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

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

Commission File Number: 1-10317

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 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		Smaller reporting company o
				(Do not check if a smaller reporting company.)

     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 4, 2010, there were 616,543,521 shares of the registrant’s Common Stock, $.01 par value, outstanding.

 

 

LSI CORPORATION
FORM 10-Q
For the Quarter Ended October 3, 2010
INDEX

		Page
		No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements			3
Condensed Consolidated Balance Sheets as of October 3, 2010 and December 31, 2009 (unaudited)			3
Condensed Consolidated Statements of Operations for the three and nine months ended October 3, 2010 and October 4, 2009 (unaudited)			4
Condensed Consolidated Statements of Cash Flows for the nine months ended October 3, 2010 and October 4, 2009 (unaudited)			5
Notes to Unaudited Condensed Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
Item 3. Quantitative and Qualitative Disclosures about Market Risk			30
Item 4. Controls and Procedures			30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			31
Item 1A. Risk Factors			31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			33
Item 6. Exhibits			33
Signatures			34
Exhibit Index			35
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

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

		October 3,				December 31,
		2010				2009
ASSETS
Cash and cash equivalents		$	438,981			$	778,291
Short-term investments			161,871				183,781
Accounts receivable, less allowances of $8,332 and $9,902, respectively			313,867				338,961
Inventories			220,120				169,335
Prepaid expenses and other current assets			103,400				115,084
Total current assets			1,238,239				1,585,452
Property and equipment, net			208,831				218,972
Identified intangible assets, net			618,536				739,244
Goodwill			188,698				188,698
Other assets			221,338				235,564
Total assets		$	2,475,642			$	2,967,930
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable		$	184,544			$	213,008
Accrued salaries, wages and benefits			127,090				77,281
Other accrued liabilities			187,693				214,096
Current portion of long-term debt			—				350,000
Total current liabilities			499,327				854,385
Pension and post-retirement benefit obligations			429,829				454,206
Income taxes payable — non-current			87,755				103,047
Other non-current liabilities			82,262				95,188
Total liabilities			1,099,173				1,506,826
Commitments and contingencies (Note 13)
Stockholders’ equity:
Preferred stock, $.01 par value: 2,000 shares authorized; none outstanding			—				—
Common stock, $.01 par value: 1,300,000 shares authorized; 616,278 and 656,484 shares outstanding, respectively			6,163				6,565
Additional paid-in capital			5,997,804				6,142,674
Accumulated deficit			(4,355,121	)			(4,408,494	)
Accumulated other comprehensive loss			(272,377	)			(279,641	)
Total stockholders’ equity			1,376,469				1,461,104
Total liabilities and stockholders’ equity		$	2,475,642			$	2,967,930

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

LSI CORPORATION

		Three Months Ended								Nine Months Ended
		October 3, 2010				October 4, 2009				October 3, 2010				October 4, 2009
Revenues		$	628,984			$	578,419			$	1,905,571			$	1,581,363
Cost of revenues			352,458				352,833				1,082,169				1,004,812
Gross profit			276,526				225,586				823,402				576,551
Research and development			166,272				151,047				504,297				455,250
Selling, general and administrative			85,355				82,175				257,498				247,659
Restructuring of operations and other items, net			3,693				4,745				10,380				35,960
Income/(loss) from operations			21,206				(12,381	)			51,227				(162,318	)
Interest expense			—				(3,899	)			(5,601	)			(17,999	)
Interest income and other, net			10,315				3,535				6,147				15,742
Income/(loss) before income taxes			31,521				(12,745	)			51,773				(164,575	)
Provision/(benefit) for income taxes			8,100				(65,230	)			(1,600	)			(52,030	)
Net income/(loss)		$	23,421			$	52,485			$	53,373			$	(112,545	)
Net income/(loss) per share:
Basic		$	0.04			$	0.08			$	0.08			$	(0.17	)
Diluted		$	0.04			$	0.08			$	0.08			$	(0.17	)
Shares used in computing per share amounts:
Basic			629,852				651,865				646,167				650,183
Diluted			633,731				658,963				653,685				650,183

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

LSI CORPORATION

		Nine Months Ended
		October 3, 2010				October 4, 2009
Operating activities:
Net income/(loss)		$	53,373			$	(112,545	)
Adjustments:
Depreciation and amortization			200,718				198,918
Stock-based compensation expense			51,884				49,804
Gain on redemption of convertible subordinated notes			—				(149	)
Write-down of equity securities, net of gain on sale of securities			6,779				1,529
Loss/(gain) on sale of property and equipment			153				(220	)
Unrealized foreign exchange loss			6,374				315
Deferred taxes			34				(253	)
Changes in assets and liabilities, net of assets acquired and liabilities assumed in business combinations:
Accounts receivable, net			25,094				(3,217	)
Inventories			(50,785	)			78,406
Prepaid expenses and other assets			13,898				48,272
Accounts payable			(23,541	)			(6,581	)
Accrued and other liabilities			(28,446	)			(126,556	)
Net cash provided by operating activities			255,535				127,723
Investing activities:
Purchases of debt securities available-for-sale			(24,218	)			(10	)
Proceeds from maturities and sales of debt securities available-for-sale			36,209				77,640
Purchases of equity securities			(316	)			(9,534	)
Proceeds from sale of securities			9,795				165
Purchases of property, equipment and software			(67,262	)			(68,738	)
Proceeds from sale of property and equipment			559				2,749
Acquisition of businesses and companies, net of cash acquired			—				(46,981	)
Proceeds from maturity of notes receivable associated with sale of semiconductor operations in Thailand			—				10,000
Decrease in non-current assets and deposits			—				13,501
Net cash used in investing activities			(45,233	)			(21,208	)
Financing activities:
Redemption of convertible subordinated notes			—				(244,047	)
Repayment of debt obligations			(349,999	)			—
Issuances of common stock			22,057				10,040
Purchase of common stock under repurchase program			(217,743	)			—
Net cash used in financing activities			(545,685	)			(234,007	)
Effect of exchange rate changes on cash and cash equivalents			(3,927	)			3,576
Net change in cash and cash equivalents			(339,310	)			(123,916	)
Cash and cash equivalents at beginning of period			778,291				829,301
Cash and cash equivalents at end of period		$	438,981			$	705,385

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 (“LSI” or the “Company”) reports on a 13- or 14-week quarter with a year ending December 31. The third quarter of 2010 and 2009 consisted of 13 weeks each and ended on October 3, 2010 and on October 4, 2009, respectively. The first nine months of 2010 and 2009 consisted of approximately 39 weeks each. The results of operations for the quarter ended October 3, 2010 are not necessarily indicative of the results to be expected for the full year.

     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 normal recurring adjustments necessary for a fair presentation of the Company’s financial position, results of operations, and cash flows for the interim periods presented. 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, 2009.

Recent Accounting Pronouncements

     Pronouncements not yet effective:

     In October 2009, the Financial Accounting Standards Board (“FASB”) amended revenue recognition guidance on multiple-deliverable arrangements to address how to separate deliverables and how to measure and allocate arrangement consideration. The new guidance requires the use of management’s best estimate of selling price for the deliverables in an arrangement when a vendor does not have specific objective evidence of selling price or third party evidence of selling price. In addition, excluding specific software revenue guidance, the residual method of allocating arrangement consideration is no longer permitted, and an entity is required to allocate arrangement consideration using the relative selling price method. This guidance also expands the disclosure requirements to include both quantitative and qualitative information. This guidance is effective for the Company beginning the first quarter of 2011 and is not expected to have any significant impact on the Company’s results of operation or financial position.

