benefit Cost
 Three months ended
    
    
    Six months endedJuly 1, 2007
    
    
    July 1, 2007Postretirement
    
    
    
    
    
    
    PostretirementPension Benefits
    
    
    Benefits
    
    
    Pension Benefits
    
    
    Benefits(In thousands)Service cost
    
    $
    1,867
    
    
    $
    41
    
    
    $
    1,867
    
    
    $
    41Interest cost
    
    
    18,396
    
    
    
    931
    
    
    
    18,396
    
    
    
    931Expected return on plan assets
    
    
    (20,859
    )
    
    
    (1,194
    )
    
    
    (20,859
    )
    
    
    (1,194
    )Amortization of prior service cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Recognized net actuarial loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net periodic benefit cost
    
    
    (596
    )
    
    
    (222
    )
    
    
    (596
    )
    
    
    (222
    )Curtailment gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Settlement charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total benefit cost
    
    $
    (596
    )
    
    $
    (222
    )
    
    $
    (596
    )
    
    $
    (222
    )
  July 1, 2007PostretirementPension Benefits
    
    
    BenefitsAccrued benefit liability
    
    $
    197,775
    
    
    $
    5,955Accumulated other comprehensive loss
    
    
    
    
    
    
    Net amount realized
    
    
    197,775
    
    
    
    5,955
 Employers Accounting for Defined Benefit Pension and Other Postretirement Plans
 an amendment of FASB Statements No. 87, 88, 106, and 132(R).
 15




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##### Table of Contents



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
    
    
 8.13 %

    
    
    N/A
    
    
    
 7.75 %
  Allocation as of April 2, 2007Pension
    
    PostretirementBenefits
    
    BenefitsEquity Securities
    
    
    54 %

    
    
       40 %Debt Securities
    
    
    46 %

    
    
    60 %
  Pension
    
    PostretirementBenefits
    
    BenefitsApril 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
  16




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##### Table of Contents



NOTE 6  BALANCE SHEET DETAIL
 July 1,
    
    
    December 31,2007
    
    
    2006(In thousands)Cash and cash equivalents:Cash in financial institutions
    
    $
    100,490
    
    
    $
    50,478Cash equivalents
    
    
    624,980
    
    
    
    277,322Total cash and cash equivalents
    
    $
    725,470
    
    
    $
    327,800Available-for-sale debt securities:Asset and mortgage-backed securities
    
    $
    236,815
    
    
    $
    363,723U.S. government and agency securities
    
    
    158,206
    
    
    
    272,287Corporate and municipal debt securities
    
    
    37,788
    
    
    
    45,127Total short-term investments
    
    $
    432,809
    
    
    $
    681,137Long-term investments in equity securities:Marketable equity securities available-for-sale
    
    $
    2,335
    
    
    $
    2,827Non-marketable equity securities
    
    
    10,580
    
    
    
    12,973Total long-term investments in equity securities
    
    $
    12,915
    
    
    $
    15,800Inventories:Raw materials
    
    $
    34,163
    
    
    $
    44,151Work-in-process
    
    
    116,082
    
    
    
    52,497Finished goods
    
    
    134,766
    
    
    
    112,822Total inventories
    
    $
    285,011
    
    
    $
    209,470Intangible assets, net of accumulated amortization:Semiconductor segment
    
    $
    1,675,952
    
    
    $
    16,701Storage Systems segment
    
    
    38,561
    
    
    
    42,783Total intangible assets, net of
accumulated amortization
    
    $
    1,714,513
    
    
    $
    59,484
  July 1, 2007
    
    
    December 31, 2006Gross
    
    
    Accumulated
    
    
    Gross
    
    
    AccumulatedCarrying Amount
    
    
    Amortization
    
    
    Carrying Amount
    
    
    AmortizationSemiconductor:Current technology
    
    $
    1,090,058
    
    
    $
    (267,131
    )
    
    $
    240,458
    
    
    $
    (232,716
    )Trademarks
    
    
    26,785
    
    
    
    (26,239
    )
    
    
    26,285
    
    
    
    (25,446
    )Customer base
    
    
    525,588
    
    
    
