UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 28, 2008

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

LSI CORPORATION

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)

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

      Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer   o (Do not check if a smaller reporting company)		Smaller Reporting Company o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

     As of November 3, 2008, there were 645,085,812 shares of the registrant’s Common Stock, $.01 par value, outstanding.

 

 

LSI CORPORATION
Form 10-Q
For the Quarter Ended September 28, 2008
INDEX

		Page
		No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements			3
Condensed Consolidated Balance Sheets as of September 28, 2008 (unaudited) and December 31, 2007			3
Condensed Consolidated Statements of Operations for the three months and nine months ended September 28, 2008 and September 30, 2007 (unaudited)			4
Condensed Consolidated Statements of Cash Flows for the nine months ended September 28, 2008 and September 30, 2007 (unaudited)			5
Notes to Unaudited Condensed Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
Item 3. Quantitative and Qualitative Disclosures about Market Risk			32
Item 4. Controls and Procedures			32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			33
Item 1A. Risk Factors			33
Item 6. Exhibits			34
Signatures			35
Exhibit Index			36
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

FORWARD-LOOKING STATEMENTS

     This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The words “estimate,” “plan,” “intend,” “expect,” “anticipate,” “believe” and similar words are intended to identify forward-looking statements. Although we believe our expectations are based on reasonable assumptions, our actual results could differ materially from those projected in the forward-looking statements. We have described in Part II, Item 1A- “Risk Factors” a number of factors that could cause our actual results to differ from our projections or estimates. Except where otherwise indicated, the statements made in this report are made as of the date we filed this report with the Securities and Exchange Commission and should not be relied upon as of any subsequent date. We expressly disclaim any obligation to update the information in this report, except as may otherwise be required by law.

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

LSI CORPORATION

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

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

LSI CORPORATION

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

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

LSI CORPORATION

NOTE 1 — BASIS OF PRESENTATION

     For financial reporting purposes, LSI Corporation (the “Company” or “LSI”) reports on a 13- or 14-week quarter with a year ending December 31. The current quarter ended September 28, 2008. The third quarter of 2007 ended September 30, 2007. The results of operations for the quarter ended September 28, 2008, are not necessarily indicative of the results to be expected for the full year. The first nine months of 2008 and 2007 consisted of approximately 39 weeks each. The third quarter in each of 2008 and 2007 consisted of 13 weeks.

     On April 2, 2007, the Company acquired Agere Systems Inc. (“Agere”) through the merger of Agere and a subsidiary of the Company.

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ significantly from these estimates.

     In management’s opinion, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments and restructuring and other items, net, as discussed in Note 3), necessary to state fairly the financial information included herein. While the Company believes that the disclosures are adequate to make the information not misleading, these financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

Recent Accounting Pronouncements

     In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 157 (“FAS 157”), “Fair Value Measurements.” FAS 157 establishes a single authoritative definition of fair value, sets out a framework for measuring fair value, and expands on required disclosures about fair value measurement. FAS 157 is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB Staff Position (“FSP”) 157-2, “Effective Date of FASB Statement No. 157,” which delays the effective date of FAS 157 for all nonrecurring fair value measurements of nonfinancial assets and nonfinancial liabilities until fiscal years beginning after November 15, 2008. In October 2008, the FASB issued FSP 157-3, “Determining the Fair Value of a Financial Asset When the Market for that Asset Is Not Active,” which amends FAS 157 by incorporating “an example to illustrate key considerations in determining the fair value of a financial asset” in an inactive market. FSP 157-3 is effective upon issuance and should be applied to prior periods for which financial statements have not been issued. The adoption of FAS 157 for financial assets and financial liabilities, effective January 1, 2008, had no material impact on the Company’s results of operations or financial position. The Company is currently assessing the impact of FAS 157 for nonfinancial assets and nonfinancial liabilities on its results of operations and financial position.

     FAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Company’s financial assets and financial liabilities recorded at fair value have been categorized based upon the following three levels of inputs in accordance with FAS 157:

     Level 1 — Unadjusted, quoted prices in active, accessible markets for identical assets or liabilities. The Company’s investments in marketable equity securities and money market funds that are traded in active exchange markets, as well as United States Treasury securities that are highly liquid and are actively traded in over-the-counter markets are classified under level 1.

     Level 2 — Observable inputs other than level 1 prices such as quoted prices for similar assets or liabilities in active markets; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. The Company’s investments in U.S. government agency securities, commercial paper, corporate and municipal debt securities and asset and mortgage backed securities are traded less frequently than exchange traded securities and are valued using inputs that include quoted prices for similar assets in active markets, and inputs other than quoted prices that are observable for the asset, such as interest rates and yield curves that are observable at commonly quoted

intervals. Forward foreign currency contracts traded in the over-the-counter markets are valued using market transactions, or broker quotations. As such, these derivative instruments are classified within level 2.

     Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

     The Company utilizes the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

     The following table summarizes assets measured at fair value on a recurring basis as of September 28, 2008:

		Fair Value Measurements as of September 28, 2008
		Level 1				Level 2				Level 3				Total
		(In thousands)
Short-term investments in debt securities and certain cash equivalents		$	704,354			$	345,769				—			$	1,050,123
Long-term investments in marketable equity securities		$	1,276				—				—			$	1,276
Rabbi Trust — all invested in money market funds		$	10,107				—				—			$	10,107

     In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (Revised 2007) (“FAS 141(R)”), “Business Combinations.” FAS 141(R) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in an acquiree and the goodwill acquired in an acquisition. FAS 141(R) also establishes disclosure requirements to evaluate the nature and financial effects of a business combination. FAS 141(R) is effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the potential impact, if any, of the adoption of FAS 141(R) on its results of operations and financial position.

     In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161 (“FAS 161”), “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133.” FAS 161 expands quarterly disclosure requirements in FAS 133 about an entity’s derivative instruments and hedging activities. FAS 161 is effective for fiscal years beginning after November 15, 2008. The Company is currently evaluating the impact, if any, of the adoption of FAS 161 on its results of operations and financial position.