     In October 2009, the FASB issued guidance to clarify that tangible products containing software components and non-software components that function together to deliver a product’s essential functionality will be considered non-software deliverables and will be scoped out of the software revenue recognition guidance. This guidance is effective for the Company beginning in the first quarter of 2011 and is not expected to have any significant impact on the Company’s results of operation or financial position.

     Pronouncements adopted during the nine months ended October 3, 2010:

     In June 2009, the FASB issued guidance that amends the consolidation rules related to variable interest entities. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. This guidance requires ongoing reassessments of whether an enterprise is the primary beneficiary of the variable interest entity. This guidance is effective for fiscal years beginning after November 15, 2009. The Company adopted this guidance in the first quarter of 2010. The adoption did not impact the Company’s results of operations or financial position.

     In January 2010, the FASB issued revised guidance that expands the disclosure requirements for fair value measurements. New disclosure required under the revised guidance includes information about significant transfers in and out of Level 1 and Level 2 and the reason for such transfers, and inclusion of purchases, sales, issuances and settlements information for Level 3 measurements in the rollforward of activity on a gross basis. This guidance is effective for fiscal years beginning after December 15, 2009, except for the rollforward of activities on a gross basis for Level 3, which is effective for fiscal years beginning after December 15, 2010. The

Company adopted this guidance in the first quarter of 2010. The adoption did not impact the Company’s results of operations or financial position.

Note 2 — Stock-Based Compensation and Common Stock

Stock-Based Compensation Expense

     The following table summarizes stock-based compensation expense, net of estimated forfeitures, related to the Company’s stock options, Employee Stock Purchase Plan (“ESPP”) and restricted stock unit awards:

		Three Months Ended								Nine Months Ended
Stock-Based Compensation Expense Included In:		October 3, 2010				October 4, 2009				October 3, 2010				October 4, 2009
		(In thousands)
Cost of revenues		$	2,109			$	1,697			$	6,113			$	5,732
Research and development			7,714				6,386				24,256				21,443
Selling, general and administrative			7,135				6,729				21,515				22,629
Total stock-based compensation expense		$	16,958			$	14,812			$	51,884			$	49,804

     Stock Options:

     The fair value of each option grant is estimated as of the date of grant using a reduced-form calibrated binominal lattice model (the “lattice model”). The following table summarizes the weighted-average assumptions that the Company applied in the lattice model:

		Three Months Ended								Nine Months Ended
		October 3, 2010				October 4, 2009				October 3, 2010				October 4, 2009
Estimated grant date fair value per share		$	1.60			$	1.93			$	1.95			$	1.41
Expected life (years)			4.48				3.90				4.29				4.26
Risk-free interest rate			1	%			2	%			2	%			2	%
Volatility			49	%			58	%			51	%			67	%

     The following table summarizes changes in stock options outstanding during the nine month period ended October 3, 2010:

						Weighted-Average				Weighted-Average				Aggregate
		Number of				Exercise				Remaining				Intrinsic
		Shares				Price Per Share				Contractual Term				Value
		(In thousands)								(In years)				(In thousands)
Options outstanding at December 31, 2009			91,526			$	9.83				—				—
Options granted			7,271				5.47				—				—
Options exercised			(1,619	)			3.94				—				—
Options canceled			(5,056	)			43.67				—				—
Options outstanding at October 3, 2010			92,122			$	7.73				3.48			$	28,956
Options exercisable at October 3, 2010			58,996			$	9.39				2.57			$	6,737

     Employee Stock Purchase Plan:

     Compensation expense for the Company’s ESPP is calculated using the fair value of the employees’ purchase rights under the Black-Scholes model. Under the ESPP, rights to purchase shares are granted during the second and fourth quarters of each year. A total of 3.3 million shares and 2.5 million shares were issued under the ESPP during the three months ended July 4, 2010 and July 5, 2009, respectively. No shares related to the ESPP were issued during the three months ended October 3, 2010 and October 4, 2009. The following table summarizes the weighted-average assumptions that went into the calculation of the fair value for the May 2010 and May 2009 grants:

		Three Months Ended
		July 4, 2010				July 5, 2009
Estimated grant date fair value per share			$1.74				$1.39
Expected life (years)			0.8				0.5
Risk-free interest rate			0.3%				0.3%
Volatility			48%				78%

     Restricted Stock Awards:

     Service-based:

     The cost of service-based restricted stock unit awards is determined using the fair value of the Company’s common stock on the date of grant. The vesting requirements for these restricted stock units are determined at the time of grant and require that the employee remain employed by the Company for a specified period of time. As of October 3, 2010, the total unrecognized compensation expense related to these restricted stock units, net of estimated forfeitures, was $35.5 million and is expected to be recognized over the next 3 years on a weighted-average basis. The fair value of the shares that were issued upon the vesting of restricted stock units during the three and nine months ended October 3, 2010 was $1.4 million and $5.9 million, respectively.

     The following table summarizes changes in service-based restricted stock units outstanding during the nine months ended October 3, 2010:

		Number of Units
		(In thousands)
Unvested service-based restricted stock units at December 31, 2009			2,986
Granted			7,148
Vested			(1,136	)
Forfeited			(396	)
Unvested service-based restricted stock units at October 3, 2010			8,602

     Performance-based:

     During the nine months ended October 3, 2010, the Company granted performance-based restricted stock units. The vesting of these performance-based restricted stock units is contingent upon the Company meeting certain performance criteria and requires that the employee remain employed by the Company for a specified period of time. As of October 3, 2010, the total unrecognized compensation expense related to performance-based restricted stock units was $10.8 million and, if the contingencies are fully met, is expected to be recognized over the next 1 to 3 years.

     The following table summarizes changes in performance-based restricted stock units outstanding during the nine months ended October 3, 2010:

		Number of Units
		(In thousands)
Unvested performance-based restricted stock units at December 31, 2009			—
Granted			3,046
Vested			—
Forfeited			(114	)
Unvested performance-based restricted stock units at October 3, 2010			2,932

Common Stock

     Stock Repurchase Program:

     On March 17, 2010, the Company announced that its Board of Directors had authorized a stock repurchase program of up to $250.0 million of the Company’s common stock in open market or privately negotiated transactions. The Company repurchased 31.8 million shares for $137.0 million in cash during the three months ended October 3, 2010 and 45.8 million shares for $217.7 million in cash during the nine months ended October 3, 2010. The repurchased shares were retired immediately after the repurchases were completed. Retirement of the repurchased shares is recorded as a reduction of common stock and additional paid-in capital. As of October 3, 2010, $32.3 million remained available under this stock repurchase program.