    (11,995
    )
    
    
    8,788
    
    
    
    (4,394
    )Non-compete agreements
    
    
    1,949
    
    
    
    (849
    )
    
    
    849
    
    
    
    (625
    )Existing purchase orders
    
    
    200
    
    
    
    (200
    )
    
    
    200
    
    
    
    (200
    )Supply agreement
    
    
    100
    
    
    
    (67
    )
    
    
    
    
    
    
    Patent Licensing
    
    
    317,200
    
    
    
    (9,151
    )
    
    
    
    
    
    
    Order Backlog
    
    
    53,000
    
    
    
    (26,500
    )
    
    
    
    
    
    
    Workforce
    
    
    3,567
    
    
    
    (363
    )
    
    
    3,567
    
    
    
    (65
    )Subtotal
    
    
    2,018,447
    
    
    
    (342,495
    )
    
    
    280,147
    
    
    
    (263,446
    )Storage Systems:Current technology
    
    
    164,339
    
    
    
    (127,489
    )
    
    
    164,339
    
    
    
    (124,618
    )Trademarks
    
    
    7,150
    
    
    
    (7,150
    )
    
    
    7,150
    
    
    
    (7,120
    )Customer base
    
    
    5,010
    
    
    
    (5,010
    )
    
    
    5,010
    
    
    
    (5,010
    )Supply agreement
    
    
    8,147
    
    
    
    (8,147
    )
    
    
    8,147
    
    
    
    (7,472
    )Non-compete agreements
    
    
    1,600
    
    
    
    (622
    )
    
    
    1,600
    
    
    
    (33
    )Trade Names
    
    
    800
    
    
    
    (67
    )
    
    
    800
    
    
    
    (10
    )Subtotal
    
    
    187,046
    
    
    
    (148,485
    )
    
    
    187,046
    
    
    
    (144,263
    )Total
    
    $
    2,205,493
    
    
    $
    (490,980
    )
    
    $
    467,193
    
    
    $
    (407,709
    )
  17




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##### Table of Contents



Weighted
    
    
    Six months ended
    
    
    Year endedAverage Lives
    
    
    July 1,
    
    
    December 31,(In Months)
    
    
    2007
    
    
    2006
    
    
    2005(In thousands)Current technology
    
    
    54
    
    
    $
    37,286
    
    
    $
    25,129
    
    
    $
    53,185Trademarks
    
    
    83
    
    
    
    822
    
    
    
    4,119
    
    
    
    5,001Customer base
    
    
    43
    
    
    
    7,602
    
    
    
    2,359
    
    
    
    2,427Supply agreement
    
    
    32
    
    
    
    742
    
    
    
    225
    
    
    
    1,590Non-compete agreements
    
    
    27
    
    
    
    813
    
    
    
    182
    
    
    
    281Existing purchase orders
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    Workforce
    
    
    72
    
    
    
    298
    
    
    
    65
    
    
    
    Patent Licensing
    
    
    37
    
    
    
    9,151
    
    
    
    
    
    
    
    Order Backlog
    
    
    2
    
    
    
    26,500
    
    
    
    
    
    
    
    Trade Names
    
    
    84
    
    
    
    57
    
    
    
    10
    
    
    
    Total
    
    
    48
    
    
    $
    83,271
    
    
    $
    32,089
    
    
    $
    62,484
  Fiscal Year:
    
    Amount:2007 (July 2, 2007 through December 31, 2007)
    
    $
    127,9742008
    
    
    297,9832009
    
    
    283,3452010
    
    
    232,9222011 and thereafter
    
    
    772,289$
    1,714,513
  Semiconductor
    
    
    Storage Systemssegment
    
    
    segment
    
    
    TotalBalance 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
    )Adjustment to goodwill related to FIN 48
    
    
    (34,661
    )
    
    
    
    
    
    
    (34,661
    )Balance as of July 1, 2007
    
    $
    2,341,637
    
    
    $
    175,624
    
    
    $
    2,517,261
 
 *
    
    During the six months ended July 1, 2007, the Company recorded $37.8 million and $1,584.3
million of goodwill in connection with the acquisition of SiliconStor and Agere in the
Semiconductor segment, respectively.  Interest
    