     In April 2008, the FASB issued FSP 142-3, “Determination of the Useful Life of Intangible Assets.” FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under Statement of Financial Accounting Standards No. 142 (“FAS 142”), “Goodwill and Other Intangible Assets.” FSP 142-3 is intended to improve the consistency among the useful life of a recognized intangible asset under FAS 142, the period of expected cash flows used to measure the fair value of an asset under FAS 141(R), and other guidance under generally accepted accounting principles in the Unites States. FSP 142-3 is effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the impact, if any, of the adoption of FSP 142-3 on its results of operations and financial position.

     In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162 (“FAS 162”), “The Hierarchy of Generally Accepted Accounting Principles.” This statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. This statement will be effective 60 days following the Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” The Company is currently evaluating the impact, if any, of the adoption of FAS 162 on its results of operations and financial position.

NOTE 2 — STOCK-BASED COMPENSATION

     At the Company’s annual meeting in May 2008, the stockholders approved amendments to the 2003 Equity Incentive Plan (the “2003 Plan”) and the Employee Stock Purchase Plan (the “US ESPP”). The principal changes to the 2003 Plan were:

	•		Making a total of 45 million shares available for use under the 2003 Plan. Of that amount, 15 million shares were available for grants of restricted stock and restricted stock units;
	•		Allowing non-employee directors to be eligible to participate in the 2003 Plan;

	•		Including stock appreciation rights as a permitted type of award under the 2003 Plan;
	•		Increasing the limits on the size of awards that can be granted under the 2003 Plan to any person in one year from two million to four million shares for stock options and from 0.5 million to one million shares for restricted stock and restricted stock units; and
	•		Allowing incentive stock options to be granted under the 2003 Plan until May 14, 2018.

     The Company will no longer award stock options, stock appreciation rights, restricted stock or restricted stock units under any other existing plans.

     The principal changes to the US ESPP were:

	•		Making a total of 25 million shares available for purchase under the US ESPP after May 14, 2008;
	•		Consolidating the Company’s International Employee Stock Purchase Plan (“IESPP”) into the US ESPP, which is expected to occur in November 2008; and
	•		Extending the term of the US ESPP through May 14, 2018.

     The following table summarizes stock-based compensation expense related to the Company’s stock options, employee stock purchase plans (“ESPPs,” which include the US ESPP and the IESPP) and restricted stock unit awards in the consolidated statements of operations for the three and nine months ended September 28, 2008 and September 30, 2007. Stock-based compensation costs capitalized to inventory and software development for the three and nine months ended September 28, 2008 and September 30, 2007 were not significant.

		Three Months Ended								Nine Months Ended
Stock-Based Compensation Expense Included in:		September 28, 2008				September 30, 2007				September 28, 2008				September 30, 2007
		(In thousands)
Cost of revenues		$	2,252			$	2,824			$	6,885			$	7,916
Research and development			6,593				8,916				21,985				22,611
Selling, general and administrative			8,005				10,035				25,422				25,245
Total stock-based compensation expense		$	16,850			$	21,775			$	54,292			$	55,772

     The estimated fair value of the stock-based awards, less expected forfeitures, is amortized over each award’s vesting period on a straight-line basis.

Stock Options

     The fair value of each option grant is estimated on the date of grant using a reduced form calibrated binominal lattice model (the “lattice model”). This model requires the use of historical data for employee exercise behavior and the use of the assumptions outlined in the following table:

		Three Months Ended								Nine Months Ended
		September 28, 2008				September 30, 2007				September 28, 2008				September 30, 2007
Weighted average estimated grant date fair value per share		$	2.63			$	2.54			$	2.06			$	3.31
Weighted average assumptions in calculation:
Expected life (years)			4.38				4.36				4.37				4.35
Risk-free interest rate			3	%			4	%			3	%			5	%
Volatility			53	%			49	%			52	%			46	%

     The expected life of employee stock options represents the weighted-average period the stock options are expected to remain outstanding and is a derived output of the lattice model. The expected life of employee stock options is affected by all of the underlying assumptions and calibration of the Company’s model.

     The risk-free interest rate assumption is based upon observed interest rates of constant maturity U. S. Treasury securities appropriate for the term of the Company’s employee stock options.

     The Company used an equally weighted combination of historical and implied volatilities as of the grant date. The historical volatility is the standard deviation of the daily stock returns for LSI from the date of the initial public offering of its common stock in 1983. For the implied volatilities, the Company uses near-the-money exchange-traded call options, as stock options are call options that are granted at-the-money. The historical and implied volatilities are annualized and equally weighted to determine the volatilities as of the grant date. Management believes that the equally weighted combination of historical and implied volatilities is more representative of future stock price trends than sole use of historical or implied volatilities.

     The lattice model assumes that employees’ exercise behavior is a function of the option’s remaining vested life and the extent to which the option is in-the-money. The lattice model estimates the probability of exercise as a function of these two variables based on the entire history of exercises and cancellations for all past option grants made by the Company since its initial public offering.

     Because stock-based compensation expense recognized is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on historical experience.

     A summary of the changes in stock options outstanding during the nine months ended September 28, 2008 is presented below:

						Weighted Average				Weighted Average
						Exercise				Remaining				Aggregate
		Number of				Price Per				Contractual				Intrinsic
		Shares				Share				Term				Value
		(In thousands)								(In years)				(In thousands)
Options outstanding at December 31, 2007			100,242			$	16.12				—				—
Options granted			17,993				5.75				—				—
Options exercised			(4,679	)			(5.41	)			—				—
Options canceled			(26,035	)			(21.78	)			—				—
Options outstanding at September 28, 2008			87,521			$	12.88				4.22			$	12,251
Options exercisable at September 28, 2008			49,203			$	17.45				3.02			$	3,993

     As of September 28, 2008, total unrecognized compensation expense related to nonvested stock options, net of estimated forfeitures, was approximately $93.7 million and is expected to be recognized over the next 2.7 years on a weighted average basis. The total intrinsic value of options exercised during the three and nine months ended September 28, 2008 was $1.9 million and $7.2 million, respectively. Cash received from stock option exercises was $6.8 million and $25.3 million for the three and nine months ended September 28, 2008, respectively.

     The Company’s determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as a number of highly complex and subjective assumptions. The Company uses third-party consultants to assist in developing the assumptions used in, as well as calibrating, the lattice model. The Company is responsible for determining the assumptions used in estimating the fair value of its share-based payment awards.