Note 3 — Restructuring of Operations and Other Items

     The following table summarizes the restructuring of operations and other items:

		Three Months Ended								Nine Months Ended
		October 3, 2010				October 4, 2009				October 3, 2010				October 4, 2009
		(In thousands)
Lease and contract terminations		$	1,962			$	2,332			$	2,914			$	18,376	(a)
Employee severance and benefits (b)			2,131				132				7,435				9,196
Write-down of excess assets and other liabilities			—				699				—				608
Other items			(400	)			1,582				31				7,780	(c)
Total restructuring expenses and other items		$	3,693			$	4,745			$	10,380			$	35,960

     The following table summarizes the restructuring of operations and other items by segment:

		Three Months Ended								Nine Months Ended
		October 3, 2010				October 4, 2009				October 3, 2010				October 4, 2009
		(In thousands)
Semiconductor		$	2,834			$	3,013			$	8,940			$	32,760
Storage Systems			859				1,732				1,440				3,200
Total restructuring expenses and other items		$	3,693			$	4,745			$	10,380			$	35,960

     The following table summarizes the activities affecting the restructuring reserves since December 31, 2009:

						Employee
		Lease and Contract				Severance
		Terminations				and Benefits				Total
		(In thousands)
Beginning balance at December 31, 2009		$	40,397			$	4,905			$	45,302
Expense			2,914				7,435				10,349
Utilized (a)			(19,456	)			(8,475	)			(27,931	)
Ending balance at October 3, 2010 (b)		$	23,855			$	3,865			$	27,720

Note 4 — Benefit Obligations

     The Company has pension plans covering substantially all former Agere Systems Inc. (“Agere”) U.S. employees, excluding management employees hired after June 30, 2003. Retirement benefits are offered under defined benefit pension plans, which include a management plan and a represented plan, and the payments are based on an adjusted career-average-pay formula, a dollar-per-month formula, or a cash-balance program. The cash-balance program provides for annual company contributions based on a participant’s age, compensation and interest on existing balances. It 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 a non-qualified supplemental pension plan in the U.S. that principally provides benefits based on compensation in excess of amounts that can be considered under a tax qualified plan. The Company also provides post-retirement life insurance coverage under a group life insurance plan for former

Agere employees excluding participants in the cash-balance program and management employees hired after June 30, 2003. The Company also has pension plans covering certain international employees.

     Effective April 6, 2009, the Company froze the U.S. defined benefit pension plans. Participants in the adjusted career-average-pay program will not earn any future service accruals after that date. Participants in the cash-balance program will not earn any future service accruals, but will continue to earn 4% interest per year on their cash-balance accounts.

     The following tables summarize the components of the net periodic benefit cost/(credit):

		Three Months Ended
		October 3, 2010								October 4, 2009
		Pension				Post-retirement				Pension				Post-retirement
		Benefits				Benefits				Benefits				Benefits
		(In thousands)
Service cost		$	112			$	20			$	416			$	20
Interest cost			17,577				610				18,435				606
Expected return on plan assets			(17,864	)			(1,149	)			(19,198	)			(1,219	)
Amortization of prior-service cost			9				—				11				—
Amortization of net actuarial loss/(gain)			540				—				(21	)			—
Total benefit cost/(credit)		$	374			$	(519	)		$	(357	)		$	(593	)
		Nine Months Ended
		October 3, 2010								October 4, 2009
		Pension				Post-retirement				Pension				Post-retirement
		Benefits				Benefits				Benefits				Benefits
		(In thousands)
Service cost		$	343			$	61			$	1,373			$	60
Interest cost			52,747				1,830				55,311				1,818
Expected return on plan assets			(53,597	)			(3,447	)			(57,601	)			(3,657	)
Amortization of prior-service cost			29				—				34				—
Amortization of net actuarial loss/(gain)			1,614				—				(67	)			—
Total benefit cost/(credit)		$	1,136			$	(1,556	)		$	(950	)		$	(1,779	)

     During the nine months ended October 3, 2010, the Company contributed $23.2 million to its pension plans. The Company expects to contribute an additional $7.9 million to its pension plans for the remainder of 2010. The Company does not expect to contribute to its post-retirement benefit plan in 2010.

Note 5 — Balance Sheet Details

Inventories

     Inventories were comprised of the following:

		October 3,				December 31,
		2010				2009
		(In thousands)
Raw materials		$	31,645			$	24,038
Work-in-process			39,899				19,090
Finished goods			148,576				126,207
Total inventories		$	220,120			$	169,335

Debt

     The Company repaid all of the $350.0 million principal amount of its 4% Convertible Subordinated Notes plus accrued interest upon their maturity on May 15, 2010.

Note 6 — Cash Equivalents and Investments

     The following tables summarize the Company’s cash equivalents and investments measured at fair value:

		Fair Value Measurements as of October 3, 2010
		Level 1				Level 2				Level 3				Total
		(In thousands)
Cash equivalents:
Money-market funds*		$	311,897			$	—			$	—			$	311,897
Available-for-sale debt securities: **
Asset-backed and mortgage-backed securities		$	—			$	121,647			$	—			$	121,647
U.S. government and agency securities			—				35,238				—				35,238
Corporate debt securities			—				4,986				—				4,986
Total short-term investments		$	—			$	161,871			$	—			$	161,871
Long-term investments in equity securities:
Marketable available-for-sale equity securities***		$	1,805			$	—			$	—			$	1,805

		Fair Value Measurements as of December 31, 2009
		Level 1				Level 2				Level 3				Total
		(In thousands)
Cash equivalents:
Money-market funds*		$	631,073			$	—			$	—			$	631,073
Available-for-sale debt securities: **
Asset-backed and mortgage-backed securities		$	—			$	138,282			$	—			$	138,282
U.S. government and agency securities			—				40,644				—				40,644
Corporate debt securities			—				4,855				—				4,855
Total short-term investments		$	—			$	183,781			$	—			$	183,781
Long-term investments in equity securities:
Marketable available-for-sale equity securities***		$	1,405			$	—			$	—			$	1,405

Investments in Non-Marketable Securities

     The Company does not estimate the fair value of non-marketable securities unless there are identified events or changes in circumstances that may have a significant adverse effect on the investment. The valuation of non-marketable securities is based on recent financing activities of the investees, movements in equity value, venture capital markets, the investee’s capital structure, liquidation preferences of the investee’s capital and other economic variables. During the nine months ended October 3, 2010, the Company identified changes in circumstances which had an adverse effect on certain non-marketable equity securities and recorded other than temporary impairment charges of $11.6 million. During the three and nine months ended October 4, 2009, the Company recorded other than temporary impairment charges of $1.7 million associated with certain non-marketable equity securities. These charges were recognized as a component of interest income and other, net, in the statements of operations. As of October 3, 2010 and

December 31, 2009, the aggregate carrying value of the Company’s non-marketable securities was $39.9 million and $56.6 million, respectively.

     The following tables summarize certain non-marketable securities measured and recorded at fair value on a non-recurring basis:

		Carrying Value				Fair Value Measurements												Losses for				Losses for
		as of				During Nine Months Ended October 3, 2010												Three Months Ended				Nine Months Ended
		October 3, 2010				Level 1				Level 2				Level 3				October 3, 2010				October 3, 2010
						(In thousands)
Non-marketable securities		$	—	*		$	—			$	—			$	1,900			$	—			$	11,600

		Carrying Value				Fair Value Measurements												Losses for				Losses for
		as of				During Nine Months Ended October 4, 2009												Three Months Ended				Nine Months Ended
		October 4, 2009				Level 1				Level 2				Level 3				October 4, 2009				October 4, 2009
						(In thousands)
Non-marketable securities		$	—			$	—			$	—			$	—			$	1,650			$	1,650

     The Company realized a pre-tax gain of $4.8 million associated with the sale of certain non-marketable securities during the three and nine months ended October 3, 2010. There were no sales of non-marketable securities for the three and nine months ended October 4, 2009.