    
    Conversion
    
    
    July 1,
    
    
    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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (754
    )
    
    
    Total long-term debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    719,495
    
    
    $
    350,000
 
 **
    
    Upon the completion of merger with Agere, the Company guaranteed Ageres 2002 Convertible
Subordinated Notes. The face value of the Notes were adjusted to the fair value of $370 million as
of April 2, 2007, the purchase date. The accrued debt premium will be fully amortized by December
2009. 18




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##### Table of Contents



NOTE 7  RECONCILIATION OF BASIC AND DILUTED (LOSS)/INCOME PER SHARE
  Three Months EndedJuly 1, 2007
    
    
    July 2, 2006Per-Share
    
    
    
    
    
    
    
    
    
    
    Per-ShareLoss*
    
    
    Shares+
    

 Amount
 

    
    Income*
    
    Shares+
    
    
    AmountBasic EPS:Net (loss)/income available to common stockholders
    
    $
    (377,845
    )
    
    
    751,114
    
    
    $
    (0.50
    )
    
    $
    53,847
    
    
    
    397,790
    
    
    $
    0.14Stock options, employee stock purchase rights
and restricted stock unit awards
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,823
    
    
    
    Diluted EPS:Net (loss)/income available to common stockholders
    
    $
    (377,845
    )
    
    
    751,114
    
    
    $
    (0.50
    )
    
    $
    53,847
    
    
    
    405,613
    
    
    $
    0.13
 Six Months EndedJuly 1, 2007
    
    
    July 2, 2006Per-Share
    
    
    
    
    
    
    
    
    
    
    Per-ShareLoss*
    
    
    Shares+
    
    
    Amount
    
    
    Income*
    
    
    Shares+
    
    
    AmountBasic EPS:Net (loss)/income available to common stockholders
    
    $
    (348,021
    )
    
    
    577,672
    
    
    $
    (0.60
    )
    
    $
    67,015
    
    
    
    396,312
    
    
    $
    0.17Stock options, employee stock purchase rights
and restricted stock unit awards
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,901
    
    
    
    Diluted EPS:Net (loss)/income available to common stockholders
    
    $
    (348,021
    )
    
    
    577,672
    
    
    $
    (0.60
    )
    
    $
    67,015
    
    
    
    404,213
    
    
    $
    0.17
 
 *
    
    Numerator+
    
    Denominator   NOTE 8  SEGMENT REPORTING
   Three months ended
    
    
    Six months endedJuly 1, 2007
    
    
    July 2, 2006
    
    
    July 1, 2007
    
    
    July 2, 2006Revenues:Semiconductor
    
    $
    484,840
    
    
    $
    307,391
    
    
    $
    757,214
    
    
    $
    605,765Storage Systems
    
    
    185,099
    
    
    
    182,244
    
    
    
    378,140
    
    
    
    359,754Total
    
    $
    669,939
    
    
    $
    489,635
    
    
    $
    1,135,354
    
    
    $
    965,519(Loss)/income from operations:Semiconductor
    
    $
    (365,811
    )
    
    $
    42,372
    
    
    $
    (338,652
    )
    
    $
    45,901Storage Systems
    
    
    (1,275
    )
    
    
    12,684
    
    
    
    2,205
    
    
    
    25,626Total
    
    $
    (367,086
    )
    
    $
    55,056
    
    
    $
    (336,447
    )
    
    $
    71,527
  19




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##### Table of Contents



Significant Customers
  Three months ended
    
    Six months endedJuly 1, 2007
    
    July 2, 2006
    
    July 1, 2007
    
    July 2, 2006Semiconductor segment:Number of significant customers
    
    2
    
    1
    
    3
    
    1Percentage of segment revenues
    
    26 %, 18%
    
    19%
    
    24%, 12%, 10%
    
    19%Storage Systems segment:Number of significant customers
    
    2
    
    2
    
    2
    
    2Percentage of segment revenues
    
    46 %, 19%
    
    46%, 16%
    
    46%, 19%
    
    45%, 15%Consolidated:Number of significant customers
    
    3
    
    2
    
    2
    
    2Percentage of consolidated revenues
    
    19%, 13%, 13%
    
    18%, 12%
    
    16%, 16%
    
    18%, 12%
   NOTE 9  COMPREHENSIVE (LOSS)/INCOME
  Three Months Ended
    
    
    Six Months EndedJuly 1,
    
    
    July 2,
    
    
    July 1,
    
    
    July 2,2007
    
    
    2006
    
    
    2007
    
    
    2006Net (loss)/income
    
    $
    ( 377,845
    )
    