Employee Stock Purchase Plans

     A total of 2.2 million shares and 1.7 million shares related to the ESPPs were issued during the three months ended June 29, 2008 and July 1, 2007, respectively. No shares related to the ESPPs were issued during the three months ended September 28, 2008 and September 30, 2007. For disclosure purposes, the assumptions that went into the calculation of fair value for the May 2008 and May 2007 grants were as follows:

		Three Months Ended
		June 29, 2008				July 1, 2007
Weighted average estimated grant date fair value per share		$	2.13			$	2.37
Weighted average assumptions in calculation:
Expected life (years)			0.8				0.8
Risk-free interest rate			2	%			5	%
Volatility			44	%			38	%

Restricted Stock Awards

     A summary of the changes in restricted stock units outstanding during the nine months ended September 28, 2008 is presented below.

		Number of Shares
		(In thousands)
Non-vested shares at December 31, 2007			9,177
Granted			1,736
Vested			(2,337	)
Forfeited			(512	)
Non-vested shares at September 28, 2008			8,064

     As of September 28, 2008, the total unrecognized compensation expense related to restricted stock units, net of estimated forfeitures, was $46.3 million and is expected to be recognized over the next 1.9 years on a weighted average basis. The fair value of shares vested during the three and nine months ended September 28, 2008 was $2.1 million and $12.8 million, respectively.

NOTE 3 — RESTRUCTURING AND OTHER ITEMS

     The Company recorded charges of $1.6 million and $26.9 million in restructuring of operations and other items, net, for the three and nine months ended September 28, 2008, respectively. The Company recorded charges of $101.2 million and $119.1 million in restructuring of operations and other items, net, for the three and nine months ended September 30, 2007, respectively. For a complete discussion of the 2007 restructuring actions, see Note 2 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

Restructuring and Impairment of Long-Lived Assets

     The Company recorded a charge of $1.7 million related to restructuring of operations for the three months ended September 28, 2008, which was recorded in the Semiconductor segment. The Company recorded a charge of $15.0 million related to restructuring of operations for the nine months ended September 28, 2008. Of this charge, $14.7 million and $0.3 million were recorded in the Semiconductor segment and the Storage Systems segment, respectively.

     The restructuring of operations charges included $0.9 million and $5.3 million related to the Agere merger for the three and nine months ended September 28, 2008, respectively. See further discussion under “Restructuring Actions Associated with the Agere Merger” below.

First Quarter of 2008:

     A net charge of $1.8 million in restructuring of operations resulted from the following items:

	•		A gain of $2.0 million from the sale of land in Gresham, Oregon, which had a net book value of $0.9 million. Total proceeds from the sale were $2.9 million;
	•		A charge of $5.0 million for lease termination costs, which included $3.1 million for additional lease termination costs in the United States and $1.9 million for changes in previously accrued facility lease exit costs including changes in the time-value of accruals; and
	•		A credit of $1.2 million primarily for severance and termination benefits for employees due to a change in estimates primarily for restructuring actions taken in January 2008.

Second Quarter of 2008:

     A charge of $7.1 million in restructuring of operations resulted from the following items:

	•		A charge of $3.4 million for lease termination costs, which included $2.7 million for additional United States lease termination costs including the related write-off of leasehold improvements and $0.7 million in charges for changes in assumptions and changes in the time value of accruals for previously accrued facility lease exit costs; and
	•		A charge of $3.7 million for severance and termination benefits for employees, which included $1.8 million for integrating operations in Asia and $1.9 million for changes in estimates related to various restructuring actions taken since June 2007.

Third Quarter of 2008:

     A charge of $0.8 million in restructuring of operations resulted from the following items:

	•		A credit of $0.6 million for the reversal of a prior accrual offset by changes in previously accrued facility lease exit costs including changes in the time-value of accruals; and
	•		A charge of $1.4 million for severance and termination benefits for employees, which included $0.8 million as the result of a change in severance estimates related to restructuring actions taken in January 2008 and $0.6 million primarily for integrating operations in Asia.

     The following table sets forth the Company’s restructuring reserves as of September 28, 2008, other than reserves related to restructuring actions associated with the Agere merger, which are included in other accrued liabilities and other non-current liabilities in the consolidated balance sheet, and the activities affecting the accruals since December 31, 2007:

		Balance at				Restructuring				Utilized				Balance at				Restructuring				Utilized				Balance at				Restructuring				Utilized				Balance at
		December 31,				Expense				During				March 30,				Expense				During				June 29,				Expense				During				September 28,
		2007				Q1 2008				Q1 2008				2008				Q2 2008				Q2 2008				2008				Q3 2008				Q3 2008				2008
		(In thousands)
Write-down of excess assets and other liabilities (a)		$	225			$	(1,976	)		$	1,834			$	83			$	876			$	(876	)		$	83			$	(828	)		$	828			$	83
Lease terminations (b)			23,318				4,998				(1,961	)			26,355				2,494				(4,333	)			24,516				252				(3,612	)			21,156
Payments to employees for severance (c)			24,817				(1,230	)			(12,899	)			10,688				3,723				(4,446	)			9,965				1,370				(3,626	)			7,709
Total		$	48,360			$	1,792			$	(13,026	)		$	37,126			$	7,093			$	(9,655	)		$	34,564			$	794			$	(6,410	)		$	28,948

Restructuring Actions Associated with the Agere Merger

     In connection with the Agere merger, management approved and initiated plans to restructure the operations of Agere to eliminate certain duplicative activities, reduce cost structure and better align product and operating expenses with existing general economic conditions. Agere restructuring costs were accounted for as liabilities assumed as part of the purchase business combination as of April 2, 2007 in accordance with Emerging Issues Task Force Issue No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination.” For a complete discussion of the Agere merger, see Note 4 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

     Adjustments to the initial restructuring cost estimates made before December 31, 2007 were recorded as an offset to goodwill and to restructuring expense thereafter.

