UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the Quarterly Period Ended September 30, 2007

OR

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

For the transition period from                      to                     

Commission File Number: 1-10317

LSI CORPORATION

Delaware (State of Incorporation)		94-2712976 (I.R.S. Employer Identification Number)

1621 Barber Lane
Milpitas, California 95035
(Address of principal executive offices)
(Zip code)

(408) 433-8000
(Registrant’s telephone number, including area code)

     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, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer þ                     Accelerated Filer o                     Non-Accelerated Filer 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 2, 2007, there were 705,922,684 shares of the registrant’s Common Stock, $.01 par value, outstanding.

 

 

LSI CORPORATION
Form 10-Q
For the Quarter Ended September 30, 2007
INDEX

		Page
		No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements			3
Condensed Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006 (unaudited)			3
Condensed Consolidated Statements of Operations for the three months and nine months ended September 30, 2007 and October 1, 2006 (unaudited)			4
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2007 and October 1, 2006 (unaudited)			5
Notes to unaudited Condensed Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			25
Item 3. Quantitative and Qualitative Disclosures About Market Risk			37
Item 4. Controls and Procedures			37
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			38
Item 1A. Risk Factors			38
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			40
Item 6. Exhibits			41
Signatures			42
Index to Exhibits			43
EXHIBIT 10.2
EXHIBIT 10.3
EXHIBIT 10.4
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

LSI CORPORATION

		September 30,				December 31,
		2007				2006
		(In thousands, except
		per share amounts)
ASSETS
Cash and cash equivalents		$	749,933			$	327,800
Short-term investments			347,992				681,137
Accounts receivable, less allowances of $10,108 and $13,871			436,021				348,638
Inventories			218,416				209,470
Assets held for sale			581,308				20,120
Prepaid expenses and other current assets			126,834				48,572
Total current assets			2,460,504				1,635,737
Property and equipment, net			236,501				86,045
Other intangible assets, net			1,241,979				59,484
Goodwill			2,459,419				932,323
Other assets			226,013				138,555
Total assets		$	6,624,416			$	2,852,144
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable		$	236,036			$	200,189
Accrued salaries, wages and benefits			135,675				82,292
Other accrued liabilities			350,946				155,986
Income taxes payable			24,274				88,304
Total current liabilities			746,931				526,771
Long-term debt			718,725				350,000
Pension and postretirement benefits			204,316				—
Income taxes payable — non-current			171,522				—
Other non-current liabilities			144,514				79,400
Total long-term obligations and other liabilities			1,239,077				429,400
Commitments and contingencies (Note 12)			—				—
Minority interest in subsidiary			245				235
Stockholders’ equity:
Preferred stock, $.01 par value: 2,000 shares authorized; none outstanding			—				—
Common stock, $.01 par value: 1,300,000 shares authorized; 709,770 and 403,680 shares outstanding			7,098				4,037
Additional paid-in capital			6,327,900				3,102,178
Accumulated deficit			(1,716,524	)			(1,220,306	)
Accumulated other comprehensive income			19,689				9,829
Total stockholders’ equity			4,638,163				1,895,738
Total liabilities and stockholders’ equity		$	6,624,416			$	2,852,144

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

LSI CORPORATION

		Three Months Ended								Nine Months Ended
		September 30, 2007				October 1, 2006				September 30, 2007				October 1, 2006
		(In thousands, except per share amounts)
Revenues		$	727,415			$	492,978			$	1,862,769			$	1,458,497
Cost of revenues			479,550				284,880				1,268,418				858,720
Gross profit			247,865				208,098				594,351				599,777
Research and development			182,291				102,533				488,071				305,169
Selling, general and administrative			104,518				60,276				280,931				193,790
Restructuring of operations and other items, net			101,231				2,614				119,071				(13,384	)
Acquired in-process research and development			—				—				182,900				—
(Loss)/income from operations			(140,175	)			42,675				(476,622	)			114,202
Interest expense			(9,033	)			(6,556	)			(21,972	)			(19,314	)
Interest income and other, net			11,808				13,066				33,129				32,912
(Loss)/income before income taxes			(137,400	)			49,185				(465,465	)			127,800
Provision for income taxes			3,200				5,575				23,156				17,175
Net (loss)/income		$	(140,600	)		$	43,610			$	(488,621	)		$	110,625
Net (loss)/income per share:
Basic		$	(0.20	)		$	0.11			$	(0.78	)		$	0.28
Diluted		$	(0.20	)		$	0.11			$	(0.78	)		$	0.27
Shares used in computing per share amounts:
Basic			715,733				399,613				623,692				397,408
Diluted			715,733				403,715				623,692				403,779