Investments in Available-for-Sale Securities

     The following tables summarize the Company’s available-for-sale securities:

		October 3, 2010
		Amortized				Gross Unrealized				Gross Unrealized
		Cost				Gain				Loss*				Fair Value
		(In thousands)
Short-term debt securities:
Asset-backed and mortgage-backed securities		$	112,966			$	9,151			$	(470	)		$	121,647
U.S. government and agency securities			34,144				1,095				(1	)			35,238
Corporate debt securities			4,764				222				—				4,986
Total short-term debt securities		$	151,874			$	10,468			$	(471	)		$	161,871
Long-term marketable equity securities		$	852			$	972			$	(19	)		$	1,805

		December 31, 2009
		Amortized				Gross Unrealized				Gross Unrealized
		Cost				Gain				Loss				Fair Value
		(In thousands)
Short-term debt securities:
Asset-backed and mortgage-backed securities		$	132,210			$	7,141			$	(1,069	)		$	138,282
U.S. government and agency securities			39,033				1,611				—				40,644
Corporate debt securities			4,736				175				(56	)			4,855
Total short-term debt securities		$	175,979			$	8,927			$	(1,125	)		$	183,781
Long-term marketable equity securities		$	111			$	1,294			$	—			$	1,405

     The following tables summarize the gross unrealized losses and fair values of the Company’s short-term investments that have been in a continuous unrealized loss position for less than and greater than 12 months, aggregated by investment category:

		October 3, 2010
		Less than 12 Months								Greater than 12 Months
		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
		(In thousands)
Asset-backed and mortgage-backed securities		$	8,806			$	(174	)		$	1,857			$	(296	)
U.S. government and agency securities			1,100				(1	)			—				—
Total		$	9,906			$	(175	)		$	1,857			$	(296	)

		December 31, 2009
		Less than 12 Months								Greater than 12 Months
		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
		(In thousands)
Asset-backed and mortgage-backed securities		$	9,126			$	(1,037	)		$	870			$	(32	)
Corporate debt securities			1,308				(56	)			—				—
Total		$	10,434			$	(1,093	)		$	870			$	(32	)

     There were no impairment charges for available-for-sale debt or equity securities for the three or nine months ended October 3, 2010 and October 4, 2009. There were no other than temporary impairment losses recorded in other comprehensive income for the three or nine months ended October 3, 2010 and October 4, 2009. Net realized gain or loss on sales of available-for-sale debt and equity securities for the three and nine months ended October 3, 2010 and October 4, 2009 was not significant.

     Contractual maturities of available-for-sale debt securities as of October 3, 2010 were as follows:

		Amount
		(In thousands)
Due within one year		$	24,005
Due in 1-5 years			22,283
Due in 5-10 years			10,558
Due after 10 years			105,025
Total		$	161,871

     The maturities of asset-backed and mortgage-backed securities were allocated based on contractual principal maturities assuming no prepayments.

Note 7 — Derivative Instruments

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

Cash-Flow Hedges

     The Company enters into forward contracts that are designated as foreign-currency cash-flow hedges of selected forecasted payments denominated in currencies other than U.S. dollars. These forward contracts generally mature within 12 months. The Company evaluates and calculates the effectiveness of each hedge at least quarterly. Changes in fair value 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 recorded in other comprehensive income and is subsequently reclassified into earnings when the hedged expense is recognized within the same line item in the statements of operations as the impact of the hedged transaction. The ineffective portion of the gain or loss is reported in earnings immediately. As of October 3, 2010, the total notional value of the Company’s outstanding forward contracts, designated as foreign-currency cash-flow hedges, was $30.4 million. For the three and nine months ended October 3, 2010 and October 4, 2009, the after-tax effect of foreign-exchange forward contract derivatives on other comprehensive income was not material.

Other Foreign-Currency Hedges

     The Company enters into foreign-exchange forward contracts that are used to hedge certain foreign-currency-denominated assets or liabilities that do not qualify for hedge accounting. These forward contracts generally mature within three months. Changes in the fair value of these hedges are recorded immediately in earnings to offset the changes in fair value of the assets or liabilities being hedged. As of October 3, 2010, the total notional value of the Company’s outstanding forward contracts, not designated as hedges under hedge accounting, to buy Japanese Yen, Euro, Pound Sterling, Canadian Dollar, Korean Won and Indian Rupee was $138.8 million and to sell Singapore Dollar and Israeli Shekel was $22.9 million. For the three and nine months ended October 3, 2010, gains of $6.5 million and $2.9 million, respectively, related to other foreign-currency hedges were recognized in interest income and other, net. For the three and nine months ended October 4, 2009, gains of $10.8 million and $6.4 million, respectively, related to other foreign-currency hedges were recognized in interest income and other, net.

Fair Value of Derivative Instruments

     As of October 3, 2010 and December 31, 2009, the fair value of derivative instruments included in the balance sheets was not material.

Note 8 — Reconciliation of Basic and Diluted Income/(Loss) per Share

     The following tables provide a reconciliation of the numerators and denominators used in the computation of basic and diluted per share amounts:

		Three Months Ended
		October 3, 2010												October 4, 2009
										Per Share												Per Share
		Income*				Shares+				Amount				Income*				Shares+				Amount
		(In thousands except per share amounts)
Basic:
Net income available to common stockholders		$	23,421				629,852			$	0.04			$	52,485				651,865			$	0.08
Stock options, employee stock purchase rights and restricted stock unit awards			—				3,879				—				—				7,098				—
Diluted:
Net income available to common stockholders		$	23,421				633,731			$	0.04			$	52,485				658,963			$	0.08

		Nine Months Ended
		October 3, 2010												October 4, 2009
										Per Share												Per Share
		Income*				Shares+				Amount				(Loss)*				Shares+				Amount
		(In thousands except per share amounts)
Basic:
Net income/(loss) available to common stockholders		$	53,373				646,167			$	0.08			$	(112,545	)			650,183			$	(0.17	)
Stock options, employee stock purchase rights and restricted stock unit awards			—				7,518				—				—				—				—
Diluted:
Net income/(loss) available to common stockholders		$	53,373				653,685			$	0.08			$	(112,545	)			650,183			$	(0.17	)

     The following table provides information about the weighted-average common share equivalents that were excluded from the computation of diluted shares because their inclusion would have an antidilutive effect on net income/(loss) per share:

		Three Months Ended								Nine Months Ended
		October 3, 2010				October 4, 2009				October 3, 2010				October 4, 2009
		(Shares in thousands)
Anti-dilutive securities:
Stock options			75,234				72,912				70,893				81,303
Restricted stock unit awards			7,404				1,348				422				2,200
Convertible notes			—				26,080				12,946				35,648

Note 9 — Segment and Geographic Information

     The Company operates in two reportable segments — the Semiconductor segment and the Storage Systems segment. The Chief Executive Officer has been identified as the Chief Operating Decision Maker (“CODM”). The CODM allocates resources to and assesses the performance of each segment using information about its revenue and operating income or loss before interest and taxes.