First Quarter of 2008:

     A net charge of $1.5 million in restructuring related to the Agere merger resulted from the following items:

	•		A charge of $1.1 million for changes in assumptions and the time value of accruals previously recorded for facility lease exit costs;
	•		A charge of $1.6 million for severance and termination benefits due to a change in severance estimates; and
	•		A gain of $1.2 million from the sale of assets held for sale in Singapore.

Second Quarter of 2008:

     A net charge of $2.9 million in restructuring related to the Agere merger resulted from the following items:

	•		A charge of $3.0 million for lease termination costs, which included $2.4 million for changes in assumptions resulting from changes in market conditions and $0.6 million for the change in the time value of accruals previously recorded for facility lease exit costs;
	•		A net charge of $0.2 million for severance and termination benefits due to a change in severance estimates; and
	•		A net credit of $0.3 million including a gain of $0.6 million primarily from the sale of assets held for sale in Singapore, a credit of $0.4 million primarily for the reversal of an earlier write-down of held for sale assets which were put back for use and a $0.7 million charge for plant closing costs.

Third Quarter of 2008:

     A charge of $0.9 million in restructuring related to the Agere merger resulted from lease termination costs, which included changes in assumptions resulting from changes in market conditions and changes in the time value of accruals previously recorded for facility lease exit costs.

     The following table sets forth restructuring reserves related to the Agere merger as of September 28, 2008, which are included in other accrued liabilities and other non-current liabilities in the consolidated balance sheet, and the activities affecting the accruals since December 31, 2007:

						Change in												Changes in												Changes in
		Balance at				Estimates				Utilized				Balance at				Estimates				Utilized				Balance at				Estimates				Utilized				Balance at
		December 31,				During				During				March 30,				During				During				June 29,				During				During				September 28,
		2007				Q1 2008				Q1 2008				2008				Q2 2008				Q2 2008				2008				Q3 2008				Q3 2008				2008
		(In thousands)
Lease terminations (a)		$	33,439			$	1,068			$	(3,671	)		$	30,836			$	3,002			$	(3,647	)		$	30,191			$	877			$	(2,723	)		$	28,345
Payments to employees for severance (b)			18,926				1,635				(10,581	)			9,980				190				(5,102	)			5,068				4				(738	)			4,334
Stock compensation charges in accordance with FAS 123R (c)			20,860				—				(7,844	)			13,016				—				(11,290	)			1,726				—				—				1,726
Write-down of excess assets and other liabilities (d)			—				(1,163	)			1,163				—				(320	)			320				—				47				(47	)			—
Total		$	73,225			$	1,540			$	(20,933	)		$	53,832			$	2,872			$	(19,719	)		$	36,985			$	928			$	(3,508	)		$	34,405

Assets Held for Sale

     Assets held for sale are included as a component of prepaid expenses and other current assets in the consolidated balance sheets as of September 28, 2008 and December 31, 2007. Assets held for sale of $18.4 million as of September 28, 2008 primarily included $16.8 million related to land in Gresham, Oregon and $0.9 million related to land in Colorado. Assets held for sale of $26.1 million as of December 31, 2007 included $17.7 million related to land in Gresham, Oregon, $6.8 million related to semiconductor assembly and test facilities in Singapore and $0.9 million related to land in Colorado.

     Assets classified as held for sale are recorded at the lower of their carrying amount or fair value less cost to sell and are not depreciated. The fair values of impaired equipment and facilities were researched and estimated by management. The Company reassesses the ability to realize the carrying value of these assets at the end of each quarter until the assets are sold or otherwise disposed of, and therefore, additional adjustments may be necessary.

Other Items

     The Company recorded a net credit of $0.1 million and a charge of $11.9 million related to other items for the three months and nine months ended September 28, 2008, respectively. The majority of the charge resulted from the settlement of the Litton proceeding referred to in Note 13.

NOTE 4 — BUSINESS COMBINATIONS

Acquisition of Hard Disk Drive Semiconductor Business of Infineon

     On April 25, 2008, the Company completed the acquisition of the assets of the hard disk drive (“HDD”) semiconductor business of Infineon Technologies AG (“Infineon”). The acquisition was intended to enhance the Company’s competitive position in the desktop and enterprise HDD space. The acquisition was accounted for under the purchase method of accounting.

     In connection with the acquisition, the Company also entered into additional agreements with Infineon, including a supply agreement and a transition service agreement. Under the terms of the supply agreement, Infineon will provide the Company operations handling and wafer supply services for a period of up to six months from the date of acquisition in April 2008. These services were priced separately and at fair market values. Under the terms of the transition services agreement, Infineon will provide the Company engineering services in support of the existing HDD business products for the period from the date of acquisition in April 2008 to December 31, 2009. These services were priced separately and at fair market values.

     The table below provides information about this acquisition:

Entity Name or Type of Technology; Segment Included in;

Total

Fair Value of

Description of

Purchase

Type of

Other Assets

Amortizable

Acquired Business

Acquisition Date

Price

Consideration

Acquired

Goodwill

Intangible Assets

(Dollars in millions)

HDD semiconductor business of Infineon; Semiconductor segment; Silicon solutions for hard disk drive makers

April 25, 2008

$

95.1

cash

$

10.3

$

6.6

$

78.2

     The following table sets forth the components of the identifiable intangible assets associated with this acquisition, which are being amortized over the estimated usage periods:

						Weighted Average
		Fair Value				Useful Life
		(In millions)				(in years)
Current technology		$	46.5				4
Customer base			31.7				5
Total acquired identifiable intangible assets		$	78.2

     Pro forma financial information has not been presented because the effect of this acquisition on the Company’s results of operations was not material.

Agere Merger — Pro Forma Results

     On April 2, 2007, the Company acquired Agere. The following pro forma summary is provided for illustrative purposes only and is not necessarily indicative of the consolidated results of operations for future periods or results that actually would have been realized had the Company and Agere been a consolidated entity during the period presented. The summary combines the results of operations as if Agere had been acquired as of the beginning of the period presented.

     The summary includes the impact of certain adjustments such as amortization of intangibles, stock compensation charges and interest expense related to Agere’s convertible notes that the Company guaranteed. Additionally, acquired in-process research and development associated with the Agere acquisition has been excluded from the period presented. Pro forma amounts presented below are in thousands except per share data.