    $
    53,847
    
    
    $
    (348,021
    )
    
    $
    67,015Change in unrealized (loss)/gain on available-for-sale securities
    
    
    (1,127
    )
    
    
    (5,749
    )
    
    
    2,137
    
    
    
    (8,760
    )Change in foreign currency translation adjustments
    
    
    (3,761
    )
    
    
    1,462
    
    
    
    (3,356
    )
    
    
    1,096Comprehensive (loss)/income
    
    $
    (382,733
    )
    
    $
    49,560
    
    
    $
    (349,240
    )
    
    $
    59,351
 NOTE 10  RELATED PARTY TRANSACTIONS
   20




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##### Table of Contents



NOTE 11  COMMITMENTS, CONTINGENCIES AND LEGAL MATTERS
      21




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##### Table of Contents



Guarantees
 Product warranties
 Six monthsended July 1,2007(in thousands)Balance at the beginning of the period
    
    $
    11,325Accruals for warranties issued during the period
    
    
    7,735Accruals related to pre-existing warranties (including changes in estimates)
    
    
    (168
    )Accruals assumed in Agere merger
    
    
    1,819Settlements made during the period (in cash or in kind)
    
    
    (6,305
    )Balance at the end of the period
    
    $
    14,406
 Standby letters of credit.
 NOTE 12  SUBSEQUENT EVENTS
   22




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  OVERVIEW
         23




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##### Table of Contents



RESULTS OF OPERATIONS
  Revenues
 Three months ended
    
    Six months endedJuly 1,
    
    July 2,
    
    July 1,
    
    July 2,2007
    
    2006
    
    2007
    
    2006(in millions)Semiconductor segment
    
    $
    484.8
    
    
    $
    307.4
    
    
    $
    757.2
    
    
    $
    605.8Storage Systems segment
    
    
    185.1
    
    
    
    182.2
    
    
    
    378.1
    
    
    
    359.7Consolidated
    
    $
    669.9
    
    
    $
    489.6
    
    
    $
    1,135.3
    
    
    $
    965.5
  Three months ended July 1, 2007 compared to the three months ended July 2, 2006:
  Semiconductor Segment:
  
    
    An increase due to the acquisition of Agere;
    
    Increased demand for semiconductors used in storage products associated with the ramping
of our Serial Attached SCSI, or SAS, products;
  
    
    Decreases in demand for semiconductors used in consumer product applications such as
digital audio players where our customers solution has not been included in the new
generation of its customers products, DVD products and cable set-top box solutions and
    
    Decreases in demand for semiconductors used in communication products such as
telecommunications and printing.
 Storage Systems Segment:
  Six months ended July 1, 2007 compared to the six months ended July 2, 2006:
  24




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##### Table of Contents



Semiconductor Segment:
  Storage Systems Segment:
  .
 Revenues by geography:
  Three months ended
    
    
    Six months endedJuly 1, 2007
    
    
    July 2, 2006
    
    
    July 1, 2007
    
    
    July 2, 2006North America
    
    $
    208.0
    
    
    $
    235.6
    
    
    $
    418.7
    
    
    $
    472.5Asia, including Japan
    
    
    386.9
    
    
    
    194.6
    
    
    
    575.8
    
    
    
    381.0Europe and Middle East (EMEA)
    
    
    75.0
    
    
    
    59.4
    
    
    
    140.8
    
    
    