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

LSI CORPORATION

		Nine Months Ended
		September 30, 2007				October 1, 2006
		(In thousands)
Operating activities:
Net (loss)/income		$	(488,621	)		$	110,625
Adjustments:
Depreciation and amortization			216,720				65,693
Stock-based compensation expense			55,772				36,154
Non-cash restructuring and other items			88,354				(2,576	)
Acquired in-process research and development			182,900				—
Gain on sale of intellectual property			—				(15,000	)
Gain on sale of Gresham manufacturing facility and associated intellectual property			—				(12,553	)
Write-off of intangible assets acquired in a purchase business combination			—				3,325
Non-cash foreign exchange loss/(gain)			3,221				(472	)
Loss on write-down/(gain) on sale of equity securities			2,396				(1,998	)
Gain on sale of property and equipment			(9,513	)			(245	)
Changes in deferred tax assets and liabilities			(6,797	)			24
Changes in assets and liabilities, net of assets acquired and liabilities assumed in business combinations:
Accounts receivable, net			143,998				3,063
Inventories			95,148				7,158
Prepaid expenses and other assets			35,061				(13,380	)
Accounts payable			(134,621	)			(1,161	)
Accrued and other liabilities			658				17,104
Net cash provided by operating activities			184,676				195,761
Investing activities:
Purchase of debt securities available-for-sale			(154,087	)			(498,408	)
Proceeds from maturities and sales of debt securities available-for-sale			493,029				302,407
Purchases of convertible notes/equity securities			(10,500	)			(8,150	)
Proceeds from sale of equity securities			—				6,092
Purchases of property, equipment and software			(76,986	)			(44,244	)
Proceeds from sale of property and equipment			13,790				89
Proceeds from sale of Consumer group			22,555				—
Proceeds from sale of intellectual property			—				22,670
Proceeds from sale of Fort Collins facility			—				10,998
Proceeds from sale of Colorado Springs facility			—				7,029
Proceeds from sale of Gresham manufacturing facility			—				96,426
Proceeds from sale of intellectual property associated with the Gresham manufacturing facility			—				5,100
Cash acquired from acquisition of Agere, net of acquisition costs			517,712				—
Acquisition of SiliconStor, net of cash acquired and transaction costs			(52,079	)			—
Adjustment to goodwill acquired in a prior year for resolution of a pre-acquisition income tax contingency			2,442				1,373
Net cash provided by/(used in) investing activities			755,876				(98,618	)
Financing activities:
Issuance of common stock			28,994				36,005
Purchase of common stock under repurchase programs			(549,113	)			—
Net cash (used in)/provided by financing activities			(520,119	)			36,005
Effect of exchange rate changes on cash and cash equivalents			1,700				613
Increase in cash and cash equivalents			422,133				133,761
Cash and cash equivalents at beginning of year			327,800				264,649
Cash and cash equivalents at end of period		$	749,933			$	398,410
Non-cash information:
Issuance of common stock in consideration for acquired assets and liabilities of Agere		$	3,647,021			$	—

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 most recent quarter ended September 30, 2007. The results of operations for the quarter ended September 30, 2007, are not necessarily indicative of the results to be expected for the full year. The first nine months of 2007 ended on September 30, 2007 and the first nine months of 2006 ended on October 1, 2006 and consisted of 39 weeks each. The third quarter in each of 2007 and 2006 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. See Note 3 to the unaudited condensed consolidated financial statements (hereafter referred to as the “Notes”).

     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 and 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 4), necessary to state fairly the financial information included herein. While the Company believes that the disclosures are adequate to make the information not misleading, it is suggested that these financial statements 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, 2006.

     Amortization of intangibles which was previously reported separately in operating expense has been reclassified to cost of revenues for the three and nine months ended October 1, 2006, to conform to the current period presentation.