		Nine Months Ended
		September 30, 2007
Revenues		$	2,197,613
Net loss		$	(309,374	)
Basic loss per share		$	(0.41	)
Diluted loss per share		$	(0.41	)

NOTE 5 — BENEFIT OBLIGATIONS

     The Company has pension plans covering substantially all former Agere U. S. employees, excluding management employees hired after June 30, 2003. Retirement benefits are offered under a defined benefit plan and are based on either an adjusted career average pay or dollar per month formula or on a cash balance plan. The cash balance plan provides for annual company contributions based on a participant’s age and compensation and interest on existing balances and covers employees of certain companies acquired by Agere since 1996 and management employees hired after January 1, 1999 and before July 1, 2003. The Company also has postretirement benefit plans that include healthcare benefits and life insurance coverage for former Agere employees. Participants in the cash balance plan and management employees hired after June 30, 2003 are not entitled to company paid benefits under the postretirement benefit plans. The Company also has pension plans covering certain international employees.

     The following table sets forth the components of the net periodic benefit credit for the three and nine months ended September 28, 2008 and September 30, 2007:

		Three Months Ended
		September 28, 2008								September 30, 2007
		Pension				Post-retirement				Pension				Post-retirement
		Benefits				Benefits				Benefits				Benefits
		(In thousands)
Service cost		$	1,298			$	25			$	1,867			$	41
Interest cost			18,947				745				18,395				932
Expected return on plan assets			(20,701	)			(1,258	)			(21,026	)			(1,235	)
Amortization of prior service cost			4				—				—				—
Net actuarial gain recognized			—				(30	)			—				—
Total benefit credit		$	(452	)		$	(518	)		$	(764	)		$	(262	)

		Nine Months Ended
		September 28, 2008								September 30, 2007
		Pension				Post-retirement				Pension				Post-retirement
		Benefits				Benefits				Benefits				Benefits
		(In thousands)
Service cost		$	4,201			$	77			$	3,734			$	82
Interest cost			56,084				2,278				36,791				1,863
Expected return on plan assets			(61,865	)			(3,775	)			(41,885	)			(2,429	)
Amortization of prior service cost			12				—				—				—
Net actuarial gain recognized			(1	)			(89	)			—				—
Total benefit credit		$	(1,569	)		$	(1,509	)		$	(1,360	)		$	(484	)

     During the nine months ended September 28, 2008, the Company contributed $8.8 million to its pension plans and $11.9 million to its post-retirement benefit plans. The Company expects to contribute an additional $1.7 million and $3.6 million to its pension plans and post-retirement benefit plans, respectively, for the remainder of 2008.

NOTE 6 — INTANGIBLE ASSETS AND GOODWILL

     Intangible Assets

     As of September 28, 2008 and December 31, 2007, intangible assets by reportable segment were comprised of the following:

		September 28, 2008								December 31, 2007
		Gross				Accumulated				Gross				Accumulated
		Carrying Amount				Amortization				Carrying Amount				Amortization
		(In thousands)
Semiconductor:
Current technology		$	894,808			$	(394,702	)		$	848,656			$	(298,525	)
Trademarks			26,657				(26,236	)			26,730				(26,272	)
Customer base			399,508				(65,782	)			367,808				(20,761	)
Non-compete agreements			1,949				(1,639	)			1,949				(1,165	)
Existing purchase orders			200				(200	)			200				(200	)
Supply agreement			100				(100	)			100				(100	)
Patent licensing			313,800				(54,367	)			313,800				(27,183	)
Order backlog			41,300				(41,300	)			41,300				(41,300	)
Workforce			3,567				(1,108	)			3,567				(661	)
Trade names			2,248				(375	)			2,248				(94	)
Subtotal			1,684,137				(585,809	)			1,606,358				(416,261	)
Storage Systems:
Current technology			164,339				(134,668	)			164,339				(130,361	)
Trademarks			7,150				(7,150	)			7,150				(7,149	)
Customer base			5,010				(5,010	)			5,010				(5,010	)
Non-compete agreements			1,600				(1,600	)			1,600				(1,156	)
Supply agreement			8,147				(8,147	)			8,147				(8,147	)
Trade names			800				(209	)			800				(124	)
Subtotal			187,046				(156,784	)			187,046				(151,947	)
Total intangible assets		$	1,871,183			$	(742,593	)		$	1,793,404			$	(568,208	)

     On April 25, 2008, the Company completed the acquisition of Infineon’s HDD semiconductor business.

     The following table sets forth amortization expense and weighted average lives of intangible assets:

		Weighted				Nine Months Ended
		Average Lives				September 28, 2008				September 30, 2007
		(In months)				(In thousands)
Current technology			57			$	100,833			$	65,392
Trademarks			83				37				839
Customer base			45				45,020				13,809
Non-compete agreements			27				918				1,238
Supply agreement			32				—				775
Patent licensing			36				27,183				18,259
Order backlog			2				—				53,000
Workforce			72				447				447
Trade names			75				366				86
Total			50			$	174,804			$	153,845

     The estimated future amortization expense related to intangible assets as of September 28, 2008 was as follows:

		Amount
		(In thousands)
Fiscal Year:
2008 (September 29 through December 31, 2008)		$	60,279
2009			234,926
2010			191,666
2011			149,914
2012 and thereafter			491,805
Total		$	1,128,590

Goodwill

     The following table sets forth changes in the carrying amount of goodwill for the nine months ended September 28, 2008:

		Semiconductor				Storage Systems
		Segment				Segment				Total
		(In thousands)
Balance as of December 31, 2007		$	323,927			$	175,624			$	499,551
Goodwill acquired during the year *			6,624				—				6,624
Goodwill acquired in a prior year for a pre-acquisition income tax contingency **			31,342				—				31,342
Balance as of September 28, 2008		$	361,893			$	175,624			$	537,517

NOTE 7 — DERIVATIVE INSTRUMENTS

     The Company has foreign subsidiaries that operate and sell the Company’s products in various global markets. As a result, the Company is exposed to changes in foreign currency exchange rates. The Company utilizes various hedge instruments, primarily forward contracts, to manage its exposure associated with net asset and liability positions denominated in non-functional currencies and forecasted foreign currency transactions to reduce the volatility of earnings and cash flows. The Company does not hold derivative financial instruments for speculative or trading purposes.