Summary of Operations by Segment

     The following is a summary of operations by segment:

		Three Months Ended								Nine Months Ended
		October 3, 2010				October 4, 2009				October 3, 2010				October 4, 2009
		(In thousands)
Revenues:
Semiconductor		$	390,043			$	371,834			$	1,223,230			$	1,040,654
Storage Systems			238,941				206,585				682,341				540,709
Consolidated		$	628,984			$	578,419			$	1,905,571			$	1,581,363
Income/(loss) from operations:
Semiconductor		$	(6,177	)		$	(20,084	)		$	(11,907	)		$	(152,411	)
Storage Systems			27,383				7,703				63,134				(9,907	)
Consolidated		$	21,206			$	(12,381	)		$	51,227			$	(162,318	)

Information about Geographic Areas

     Revenues from sales within the United States were $175.5 million, representing 27.9% of consolidated revenues, for the three months ended October 3, 2010, as compared to $150.1 million, representing 26.0% of consolidated revenues, for the three months ended October 4, 2009.

     Revenues from sales within the United States were $504.7 million, representing 26.5% of consolidated revenues, for the nine months ended October 3, 2010, as compared to $369.9 million, representing 23.4% of consolidated revenues, for the nine months ended October 4, 2009.

Note 10 — Comprehensive Income/(Loss)

     Comprehensive income or 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. The following table summarizes the changes in the total comprehensive income or loss, net of taxes:

		Three Months Ended								Nine Months Ended
		October 3, 2010				October 4, 2009				October 3, 2010				October 4, 2009
		(In thousands)
Net income/(loss)		$	23,421			$	52,485			$	53,373			$	(112,545	)
Net unrealized gain on investments			738				1,482				2,046				2,697
Net unrealized gain/(loss) on derivatives			2,019				(118	)			767				1,049
Foreign currency translation adjustments			4,928				11,042				2,808				3,720
Amortization of prior-service cost and net actuarial loss/(gain)			549				(122	)			1,643				(145	)
Total comprehensive income/(loss)		$	31,655			$	64,769			$	60,637			$	(105,224	)

Note 11 — Income Taxes

     The Company recorded an income tax provision of $8.1 million and an income tax benefit of $1.6 million for the three and nine months ended October 3, 2010, respectively, and income tax benefits of $65.2 million and $52.0 million for the three and nine months ended October 4, 2009, respectively.

     During the nine months ended October 3, 2010, the Company recorded a reversal of $28.0 million in liabilities, which includes previously unrecognized tax benefits of $12.2 million and interest and penalties of $15.8 million, as a result of the expiration of statutes of limitations in multiple jurisdictions.

     During the three months ended October 4, 2009, the Company recorded a reversal of $75.0 million in liabilities, which includes previously unrecognized tax benefits of $71.3 million and interest and penalties of $3.7 million, as a result of a settlement of a multi-year audit in a foreign jurisdiction and the expiration of a statute of limitations. During the nine months ended October 4, 2009, the Company recorded a reversal of $104.9 million in liabilities, which includes previously unrecognized tax benefits of $87.1 million and interest and penalties of $17.8 million, as a result of a settlement of a multi-year audit in a foreign jurisdiction and the expiration of statutes of limitations. Also during the nine months ended October 4, 2009, the Company recorded an increase of $32.9 million in liabilities, which includes unrecognized tax benefits of $25.0 million and interest and penalties of $7.9 million, as a result of re-measurements of uncertain tax positions taken in prior periods based on new information.

     The Company computes the tax provision using an estimated annual tax rate. The Company has excluded the income or loss from certain jurisdictions when estimating the annual rate because of the anticipated annual pre-tax losses in those jurisdictions for which tax benefits are not realizable or cannot be recognized in the current year. Excluding certain foreign jurisdictions, the Company believes that it is more likely than not that the future benefit of deferred tax assets will not be realized.

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 comparable to those charged to an unrelated third party. The Company also purchases drives used in its storage systems from Seagate Technology for prices comparable to those paid to other vendors for similar products. Revenues from sales to Seagate Technology were $78.6 million and $263.5 million for the three and nine months ended October 3, 2010, respectively. Revenues from sales to Seagate Technology were $90.5 million and $252.9 million for the three and nine months ended October 4, 2009, respectively. Purchases from Seagate Technology were $20.8 million and $49.7 million for the three and nine months ended October 3, 2010, respectively. Purchases from Seagate Technology were $14.4 million and $32.8 million for the three and nine months ended October 4, 2009, respectively. The Company had accounts receivable from Seagate Technology of $47.3 million and $53.6 million as of October 3, 2010 and December 31, 2009, respectively.

     The Company has an equity interest in a joint venture, Silicon Manufacturing Partners Pte Ltd. (“SMP”), with GLOBALFOUNDRIES, 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 GLOBALFOUNDRIES 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 GLOBALFOUNDRIES’ significant participatory rights under the joint venture agreement. Because of GLOBALFOUNDRIES’ approval rights, the Company cannot make any significant decisions regarding SMP without GLOBALFOUNDRIES’ 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 GLOBALFOUNDRIES, and GLOBALFOUNDRIES provides day-to-day operational support to SMP.

     The Company purchased $9.9 million and $33.9 million of inventory from SMP for the three and nine months ended October 3, 2010, respectively. The Company purchased $11.4 million and $33.4 million of inventory from SMP for the three and nine months ended October 4, 2009, respectively. As of October 3, 2010 and December 31, 2009, the amounts of inventory on hand that were purchased from SMP were $9.9 million and $4.1 million, respectively, and the amounts payable to SMP were $0.8 million and $3.8 million, respectively.

Note 13 — Commitments, Contingencies and Legal Matters

Purchase Commitments

     The Company maintains purchase commitments with certain 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 for different suppliers. As of October 3, 2010, the total purchase commitments were $375.1 million, which are due through 2014.

     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 GLOBALFOUNDRIES has 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 GLOBALFOUNDRIES. 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. GLOBALFOUNDRIES 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:

		Nine Months Ended
		October 3, 2010
		(In thousands)
Balance as of December 31, 2009		$	13,831
Accruals for warranties issued during the period			12,220
Accruals related to pre-existing warranties (including changes in estimates)			317
Settlements made during the period (in cash or in kind)			(11,607	)
Balance as of October 3, 2010		$	14,761

     Standby Letters of Credit:

     As of October 3, 2010 and December 31, 2009, the Company had outstanding obligations relating to standby letters of credit of $3.8 million and $4.3 million, respectively. Standby letters of credit are financial guarantees provided by third parties for leases, customs 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.

Uncertain Tax Positions

     As of October 3, 2010, the Company had $151.7 million of unrecognized tax benefits, for which the Company is unable to make a reasonably reliable estimate as to when cash settlement with a taxing authority may occur. 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 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 the unrecognized tax benefits, plus accrued interest and penalties, could decrease by an amount of up to $13.5 million.

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 certain payments made by the Company.