Recent Accounting Pronouncements

     In June 2006, the Financial Accounting Standards Board (“FASB”) issued interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109 (“FAS 109”).” FIN 48 prescribes a recognition threshold and measurement attribute for tax positions taken or expected to be taken in a tax return. This interpretation also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The evaluation of a tax position in accordance with this interpretation is a two-step process. In the first step, recognition, the Company determines whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The second step addresses measurement of a tax position that meets the more-likely-than-not criteria. The tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Differences between tax positions taken in a tax return and amounts recognized in the financial statements will generally result in (a) an increase in a liability for income taxes payable or a reduction of an income tax refund receivable, (b) a reduction in a deferred tax asset or an increase in a deferred tax liability or (c) both (a) and (b). Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be de-recognized in the first subsequent financial reporting period in which that threshold is no longer met. Use of a valuation allowance as described in FAS 109 is not an appropriate substitute for the de-recognition of a tax position. The requirement to assess the need for a valuation allowance for deferred tax assets based on sufficiency of future taxable income is unchanged by this interpretation.

     The Company adopted the provisions of FIN 48 as of January 1, 2007. The Company recognized the cumulative effect of adoption as a $3.4 million increase to the opening balance of accumulated deficit as of January 1, 2007. The amount of unrecognized tax benefit as of the date of adoption after the FIN 48 adjustment was $132.9 million. Of this amount, $103.0 million related to unrecognized tax positions that, if recognized, would affect the annual effective tax rate of the Company. The Company does not expect any uncertain tax benefits to significantly increase or decrease within the next 12 months.

     The Company files income tax returns at the U.S. federal level and in various states and foreign jurisdictions. The Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2001. The Company’s subsidiaries in Hong Kong (1997 to 2001) and Singapore (1999 to 2002) are currently under audit.

     The Company recognizes interest and penalties accrued in relation to unrecognized tax benefits in tax expense. As of the date of adoption, the Company had accrued approximately $32.3 million for the payment of interest and penalties. As of September 30, 2007, we have recorded additional interest and penalties of $4.8 million.

     The amount of the unrecognized tax benefit acquired from Agere on April 2, 2007 was $64.0 million. None of this amount related to unrecognized tax positions that, if recognized, would affect the annual effective tax rate of the Company. Any adjustments relating to unrecognized tax benefits for the Agere pre-acquisition period, including related interest and penalties, would be recorded to goodwill. The Company does not expect any uncertain tax benefits to significantly increase or decrease within the next 12 months.

     Acquired accrued interest and penalties from Agere were approximately $10.7 million. As of September 30, 2007, the Company recorded additional interest and penalties of $2.6 million.

     Since the date of adoption, there were no material changes in the liability for uncertain tax positions.

     In June 2006, the FASB Emerging Issues Task Force issued EITF Issue No. 06-2 (“EITF 06-02”), “Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43 (“FAS 43”), Accounting for Compensated Absences.” EITF 06-02 addresses the accounting for an employee’s right to a compensated absence under a sabbatical or other similar benefit arrangement which is unrestricted (that is, the employee is not required to perform any services for or on behalf of the entity during the absence) and which requires the completion of a minimum service period and in which the benefit does not increase with additional years of service. For sabbatical arrangements meeting these criteria, EITF 06-02 concludes that the accumulated criteria have been met in paragraph 6(b) of FAS 43 and that if the remaining sections of paragraph 6 are met, the sabbatical arrangement should be accrued over the requisite service period, which for the Company would be 10 years. The Company offers a sabbatical of 20 days to full-time employees upon completion of 10 years of service. The Company adopted EITF 06-02 in the first quarter of 2007, with a cumulative effect adjustment to accumulated deficit of $4.2 million.

     The impact of the adoption of FIN 48 and EITF 06-02 on the opening balance of accumulated deficit as of January 1, 2007 is as follows (in thousands):

Accumulated deficit as of December 31, 2006		$	(1,220,306	)
Impact of adoption of FIN 48			(3,393	)
Impact of adoption of EITF 06-02			(4,204	)
Accumulated deficit as of January 1, 2007		$	(1,227,903	)

     In September 2006, the FASB issued Statement 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, and will be applied prospectively. The Company is currently evaluating the impact that the provisions of FAS 157 will have on the Company’s consolidated balance sheet and statement of operations.