     The Company enters into forward contracts that are designated as foreign currency cash flow hedges of forecasted payments denominated in currencies other than U.S. dollars. Changes in the fair value of the forward contracts attributable to changes in time value are excluded from the assessment of effectiveness and are recognized in interest income and other, net. The effective portion of the forward contracts’ gain or loss is initially reported as a component of accumulated other comprehensive income and subsequently reclassified into earnings when the hedged exposure affects earnings. The ineffective portion, if any, of the gain or loss is reported in earnings immediately. As of September 28, 2008, the Company held forward contracts designated as foreign currency cash flow hedges of forecasted Euro, Pound Sterling and Indian Rupee payment transactions that were set to expire from one to eleven months. For the three and nine months ended September 28, 2008, the changes in time value of these forward contracts were not significant. The unrealized gains, net of incomes taxes, included in accumulated other comprehensive income as of September 28, 2008, which will be reclassified into earnings within the next twelve months, were $0.1 million. The Company did not record any gains or losses due to hedge ineffectiveness for the three and nine months ended September 28, 2008. There were no such hedges outstanding as of December 31, 2007.

NOTE 8 — OTHER BALANCE SHEET DETAILS

		September 28,				December 31,
		2008				2007
		(In thousands)
Cash and cash equivalents:
Cash in financial institutions		$	65,751			$	117,464
Cash equivalents			719,159				904,105
Total cash and cash equivalents		$	784,910			$	1,021,569
Available-for-sale debt securities: *
Asset-backed and mortgage-backed securities		$	206,523			$	207,290
U.S. government and agency securities			163,226				121,350
Corporate and municipal debt securities			19,268				47,388
Total short-term investments		$	389,017			$	376,028
Inventories:
Raw materials		$	31,560			$	30,023
Work-in-process			63,696				95,262
Finished goods			114,702				115,557
Total inventories		$	209,958			$	240,842

						Interest				Conversion				September 28,				December 31,
		Maturity				Rate				Price				2008				2007
		(In thousands)
Long-term debt:
2003 Convertible Subordinated Notes			2010				4.00	%		$	13.4200			$	350,000			$	350,000
2002 Convertible Subordinated Notes **			2009				6.50	%		$	15.3125				361,645				361,660
Accrued debt premium															8,589				8,589
															720,234				720,249
Amortization of accrued debt premium															(4,639	)			(2,282	)
Total long-term debt														$	715,595			$	717,967

NOTE 9 — RECONCILIATION OF BASIC AND DILUTED INCOME/(LOSS) PER SHARE

     The following table sets forth a reconciliation of the numerators and denominators used in the computation of basic and diluted per share amounts:

		Three Months Ended
		September 28, 2008												September 30, 2007
										Per-Share												Per-Share
		Income*				Shares+				Amount				Loss*				Shares+				Amount
		(In thousands except per share amounts)
Basic income/(loss) per share:
Net income/(loss) available to common stockholders		$	11,371				643,849			$	0.02			$	(140,600	)			715,733			$	(0.20	)
Stock options, employee stock purchase rights and restricted stock unit awards			—				3,569				—				—				—				—
Diluted income/(loss) per share:
Net income/(loss) available to common stockholders		$	11,371				647,418			$	0.02			$	(140,600	)			715,733			$	(0.20	)

		Nine Months Ended
		September 28, 2008												September 30, 2007
										Per-Share												Per-Share
		Loss*				Shares+				Amount				Loss*				Shares+				Amount
		(In thousands except per share amounts)
Basic loss per share:
Net loss available to common stockholders		$	(15,904	)			648,519			$	(0.02	)		$	(488,621	)			623,692			$	(0.78	)
Stock options, employee stock purchase rights and restricted stock unit awards			—				—				—				—				—				—
Diluted loss per share:
Net loss available to common stockholders		$	(15,904	)			648,519			$	(0.02	)		$	(488,621	)			623,692			$	(0.78	)

     Options to purchase 80,902,022 and 87,628,269 shares were excluded from the computation of diluted shares for the three and nine months ended September 28, 2008, respectively, because of their antidilutive effect on net income/(loss) per share. Options to purchase 99,238,936 and 76,909,990 shares were excluded from the computation of diluted shares for the three and nine months ended September 30, 2007, respectively, because of their antidilutive effect on net loss per share.

     For the three and nine months ended September 28, 2008, 49,698,093 and 49,698,418 weighted average potentially dilutive shares associated with convertible notes, respectively, were excluded from the calculation of diluted shares because of their antidilutive effect on net income/(loss) per share. For the three and nine months ended September 30, 2007, 49,699,072 and 41,826,201 weighted average potentially dilutive shares associated with convertible notes, respectively, were excluded from the calculation of diluted shares because of their antidilutive effect on net loss per share.

NOTE 10 — SEGMENT REPORTING

     The Company operates in two reportable segments — the Semiconductor segment and the Storage Systems segment — in which the Company offers products and services for a variety of electronic systems applications. LSI’s products are marketed primarily to original equipment manufacturers (“OEMs”) that sell products to the Company’s target end customers.

Summary of Operations by Segment

     The following is a summary of operations by segment for the three and nine months ended September 28, 2008 and September 30, 2007:

		Three Months Ended								Nine Months Ended
		September 28, 2008				September 30, 2007				September 28, 2008				September 30, 2007
		(In thousands)
Revenues:
Semiconductor		$	500,432			$	530,013			$	1,421,244			$	1,287,227
Storage Systems			213,876				197,402				645,874				575,542
Total		$	714,308			$	727,415			$	2,067,118			$	1,862,769
Income/(loss) from operations:
Semiconductor		$	8,892			$	(147,344	)		$	(47,371	)		$	(485,996	)
Storage Systems			13,644				7,169				45,718				9,374
Total		$	22,536			$	(140,175	)		$	(1,653	)		$	(476,622	)

     For the three months ended September 28, 2008, restructuring of operations and other items, a net of $1.6 million, was primarily included in the Semiconductor segment. For the nine months ended September 28, 2008, restructuring of operations and other items, net, for the Semiconductor and Storage Systems segments were $26.6 million and $0.3 million, respectively.