Legal Matters

     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 claims an unspecified amount of damages and seeks compensatory 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 appealed that ruling. On March 3, 2009, the North Carolina Court of Appeals affirmed the lower court’s 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. In January 2010, Sony Ericsson amended its complaint by adding claims for fraudulent concealment and gross negligence. On September 10, 2010, Agere filed a motion for summary judgment.

     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 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. Agere believes it has a number of defenses to the infringement claims in this action, including laches, exhaustion and its belief that it has a license to the patents. The court postponed hearing motions based on these defenses until after the trial, and did not allow Agere to present evidence on these defenses at trial. On February 17, 2009, the jury in this case returned a verdict finding that three of the four patents were invalid and that Agere products infringed the one patent found to be valid and awarding GE $7.6 million for infringement of that patent. The jury also found Agere’s infringement was willful, which means that the judge could increase the amount of damages up to three times its original amount. The court has not scheduled hearings on Agere’s post-trial motions related to its defenses. One of these motions seeks to have a mis-trial declared based on Agere’s belief that GE withheld evidence in discovery, which affected Agere’s ability to present evidence at trial. On October 6, 2010, a special master appointed by the court determined that GE’s actions were not wrongful and that the evidence withheld by GE was not material to the jury’s findings. Agere is challenging this determination. If the jury’s verdict is entered by the court, Agere would also expect to be required to pay interest from the date of infringing sales. If the verdict is entered, LSI intends to appeal the matter. On February 17, 2010, the court issued an order granting GE’s summary judgment motions seeking to bar Agere’s defenses of laches, exhaustion, and license and denying Agere’s summary judgment motions concerning the same defenses. On July 30, 2010, the court held that one of the patents found invalid by the jury was valid. The court also held that the February 17, 2010 order was not inconsistent with its previous ruling that Agere would be permitted to renew its laches, licensing, and exhaustion defenses, and that Agere has not been precluded from asserting them post-trial.

     In April 2008, LSI filed an action with the International Trade Commission (“ITC”) seeking from the United States the exclusion of products produced by 23 companies. Qimonda AG, one of these companies, filed a lawsuit against LSI in the United States District Court for the Eastern District of Virginia (Richmond Division) on November 12, 2008, alleging that LSI’s products infringe seven of Qimonda’s patents. Qimonda is seeking monetary damages, treble damages and costs, expenses and attorneys’ fees due to alleged willfulness, interest, and temporary and permanent injunctive relief for all the patents in the suit. On November 20, 2008, Qimonda filed an ITC action against LSI and Seagate alleging that multiple LSI products infringe the same seven patents, and seeking an injunction against sales of infringing products. Subsequently, Qimonda dropped from the ITC proceeding its claims relating to three of the patents. A hearing on Qimonda’s ITC claims was held before an administrative law judge in June 2009. On October 14, 2009, the judge issued an initial determination, in which he found that a domestic industry did not exist in the U.S. for any of the four patents asserted by Qimonda. The judge also found that three of the four patents were not infringed and that the one patent found to be infringed was invalid. On January 29, 2010, the ITC issued a notice terminating the investigation against LSI and Seagate with a finding of no violation of Section 337 of the Tariff Act of 1930. Based on this notice, an injunction from the ITC is not available to Qimonda at this time. On March 29, 2010, Qimonda filed a notice of appeal with the Court of Appeals for the Federal Circuit appealing rulings related to two of the four asserted patents. Qimonda has stated that insolvency proceedings for it opened on April 1, 2009.

     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 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 to a third-party’s intellectual property that could require royalty payments in the future and the Company to grant a license to certain of its intellectual property to a third party under a cross-license agreement. The results of litigation are inherently uncertain, and material adverse outcomes are possible.

     The Company believes the amounts provided in its financial statements, which are not material, are adequate in light of the probable and estimable liabilities. However, because such matters are subject to many uncertainties, the ultimate outcomes are not predictable, and there can be no assurances that the actual amounts required to satisfy alleged liabilities from the matters described above will not exceed the amounts reflected in the Company’s financial statements or will not have a material adverse effect on its results of operations, financial position or cash flows.

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

     This management’s discussion and analysis should be read in conjunction with the other sections of this Form 10-Q, including Part 1, “Item 1. Financial Statements.”

     Where more than one significant factor contributed to changes in results from year to year, we have quantified these factors throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations where practicable and material to understanding the discussion.

OVERVIEW

     We design, develop and market complex, high-performance storage and networking semiconductors and storage systems. We provide silicon-to-system solutions that are used at the core of products that create, store, consume and transport digital information. We offer a broad portfolio of capabilities including custom and standard product integrated circuits used in hard disk drives, solid state drives, high-speed communication systems, computer servers, storage systems and personal computers. We also offer external storage systems, storage systems software, redundant array of independent disks, or RAID, adapters for computer servers and RAID software applications.

     We operate in two segments — the Semiconductor segment and the Storage Systems segment.

     Our Semiconductor segment designs, develops and markets highly complex integrated circuits for storage and networking applications. These solutions include both custom solutions and standard products. We design custom solutions for a specific application defined by the customer. We develop standard products for market applications that we define and sell to multiple customers. We sell our integrated circuits for storage applications principally to makers of hard disk drives, solid state drives and computer servers. We sell our integrated circuits for networking applications principally to makers of devices used in computer and telecommunications networks and, to a lesser extent, to makers of personal computers. We also generate revenue by licensing other entities to use our intellectual property.

     Our Storage Systems segment designs and sells enterprise storage systems and storage software applications that enable storage area networks. We also offer RAID adapters for computer servers and associated software for attaching storage devices to computer servers. We sell our storage systems and storage solutions primarily to original equipment manufacturers, or OEMs, who resell these products to end customers under their own brand names.

     Our revenues depend on market demand for these types of products and our ability to compete in highly competitive markets. We face competition not only from makers of products similar to ours, but also from competing technologies. For example, we see the development of solid state drives based on flash memory rather than the spinning platters used in hard disk drives as a long-term potential competitor to certain types of hard disk drives and have begun focusing development efforts in that area.

     The U.S. and global economies have experienced a significant downturn driven by a financial and credit crisis that could continue to challenge those economies for some period of time. In 2009, we took a number of actions to reduce our expenses, including a corporate-level restructuring designed to increase synergies across our Semiconductor segment, reductions in our global workforce, temporary and permanent reductions in employee compensation-related expenses and reductions in discretionary spending. While we reduced a number of expenses in response to the economic downturn, we have also tried to limit the impact of the reductions on our research and development efforts in order to attempt to maintain a continuing flow of new products. During the first nine months of 2010, we restored most of the employee compensation-related expenses that we reduced on a temporary basis in 2009 while continuing to reduce headcount in certain non-strategic areas.

     Our revenues for the three months ended October 3, 2010 were $629.0 million, an increase of $50.6 million, or 8.7%, as compared to $578.4 million for the three months ended October 4, 2009. Our revenues for the nine months ended October 3, 2010 were $1,905.6 million, an increase of $324.2 million, or 20.5%, as compared to $1,581.4 million for the nine months ended October 4, 2009. The increase during the nine months ended October 3, 2010 was primarily attributable to an increase in demand for semiconductors used in storage and networking product applications and an increase in demand for storage systems and server RAID adapters.