     In September 2006, the FASB issued Statement No. 158 (“FAS 158”), “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,” which amends FAS No. 87, “Employers’ Accounting for Pensions,” FAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” FAS No. 106, “Employers’ Accounting for Postretirement Benefits Other than Pensions,” and FAS No. 132(R), “Employers’ Disclosure about Pensions and Other Postretirement Benefits – an amendment of FASB Statements No. 87, 88 and 106.” FAS 158 requires an entity to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status through comprehensive income in the year in which the changes occur. This Statement requires entities to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. As a result of the Agere merger, the Company acquired Agere’s pension plans and postretirement benefit plans. See Note 5.

     In February 2007, the FASB issued Statement No. 159 (“FAS 159”), “The Fair Value Option for Financial Assets and Financial Liabilities – including an amendment of FASB Statement No. 115.” FAS 159 permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. FAS 159 is effective for the Company beginning in the first quarter of 2008, although earlier adoption is permitted. The Company is currently evaluating the impact that FAS 159 will have on the Company’s consolidated balance sheet and statement of operations.

NOTE 2 — STOCK-BASED COMPENSATION

     Stock-based compensation expense for the three and nine months ended September 30, 2007 was $21.8 million and $55.8 million, respectively, and for the three and nine months ended October 1, 2006 was $11.0 million and $36.2 million, respectively, as shown in the table below. Stock-based compensation costs capitalized to inventory and software development for the three and nine months ended September 30, 2007 and October 1, 2006 were not significant.

     The estimated fair value of the Company’s stock-based awards, less expected forfeitures, is amortized over the awards’ vesting period (the requisite service period), on a straight-line basis. The table below summarizes stock-based compensation expense, related to employee stock options, the Company’s employee stock purchase plans (“ESPP”) and restricted stock unit awards for the three and nine months ended September 30, 2007 and October 1, 2006.

		Three Months Ended								Nine Months Ended
Stock-Based Compensation Expense Included In:		September 30, 2007				October 1, 2006				September 30, 2007				October 1, 2006
		(In thousands)
Cost of revenues		$	2,824			$	1,719			$	7,916			$	5,702
Research and development			8,916				3,908				22,611				13,073
Selling, general and administrative			10,035				5,398				25,245				17,379
Total stock-based compensation expense		$	21,775			$	11,025			$	55,772			$	36,154

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 assumptions outlined in the following table:

		Three Months Ended								Nine Months Ended
		September 30, 2007				October 1, 2006				September 30, 2007				October 1, 2006
Weighted average estimated grant date fair value		$	2.54			$	2.97			$	3.31			$	3.30
Weighted average assumptions in calculation:
Expected life (years)			4.36				4.36				4.35				4.32
Risk-free interest rate			4	%			5	%			5	%			5	%
Volatility			49	%			48	%			46	%			48	%

     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 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 Company’s initial public offering in 1983. The Company used implied volatilities of near-the-money exchange traded call options as stock options are call options that are granted at-the-money. The historical and implied volatilities were 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 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 lattice model assumes that employees’ exercise behavior is a function of the option’s remaining 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 option grants made by the Company since its initial public offering in 1983.

     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 under the Company’s equity-based compensation plans during the nine months ended September 30, 2007 is presented below:

						Weighed Average Exercise				Weighted Average Remaining				Aggregate
		Number of				Price Per				Contractual				Intrinsic
		Shares				Shares				Term				Value
		(In thousands)								(In years)				(In thousands)
Options outstanding at December 31, 2006			56,750			$	11.92				—				—
Options assumed in Agere merger			48,884				22.41				—				—
Options granted			10,766				9.26				—				—
Options exercised			(2,821	)			(6.10	)			—				—
Options canceled			(9,344	)			(15.13	)			—				—
Options outstanding at September 30, 2007			104,235			$	16.43				3.68			$	41,417
Options exercisable at September 30, 2007			70,336			$	20.47				2.75			$	27,722

     As of September 30, 2007, total unrecognized compensation expense related to nonvested stock options, net of estimated forfeitures, was approximately $110.8 million and is expected to be recognized over the next 2.7 years calculated on a weighted average basis. The total intrinsic value of options exercised during the three and nine months ended September 30, 2007 was $1.6 million and $6.5 million, respectively. Cash received from stock option exercises was $7.1 million and $17.2 million during the three and nine months ended September 30, 2007, 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.