     For the three months ended September 30, 2007, restructuring of operations and other items, a net of $101.2 million, was primarily included in the Semiconductor segment. For the nine months ended September 30, 2007, restructuring of operations and other items, net, for the Semiconductor and Storage Systems segments were $115.0 million and $4.1 million, respectively.

Significant Customers

     The following table summarizes the number of the Company’s significant customers, each of whom accounted for 10% or more of the Company’s revenues, along with the percentage of revenues they individually represent by segment and on a consolidated basis:

		Three Months Ended								Nine Months Ended
		September 28, 2008				September 30, 2007				September 28, 2008				September 30, 2007
Semiconductor segment:
Number of significant customers			1				2				1				2
Percentage of segment revenues			26	%			29%, 17	%			27	%			26%, 14	%
Storage Systems segment:
Number of significant customers			4				3				2				2
Percentage of segment revenues			46%, 12%, 10%, 10	%			46%, 15%, 11	%			45%, 15	%			46%, 18	%
Consolidated:
Number of significant customers			2				3				2				2
Percentage of consolidated revenues			18%, 15	%			21%, 13%, 12	%			19%, 15	%			18%, 15	%

Information about Geographic Areas

     Revenues from domestic operations were $155.2 million, representing 21.7% of consolidated revenues, for the three months ended September 28, 2008 compared to $205.2 million, representing 28.2% of consolidated revenues, for the three months ended September 30, 2007.

     Revenues from domestic operations were $582.8 million, representing 28.2% of consolidated revenues, for the nine months ended September 28, 2008 compared to $623.8 million, representing 33.5% of consolidated revenues, for the nine months ended September 30, 2007.

NOTE 11 — COMPREHENSIVE INCOME/(LOSS)

     Comprehensive income/(loss) is defined as a change in equity of a company during a period from transactions and other events and circumstances, excluding transactions resulting from investments by owners and distributions to owners. Comprehensive income/ (loss), net of taxes, for the three and nine months ended September 28, 2008 and September 30, 2007 is as follows:

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

NOTE 12 — RELATED PARTY TRANSACTIONS

     A member of the Company’s board of directors is also a member of the board of directors of Seagate Technology. The Company sells semiconductors used in storage product applications to Seagate Technology for prices an unrelated third party would pay for such products. Revenues from sales to Seagate Technology were $131.6 million and $384.2 million for the three and nine months ended September 28, 2008, respectively. Revenues from sales to Seagate Technology were $155.0 million and $334.5 million for the three and nine months ended September 30, 2007, respectively. The Company had accounts receivable from Seagate Technology of $73.4 million and $103.6 million as of September 28, 2008 and December 31, 2007, respectively.

     Upon the merger with Agere, the Company acquired an equity interest in a joint venture, Silicon Manufacturing Partners Pte Ltd. (“SMP”), formed by Agere and Chartered Semiconductor Manufacturing Ltd. (“Chartered Semiconductor”), a manufacturing foundry for integrated circuits. SMP operates an integrated circuit manufacturing facility in Singapore. The Company owns a 51% equity interest in this joint venture, and Chartered Semiconductor owns the remaining 49% equity interest. The Company’s 51% interest in SMP is accounted for under the equity method because the Company is effectively precluded from unilaterally taking any significant action in the management of SMP due to Chartered Semiconductor’s significant participatory rights under the joint venture agreement. Because of Chartered Semiconductor’s approval rights, the Company cannot make any significant decisions regarding SMP without Chartered Semiconductor’s approval, despite the 51% equity interest. In addition, the General Manager, who is responsible for the day-to-day management of SMP, is appointed by Chartered Semiconductor and Chartered Semiconductor provides the day-to-day operational support to SMP.

     The Company purchased $16.6 million and $53.1 million of inventory from SMP for the three and nine months ended September 28, 2008, respectively. The Company purchased $18.4 million and $37.0 million of inventory from SMP for the three and nine months ended September 30, 2007, respectively. As of September 28, 2008 and December 31, 2007, the amount of inventory on hand that was purchased from SMP was $9.3 million and $11.3 million, respectively, and the amounts payable to SMP were $4.6 million and $10.2 million, respectively.

NOTE 13 — COMMITMENTS, CONTINGENCIES AND LEGAL MATTERS

Purchase Commitments

     The Company maintains some purchase commitments with suppliers primarily for raw materials and manufacturing services and for some non-production items. Purchase commitments for inventory materials are generally restricted to a forecasted time-horizon as mutually agreed upon between the parties. This forecasted time-horizon can vary among different suppliers.

     In connection with the sale of the Company’s Gresham, Oregon semiconductor manufacturing facility in 2006, the Company entered into a multi-year wafer supply agreement with ON Semiconductor, under which LSI agreed to purchase $202.6 million in wafers from ON Semiconductor between May 2006 and the end of LSI’s fourth quarter of 2008. In September 2008, this wafer supply agreement was amended to extend the ending period for the commitment to the end of LSI’s second quarter of 2009. As of September 28, 2008, the remaining purchases required under this arrangement were not significant.

     The Company has a take or pay agreement with SMP under which it has agreed to purchase 51% of the managed wafer capacity from SMP’s integrated circuit manufacturing facility and Chartered Semiconductor agreed to purchase the remaining 49% of the managed wafer capacity. SMP determines its managed wafer capacity each year based on forecasts provided by the Company and

Chartered Semiconductor. If the Company fails to purchase its required commitments, it will be required to pay SMP for the fixed costs associated with the unpurchased wafers. Chartered Semiconductor is similarly obligated with respect to the wafers allotted to it. The agreement may be terminated by either party upon two years written notice. The agreement may also be terminated for material breach, bankruptcy or insolvency.

Guarantees

Product Warranties:

     The Company warrants finished goods against defects in material and workmanship under normal use and service for periods of one to five years. A liability for estimated future costs under product warranties is recorded when products are shipped.