     We reported net income of $23.4 million, or $0.04 per diluted share, for the three months ended October 3, 2010 as compared to $52.5 million, or $0.08 per diluted share, for the three months ended October 4, 2009. We reported net income of $53.4 million, or $0.08 per diluted share, for the nine months ended October 3, 2010 as compared to a net loss of $112.5 million, or $0.17 per basic share, for the nine months ended October 4, 2009. During the three and nine months ended October 3, 2010, we recorded restructuring of operations and other items, net, of $3.7 million and $10.4 million, respectively, as compared to $4.7 million and $36.0 million, respectively, for the three and nine months ended October 4, 2009. For the three and nine months ended October 3, 2010, we recorded an income tax provision of $8.1 million and a benefit of $1.6 million, respectively, as compared to income tax benefits of $65.2 million and $52.0 million, respectively, for the three and nine months ended October 4, 2009. The $1.6 million benefit for income taxes during the nine months ended October 3, 2010 was primarily the result of $28.0 million of reversals of liabilities due to the expiration of statutes of limitations in multiple jurisdictions.

     Cash, cash equivalents and short-term investments were $600.9 million as of October 3, 2010 as compared to $962.1 million as of December 31, 2009. For the three and nine months ended October 3, 2010, we generated $82.1 million and $255.5 million, respectively, in cash from operating activities, as compared to $68.7 million and $127.7 million, respectively, for the three and nine months ended October 4, 2009. During the nine months ended October 3, 2010, we repaid all of the $350 million of our outstanding 4% Convertible Subordinated Notes upon their maturity on May 15, 2010 and repurchased 45.8 million shares of our common stock for $217.7 million in cash.

RESULTS OF OPERATIONS

Revenues

     The following table summarizes our revenues by segment:

		Three Months Ended								Nine Months Ended
		October 3, 2010				October 4, 2009				October 3, 2010				October 4, 2009
		(In millions)
Semiconductor segment		$	390.1			$	371.8			$	1,223.3			$	1,040.7
Storage Systems segment			238.9				206.6				682.3				540.7
Consolidated		$	629.0			$	578.4			$	1,905.6			$	1,581.4

     Three months ended October 3, 2010 compared to the three months ended October 4, 2009:

     Total consolidated revenues for the three months ended October 3, 2010 increased by $50.6 million, or 8.7%, as compared to the three months ended October 4, 2009.

     Semiconductor Segment:

     Revenues for the Semiconductor segment increased by $18.3 million, or 4.9%, for the three months ended October 3, 2010 as compared to the three months ended October 4, 2009. The increase was primarily attributable to an increase in demand for semiconductors used in networking product applications and increased revenues from the licensing of our intellectual property, offset in part by a decrease in revenues from semiconductors used in storage product applications.

     Storage Systems Segment:

     Revenues for the Storage Systems segment increased by $32.3 million, or 15.6%, for the three months ended October 3, 2010 as compared to the three months ended October 4, 2009. The increase was attributable to increases in demand for our entry-level storage systems, including a new entry-level storage product we introduced in the first quarter of 2010, and for our server RAID adapters and software.

     Nine months ended October 3, 2010 compared to the nine months ended October 4, 2009:

     Total consolidated revenues for the nine months ended October 3, 2010 increased by $324.2 million, or 20.5%, as compared to the nine months ended October 4, 2009.

     Semiconductor Segment:

     Revenues for the Semiconductor segment increased by $182.6 million, or 17.5%, for the nine months ended October 3, 2010 as compared to the nine months ended October 4, 2009. The increase was primarily attributable to an increase in demand for semiconductors used in storage and networking product applications and, to a lesser extent, increased revenues from the licensing of our intellectual property.

     Storage Systems Segment:

     Revenues for the Storage Systems segment increased by $141.6 million, or 26.2%, for the nine months ended October 3, 2010 as compared to the nine months ended October 4, 2009. The increase was attributable to increases in demand for our entry-level and mid-range storage systems, related premium software features, our server RAID adapters and software and, to a lesser extent, additional revenues in 2010 from the acquisitions of the 3ware RAID storage adapter business in April 2009 and ONStor, Inc. in July 2009.

     Significant Customers:

     The following table provides information about our significant customers, each of whom accounted for 10% or more of consolidated revenues or 10% or more of either segment’s revenues:

		Three Months Ended								Nine Months Ended
		October 3, 2010				October 4, 2009				October 3, 2010				October 4, 2009
Semiconductor segment:
Number of significant customers			1				1				1				1
Percentage of Semiconductor segment revenues			20	%			24	%			22	%			24	%
Storage Systems segment:
Number of significant customers			2				2				2				3
Percentage of Storage Systems segment revenues			46%, 15	%			49%, 13	%			46%, 14	%			47%, 12%, 10	%
Consolidated:
Number of significant customers			2				2				2				2
Percentage of consolidated revenues			20%, 13	%			20%, 16	%			19%, 14	%			18%, 16	%

Revenues by Geography

     The following table summarizes our revenues by geography based on the ordering location of the customer:

		Three Months Ended								Nine Months Ended
		October 3, 2010				October 4, 2009				October 3, 2010				October 4, 2009
		(In millions)
North America *		$	175.5			$	150.1			$	504.7			$	369.9
Asia **			286.3				286.4				926.7				811.7
Europe and the Middle East			167.2				141.9				474.2				399.8
Total		$	629.0			$	578.4			$	1,905.6			$	1,581.4

     Three months ended October 3, 2010 compared to the three months ended October 4, 2009:

     Revenues in North America and Europe and the Middle East increased 16.9% and 17.8%, respectively, for the three months ended October 3, 2010 as compared to the three months ended October 4, 2009. The increase in North America was primarily attributable to increased demand for storage systems, server RAID adapters and software, and an increase in revenues from the licensing of our intellectual property. The increase in Europe and the Middle East was primarily attributable to increased demand for storage systems, server RAID adapters and software, and semiconductors used in networking product applications.

     Nine months ended October 3, 2010 compared to the nine months ended October 4, 2009:

     Revenues in North America, Europe and the Middle East, and Asia increased 36.4%, 18.6% and 14.2%, respectively, for the nine months ended October 3, 2010 as compared to the nine months ended October 4, 2009. The increase in North America was primarily attributable to increased demand for storage systems, server RAID adapters and software, semiconductors used in storage product applications, and an increase in revenues from the licensing of our intellectual property. The increase in Europe and the Middle East was primarily attributable to increased demand for semiconductors used in storage and networking product applications, storage systems, and server RAID adapters and software. The increase in Asia was primarily attributable to increased demand for semiconductors used in storage and networking product applications, and server RAID adapters and software.

Gross Profit Margin

     The following table summarizes our gross profit margins by segment:

		Three Months Ended								Nine Months Ended
		October 3, 2010				October 4, 2009				October 3, 2010				October 4, 2009
		(Dollars in millions)
Semiconductor segment:		$	185.4			$	152.5			$	567.0			$	399.2
Percentage of Semiconductor segment revenues			47.5	%			41.0	%			46.4	%			38.4	%
Storage Systems segment:		$	91.1			$	73.1			$	256.4			$	177.4
Percentage of Storage Systems segment revenues			38.1	%			35.4	%			37.6	%			32.8	%
Consolidated:		$	276.5			$	225.6			$	823.4			$	576.6
Percentage of consolidated revenues			44.0	%			39.0	%			43.2	%			36.5	%

     Three months ended October 3, 2010 compared to the three months ended October 4, 2009:

     Consolidated gross profit as a percentage of total revenues, or gross margin, increased to 44.0% for the three months ended October 3, 2010 from 39.0% for the three months ended October 4, 2009.