    112.0Total
    
    $
    669.9
    
    
    $
    489.6
    
    
    $
    1,135.3
    
    
    $
    965.5
 Three months ended July 1, 2007 compared to the three months ended July 2, 2006:
  Six months ended July 1, 2007 compared to the six months ended July 2, 2006:
  25




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##### Table of Contents



Gross profit margin, Operating Costs and Expenses
  Gross profit margin:
 Three months ended
    
    
    Six months endedJuly 1, 2007
    
    
    July 2, 2006
    
    
    July 1, 2007
    
    
    July 2, 2006Semiconductor segment
    
    $
    88.9
    
    
    $
    141.3
    
    
    $
    220.4
    
    
    $
    271.3Percentage of revenues
    
    
    18.3
    %
    
    
    46.0
    %
    
    
    29.1
    %
    
    
    44.8
    %Storage Systems segment
    
    $
    63.1
    
    
    $
    57.1
    
    
    $
    126.1
    
    
    $
    120.4Percentage of revenues
    
    
    34.1
    %
    
    
    31.3
    %
    
    
    33.4
    %
    
    
    33.5
    %Consolidated
    
    $
    152.0
    
    
    $
    198.4
    
    
    $
    346.5
    
    
    $
    391.7Percentage of revenues
    
    
    22.7
    %
    
    
    40.5
    %
    
    
    30.5
    %
    
    
    40.6
    %
  Three months ended July 1, 2007 compared to the three months ended July 2, 2006:
  Semiconductor Segment:
  
    
    An increase in the amortization of intangible assets primarily related to the acquisition of Agere;
    
    Inventory charges related to fair valuing the inventory in the acquisition of Agere of $47.9 million; and
    
    $11.0 million in charges recorded for an unfavorable wafer supply agreement with ON
Semiconductor resulting from a decline in demand in the second quarter of 2007. During the
three months ended July 2, 2006, we completed the sale of our Gresham, Oregon semiconductor
manufacturing facility to ON Semiconductor. Under the terms of the agreement, ON
Semiconductor offered employment to substantially all of the Companys manufacturing
employees based at the Gresham site, with the remaining non-manufacturing workforce
expected to continue their employment with the Company. ON Semiconductor also entered into
additional agreements with the Company, including a multi-year wafer supply and test
agreement, intellectual property license agreement, transition services agreement and a
facilities use agreement.
 Storage Systems Segment:
  Six months ended July 1, 2007 compared to the six months ended July 2, 2006:
  Semiconductor Segment:
  
    
    An increase in the amortization of intangible assets primarily related to the acquisition of Agere;
 26




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##### Table of Contents




    
    Inventory charges related to fair valuing the inventory in the acquisition of Agere of $47.9 million; and
    
    $11.0 million in charges recorded for an unfavorable wafer supply agreement resulting
from a decline in demand in the second quarter of 2007.
 Storage Systems Segment:
  Research and development:
 Three months ended
    
    
    Six months endedJuly 1, 2007
    
    
    July 2, 2006
    
    
    July 1, 2007
    
    
    July 2, 2006(In millions)Semiconductor segment
    
    $
    170.9
    
    
    $
    77.6
    
    
    $
    244.6
    
    
    $
    159.2Percentage of revenues
    
    
    35.3
    %
    
    
    25.2
    %
    
    
    32.3
    %
    
    
    26.3
    %Storage Systems segment
    
    $
    31.0
    
    
    $
    22.8
    
    
    $
    61.1
    
    
    $
    43.4Percentage of revenues
    
    
    16.7
    %
    
    
    12.5
    %
    
    
    16.2
    %
    
    
    12.1
    %Consolidated
    
    $
    201.9
    
    
    $
    100.4
    
    
    $
    305.7
    
    
    $
    202.6Percentage of revenues
    
    
    30.1
    %
    
    
    20.5
    %
    
    
    26.9
    %
    
    
    21.0
    %
 Three months ended July 1, 2007 compared to the three months ended July 2, 2006:
  Semiconductor Segment:
  Storage Systems Segment:
  Six months ended July 1, 2007 compared to the six months ended July 2, 2006:
  Semiconductor Segment:
  27




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##### Table of Contents



Storage Systems Segment:
  Selling, general and administrative:
 Three months ended
    