     The following table sets forth a summary of changes in product warranties during the nine months ended September 28, 2008 (in thousands):

Balance as of December 31, 2007		$	14,734
Accruals for warranties issued during the period			11,331
Accruals related to pre-existing warranties (including changes in estimates)			(1,529	)
Settlements made during the period (in cash or in kind)			(10,737	)
Balance as of September 28, 2008		$	13,799

Convertible Subordinated Notes:

     As part of the merger with Agere, the Company guaranteed Agere’s 6.5% Convertible Subordinated Notes due December 15, 2009. As of September 28, 2008 and December 31, 2007, $361.6 million and $361.7 million of these notes were outstanding, respectively. See Note 14 below.

Standby Letters of Credit:

     As of September 28, 2008 and December 31, 2007, the Company had outstanding obligations relating to standby letters of credit of $21.5 million and $11.1 million, respectively. Standby letters of credit are financial guarantees provided by third parties for leases, claims from litigations and certain self-insured risks. If the guarantees are called, the Company must reimburse the provider of the guarantee. The fair value of the letters of credit approximates the contract amount and they generally have one-year terms.

FASB Interpretation No. 48 (“FIN 48”) Liabilities

     As of September 28, 2008, the amount of the unrecognized tax benefits determined under FIN 48 was $228.8 million, of which none is expected to be paid within one year. This is a net increase of $21.4 million in unrecognized tax benefits from the previous quarter. Increases and decreases were made to unrecognized tax benefits as a result of tax positions taken during a prior period. In the third quarter of 2008, based on new information received, certain unrecognized tax benefits taken in prior quarters were re-measured. Other decreases were made to unrecognized tax benefits as a result of a lapse of the statute of limitations in a tax jurisdiction.

     The Company is unable to make a reasonably reliable estimate as to when cash settlement with a taxing authority may occur. However, it is reasonably possible that the total amount of unrecognized tax benefits will increase or decrease in the next 12 months. Such changes could occur based on the normal expiration of various statutes of limitations or the possible conclusion of ongoing tax audits in various jurisdictions around the world. If those events occur within the next 12 months, the Company estimates that its unrecognized tax benefits, plus accrued interest and penalties, could decrease by an amount in the range of $0 to $32.6 million. A majority of this would affect the Company’s effective tax rate.

Indemnifications

     The Company is a party to a variety of agreements pursuant to which it may be obligated to indemnify the other party. Typically, these obligations arise in connection with contracts and license agreements or the sale of assets, under which the Company customarily agrees to hold the other party harmless against losses arising from a breach of warranties, representations and covenants related to such matters as title to assets sold, validity of certain intellectual property rights, non-infringement of third-party rights, and certain income tax-related matters. In each of these circumstances, payment by the Company is typically subject to the other party

making a claim to and cooperating with the Company pursuant to the procedures specified in the particular contract. This usually allows the Company to challenge the other party’s claims or, in case of breach of intellectual property representations or covenants, to control the defense or settlement of any third-party claims brought against the other party. Further, the Company’s obligations under these agreements may be limited in terms of activity (typically to replace or correct the products or terminate the agreement with a refund to the other party), duration and/or amounts. In some instances, the Company may have recourse against third parties covering payments made by the Company.

Legal Matters

     On May 1, 2003, Litton Systems (“Litton”) and Stanford University filed a patent infringement lawsuit against Agere and others in the United States District Court for the Central District of California (Western Division). The complaint alleged that each of the defendants infringed a patent related to the manufacture of optical amplifiers. The patent, which expired in October 2003, was owned by Stanford University and was exclusively licensed to Litton. The complaint sought, among other remedies, monetary damages, counsel fees and injunctive relief. The Company settled this lawsuit on July 30, 2008, for $12.5 million.

     On April 6, 2006, Silicon Space Technology Corporation (“Silicon Space”) filed a lawsuit against LSI in the District Court of Travis County, Texas, alleging, among other things, that LSI misappropriated unspecified intellectual property related to radiation hardening of integrated circuits. In December 2007, the jury found that LSI did misappropriate Silicon Space intellectual property. A final judgment was entered on February 29, 2008, awarding Silicon Space $18.0 million plus interest from October 10, 2006 and attorneys’ fees, but denying injunctive relief. LSI and Silicon Space are challenging the judgment.

     On December 6, 2006, Sony Ericsson Mobile Communications USA Inc. (“Sony Ericsson”) filed a lawsuit against Agere in Wake County Superior Court in North Carolina, alleging unfair and deceptive trade practices, fraud and negligent misrepresentation in connection with Agere’s engagement with Sony Ericsson to develop a wireless data card for personal computers. The complaint claimed an unspecified amount of damages and seeks damages, treble damages and attorneys’ fees. On February 13, 2007, Agere filed a motion to dismiss for improper venue. On August 27, 2007, the court granted Agere’s motion to dismiss for improper venue. Sony Ericsson has appealed that ruling. On October 22, 2007, Sony Ericsson filed a lawsuit in the Supreme Court of the State of New York, New York County against LSI, raising substantially the same allegations and seeking substantially the same relief as the North Carolina proceeding.

     On March 23, 2007, CIF Licensing, LLC, d/b/a GE Licensing (“GE”) filed a lawsuit against Agere in the United States District Court for the District of Delaware, asserting that unspecified Agere products infringe patents in a portfolio of patents GE acquired from Motorola. GE has asserted that four of the patents cover inventions relating to modems. GE is seeking monetary damages.

     In addition to the foregoing, the Company and its subsidiaries are parties to other litigation matters and claims in the normal course of business. The Company does not believe, based on currently available facts and circumstances, that the final outcome of these other matters, taken individually or as a whole, will have a material adverse effect on the Company’s consolidated results of operations or financial position. However, the pending unsettled lawsuits may involve complex questions of fact and law and may require the expenditure of significant funds and the diversion of other resources to defend. From time to time, the Company may enter into confidential discussions regarding the potential settlement of such lawsuits. However, there can be no assurance that any such discussions will occur or will result in a settlement. Moreover, the settlement of any pending litigation could require the Company to incur substantial costs and, in the case of the settlement of any intellectual property proceeding against the Company, may require the Company to obtain a license under a third party’s intellectual property rights that could require royalty payments in the future and the Company to grant a license to certain of its intellectual property rights to a third party under a cross-license agreement. The results of litigation are inherently uncertain, and material adverse outcomes are possible.

NOTE 14 — SUBSEQUENT EVENTS