     Semiconductor Segment:

     Gross margins for the Semiconductor segment increased to 47.5% for the three months ended October 3, 2010 from 41.0% for the three months ended October 4, 2009. The increase was primarily attributable to the increase in revenues from the licensing of our intellectual property, which had higher gross margins, a decrease in amortization of identified intangible assets, lower manufacturing costs as a result of our cost reduction measures and, to a lesser extent, lower charges for inventory provisions as a result of continued improvement in supply chain management.

     Storage Systems Segment:

     Gross margins for the Storage Systems segment increased to 38.1% for the three months ended October 3, 2010 from 35.4% for the three months ended October 4, 2009. The increase was primarily attributable to a favorable shift in product mix resulting from higher demand for our server RAID adapters and software, which have higher gross margins, and the introduction of a new mid-range storage system in the fourth quarter of 2009 with higher gross margins. The increase was also attributable to higher overall absorption of fixed costs as a result of the 15.6% increase in segment revenues and, to a lesser extent, the absence of a $1.9 million charge incurred during the three months ended October 4, 2009 to fair value inventory acquired as part of the 3ware acquisition.

     Nine months ended October 3, 2010 compared to the nine months ended October 4, 2009:

     Consolidated gross margins increased to 43.2% for the nine months ended October 3, 2010 from 36.5% for the nine months ended October 4, 2009.

     Semiconductor Segment:

     Gross margins for the Semiconductor segment increased to 46.4% for the nine months ended October 3, 2010 from 38.4% for the nine months ended October 4, 2009. The increase was primarily attributable to higher overall absorption of fixed costs as a result of the 17.5% increase in segment revenues, a favorable shift in product mix as a result of increased revenues from the licensing of our intellectual property, which had higher gross margins, a decrease in amortization of identified intangible assets and, to a lesser extent, lower manufacturing costs as a result of our cost reduction measures.

     Storage Systems Segment:

     Gross margins for the Storage Systems segment increased to 37.6% for the nine months ended October 3, 2010 from 32.8% for the nine months ended October 4, 2009. The increase was primarily attributable to a favorable shift in product mix resulting from higher demand for our server RAID adapters and software, mid-range storage systems and related premium software, which all have higher gross margins. The increase was also attributable to higher overall absorption of fixed costs as a result of the 26.2% increase in segment revenues and, to a lesser extent, the absence of a $4.4 million charge incurred during the nine months ended October 4, 2009 to fair value inventory acquired as part of the 3ware acquisition.

Research and Development

     The following table summarizes our research and development, or R&D, expenses by segment:

		Three Months Ended								Nine Months Ended
		October 3, 2010				October 4, 2009				October 3, 2010				October 4, 2009
						(Dollars in millions)
Semiconductor segment:		$	132.1			$	117.1			$	396.7			$	356.4
Percentage of Semiconductor segment revenues			33.9	%			31.5	%			32.4	%			34.2	%
Storage Systems segment:		$	34.2			$	33.9			$	107.6			$	98.9
Percentage of Storage Systems segment revenues			14.3	%			16.4	%			15.8	%			18.3	%
Consolidated:		$	166.3			$	151.0			$	504.3			$	455.3
Percentage of consolidated revenues			26.4	%			26.1	%			26.5	%			28.8	%

     Three months ended October 3, 2010 compared to the three months ended October 4, 2009:

     Consolidated R&D expenses increased by $15.3 million, or 10.1%, for the three months ended October 3, 2010 as compared to the three months ended October 4, 2009.

     Semiconductor Segment:

     R&D expenses for the Semiconductor segment increased by $15.0 million, or 12.8%, for the three months ended October 3, 2010 as compared to the three months ended October 4, 2009. The increase was primarily attributable to the restoration of certain employee compensation-related expenses that we reduced in 2009 and increased compensation-related expenses as a result of headcount additions in 2010. R&D expenses as a percentage of segment revenues for the Semiconductor segment increased from 31.5% for the

three months ended October 4, 2009 to 33.9% for the three months ended October 3, 2010, primarily as a result of the increase in R&D expenses being higher compared to the increase in revenues.

     Storage Systems Segment:

     R&D expenses for the Storage Systems segment increased by $0.3 million, or 0.9%, for the three months ended October 3, 2010 as compared to the three months ended October 4, 2009. The increase was primarily attributable to the restoration of certain employee compensation-related expenses that we reduced in 2009, partially offset by a decrease in project related material spending. R&D expenses as a percentage of segment revenues for the Storage Systems segment decreased from 16.4% for the three months ended October 4, 2009 to 14.3% for the three months ended October 3, 2010, primarily as a result of the increase in revenues.

     Nine months ended October 3, 2010 compared to the nine months ended October 4, 2009:

     Consolidated R&D expenses increased by $49.0 million, or 10.8%, for the nine months ended October 3, 2010 as compared to the nine months ended October 4, 2009.

     Semiconductor Segment:

     R&D expenses for the Semiconductor segment increased by $40.3 million, or 11.3%, for the nine months ended October 3, 2010 as compared to the nine months ended October 4, 2009. The increase was primarily attributable to the restoration of certain employee compensation-related expenses that we reduced in 2009 and increased compensation-related expenses as a result of headcount additions in 2010. R&D expenses as a percentage of segment revenues for the Semiconductor segment decreased from 34.2% for the nine months ended October 4, 2009 to 32.4% for the nine months ended October 3, 2010, primarily as a result of the increase in revenues.

     Storage Systems Segment:

     R&D expenses for the Storage Systems segment increased by $8.7 million, or 8.8%, for the nine months ended October 3, 2010 as compared to the nine months ended October 4, 2009. The increase was primarily attributable to higher compensation-related expenditures associated with higher headcount from the acquisitions of the 3ware RAID storage adapter business in April 2009 and ONStor, Inc. in July 2009, and the restoration of certain employee compensation-related expenses that we reduced in 2009. R&D expenses as a percentage of segment revenues for the Storage Systems segment decreased from 18.3% for the nine months ended October 4, 2009 to 15.8% for the nine months ended October 3, 2010, primarily as a result of the increase in revenues.

Selling, General and Administrative

     The following table summarizes our selling, general and administrative, or SG&A, expenses by segment:

		Three Months Ended								Nine Months Ended
		October 3, 2010				October 4, 2009				October 3, 2010				October 4, 2009
		(Dollars in millions)
Semiconductor segment:		$	56.7			$	52.4			$	173.0			$	162.5
Percentage of Semiconductor segment revenues			14.5	%			14.1	%			14.1	%			15.6	%
Storage Systems segment:		$	28.7			$	29.8			$	84.5			$	85.2
Percentage of Storage Systems segment revenues			12.0	%			14.4	%			12.4	%			15.8	%
Consolidated:		$	85.4			$	82.2			$	257.5			$	247.7
Percentage of consolidated revenues			13.6	%			14.2	%			13.5	%			15.7	%