    
    Six months endedJuly 1, 2007
    
    
    July 2, 2006
    
    
    July 1, 2007
    
    
    July 2, 2006(In millions)Semiconductor segment
    
    $
    85.2
    
    
    $
    43.2
    
    
    $
    117.5
    
    
    $
    83.5Percentage of revenues
    
    
    17.6
    %
    
    
    14.1
    %
    
    
    15.5
    %
    
    
    13.8
    %Storage Systems segment
    
    $
    29.6
    
    
    $
    21.4
    
    
    $
    58.9
    
    
    $
    50.0Percentage of revenues
    
    
    16.0
    %
    
    
    11.7
    %
    
    
    15.6
    %
    
    
    13.9
    %Consolidated
    
    $
    114.8
    
    
    $
    64.6
    
    
    $
    176.4
    
    
    $
    133.5Percentage of revenues
    
    
    17.1
    %
    
    
    13.2
    %
    
    
    15.5
    %
    
    
    13.8
    %
 Three months ended July 1, 2007 compared to the three months ended July 2, 2006:
  Semiconductor Segment:
  Storage Systems Segment:
  Six months ended July 1, 2007 compared to the six months ended July 2, 2006:
  Semiconductor Segment:
  Storage Systems Segment:
  Restructuring of operations and other items:
  28




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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:
  29




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Interest income and other, net:
   Provision for income taxes:
    FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
  Working capital
  
    
    Prepaid expenses and other current assets increased by $183.7 million primarily due to
the merger with Agere, comprised of: $123.0 million in assets held for sale; $12.1 million
in prepaid software, rent and other expenses; and $9.2 million in other receivables. 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 $149.3 million.
    
    Accounts receivable increased $75.8 million due to the Agere balance of $166.9 million
offset by a decrease of $91.1 million due to lower revenues and improved collections.
 30




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##### Table of Contents




    
    Inventories increased $75.5 million. The increase in inventory reflects the Agere
balance of $70.3 million.
    
    Income taxes payable decreased by $63.4 million due to the adoption of FIN 48 in the
first quarter of 2007, offset in part by an increase in the tax provision. There was no cash
impact.
  
    
    Other accrued liabilities increased by $146.8 million due to the Agere merger, consisting
of: $60.5 million in reserves for restructuring, $5.6 million of deferred revenue, short
term pension and post retirement of $17.2 million, and $40.4 million in other tax
liabilities and various reserves and payables. In addition, the restructuring reserve
increased $20.3 million is mainly from the accrual of termination benefits such as
severance payments.
    
    Accrued salaries, wages and benefits increased $52.7 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 $36.5 million due to the Agere balance of $114.8 million
offset by a decrease of $78.3 million due to timing of invoice receipts and payments.
 Cash generated from operating activities
  
    
    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 July 1, 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.
    
    The merger with Agere.
    
    The receipt of an income tax refund for pre-acquisition tax matters associated with a previous year.
  Cash and cash equivalents (used in)/provided by financing activities
  31




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##### Table of Contents



Contractual Obligations
  Payments due by periodLess than
    
    
    1  3
    
    
    4  5
    
    
    After 5Contractual Obligations
    
    1 year
    
    
    years
    
    
    years
    
    
    years
    
    
    TotalConvertible Subordinated Notes
    
    $
    
    
    
    $
    719.5
    
    
    $
    
    
    
    $
    
    
    
    $
    719.5Operating lease obligations
    
    
    106.4
    
    
    
    148.7
    
    
    
    41.8
    
    
    
    11.2
    
    
    
    308.1Purchase commitments
    
    
    298.8
    
    
    
    4.5
    
    
    
    
    
    
    
    
    
    
    
    303.3Total
    
    $
    405.2
    
    
    $
    872.7
    
    
    $
    41.8
    
    
    $
    11.2
    
    
    $
    1,330.9
 Convertible subordinated notes:
    Operating lease obligations:
  Purchase commitments:
   32




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##### Table of Contents



CRITICAL ACCOUNTING POLICIES
  Retirement Benefits
      33




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##### Table of Contents



RECENT ACCOUNTING PRONOUNCEMENTS
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
     Foreign currency exchange risk.
  Equity price risk.
  34




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##### Table of Contents



Item 4. Controls and Procedures
 EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
  CHANGES IN INTERNAL CONTROLS
    
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  35




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##### Table of Contents




    
    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.
    
    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.
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##### Table of Contents




    
    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.
   
    
    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.
 37




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##### Table of Contents




    
    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 ProgramsApril 2, 2007-May 1, 2007
    
    
    5,048,400
    
    
    $
    8.52
    
    
    
    5,048,400
    
    
    $
    456,980,776May 2, 2007-June 1, 2007
    
    
    42,382,400
    
    
    $
    8.43
    
    
    
    42,382,400
    
    
    $
    99,644,612June 2, 2007-July 1, 2007
    
    
    2,250,000
    
    
    $
    7.54
    
    
    
    2,250,000
    
    
    $
    82,686,812Total
    
    
    49,680,800
    
    
    $
    8.40
    
    
    
    49,680,800
  
 Item 4. Submission of Matters to a Vote of Security Holders
  Proposal 1. To elect nine directors to serve for the ensuing year and until their successors
are elected.
 Votes For
    
    Votes WithheldCharles A. Haggerty
    
    
    327,799,812
    
    
    
    10,254,795Richard S. Hill
    
    
    326,062,448
    
    
    
    11,992,159James H. Keyes
    
    
    330,078,064
    
    
    
    7,976,543Michael J. Mancuso
    
    
    326,476,767
    
    
    
    11,577,840John H.F. Miner
    
    
    332,387,396
    
    
    
    5,667,211Arun Netravali
    
    
    326,504,237
    
    
    
    11,550,369Matthew J. ORourke
    
    
    332,187,308
    
    
    
    5,867,299Gregorio Reyes
    
    
    332,292,296
    
    
    
    5,762,311Abhihit Y. Talwalkar
    
    
    330,244,912
    
    
    
    7,809,695
 Proposal 2. To ratify the appointment of PricewaterhouseCoopers LLP as the independent
registered public accounting firm for the 2007 fiscal year.
 Votes For
    
    Votes Against
    
    Abstain331,239,616
    
    4,357,695
    
    2,457,295
 Proposal 3. Stockholder proposal entitled Director Election Majority Vote Standard Proposal.
 Votes For
    
    Votes Against
    
    Abstain
    
    Broker Non-Vote123,100,926
    
    91,921,766
    
    8,373,215
    
    114,658,700
 38




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##### Table of Contents



Item 6. Exhibits
 4.1
    
    Composite Certificate of Incorporation10.1
    
    2007 Bonus structure for Abhijit Y.
Talwalkar (incorporated by reference to Item 5.02 of our Current
Report on Form 8-K, filed April 5, 2007)10.2
    
    Description of Mr. Talwalkars relocation benefits (incorporated
by reference to Exhibit 10.1 to our Current Report on Form 8-K,
filed May 15, 2007)10.3
    
    LSI Employee Commuter Expense Reimbursement Policy (incorporated
by reference to Exhibit 10.2 to our Current Report on Form 8-K,
filed May 15, 2007)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
 39




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##### Table of Contents



SIGNATURES
  LSI CORPORATION(Registrant)Date: August 10, 2007
By
    /s/ Bryon LookBryon LookExecutive Vice President & Chief Financial Officer 40




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##### Table of Contents



INDEX TO EXHIBITS
 4.1
    
    Composite Certificate of Incorporation10.1
    
    2007 Bonus structure for Abhijit Y. Talwalkar (incorporated by reference to Item 5.02 of our Current
Report on Form 8-K, filed April 5, 2007)10.2
    
    Description of Mr. Talwalkars relocation benefits (incorporated
by reference to Exhibit 10.1 to our Current Report on Form 8-K,
filed May 15, 2007)10.3
    
    LSI Employee Commuter Expense Reimbursement Policy (incorporated
by reference to Exhibit 10.2 to our Current Report on Form 8-K,
filed May 15, 2007)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
 41