Employee Stock Purchase Plans

     The Company also has two ESPPs, one for U.S. employees and one for employees outside the U.S., under which rights are granted to employees to purchase shares of common stock at 85% of the lesser of the fair market value of such shares at the beginning of a 12-month offering period or the end of each six-month purchase period within such an offering period. Compensation expense is calculated using the fair value of the employees’ purchase rights under the Black-Scholes model. A total of 1.7 million shares and 1.9 million shares related to the ESPPs were issued during the three months ended July 1, 2007 and July 2, 2006, respectively. No shares related to the ESPPs were issued during the three months ended September 30, 2007 and October 1, 2006. For disclosure purposes, the Company has included the assumptions that went into the calculation of fair value for the May 2007 and May 2006 grants as follows:

		Three Months Ended
		July 1, 2007				July 2, 2006
Weighted average estimated grant date fair value		$	2.37			$	3.05
Weighted average assumptions in calculation:
Expected life (years)			0.8				0.8
Risk-free interest rate			5	%			5	%
Volatility			38	%			39	%

Restricted Stock Awards

     Under the 2003 Equity Incentive Plan (“2003 Plan”), the Company may grant restricted stock or restricted stock units. No participant may be granted more than a total of 0.5 million shares of restricted stock or restricted stock units in any year. The Company typically grants restricted stock units, vesting of which is subject to the employee’s continuing service to the Company. The cost of these awards is determined using the fair value of the Company’s common stock on the date of grant and compensation expense is recognized over the vesting period on a straight-line basis.

     A summary of the changes in restricted stock unit awards outstanding during the nine months ended September 30, 2007 is presented below.

		Number of
		Shares
		(In thousands)
Non-vested shares at December 31, 2006			1,910
Assumed in Agere merger			9,141
Granted			2,282
Vested			(1,473	)
Forfeited			(544	)
Non-vested shares at September 30, 2007			11,316

     As of September 30, 2007, the Company had approximately $64.3 million of total unrecognized compensation expense, net of estimated forfeitures, related to restricted stock unit awards, which will be recognized over the weighted average period of 2.3 years. The fair value of shares vested in the three and nine months ended September 30, 2007 was $3.4 million and $12.2 million, respectively.

NOTE 3 — BUSINESS COMBINATIONS

     The Company actively evaluates strategic acquisitions that build upon the Company’s existing library of intellectual property, human capital and engineering talent, and seeks to increase the Company’s leadership position in the areas in which the Company operates.

Merger with Agere

     On April 2, 2007, the Company completed the acquisition of Agere. Agere was a provider of integrated circuit solutions for a variety of computing and communications applications. Some of Agere’s solutions included related software and reference designs. Agere’s solutions were used in products such as hard disk drives, mobile phones, high-speed communications systems and personal computers. Agere also licensed its intellectual property to others. The purpose of the acquisition was to enable the Company to expand its comprehensive set of building block solutions including semiconductors, systems and related software for storage, networking and consumer electronics products that enable businesses and consumers to store, protect and stay connected to their information and digital content and expand its intellectual property portfolio and integrated workforce in the Semiconductor segment.

     Upon completion of the merger, each share of Agere common stock outstanding at the effective time of the merger was converted into the right to receive 2.16 shares of LSI common stock. As a result, approximately 368 million shares of LSI common stock were issued to former Agere stockholders. The fair value of the common stock issued was determined using a share price of $9.905 per share, which represented the average closing price of LSI common shares for two trading days before and ending two trading days after December 4, 2006, the date by which the merger was agreed to and announced. LSI assumed stock options and restricted stock units covering a total of approximately 58 million shares of LSI common stock. The fair value of options assumed was estimated using a reduced form calibrated binomial lattice model and a share price of $9.905 per share, which represents the average closing price of LSI common shares for two trading days before and ending two trading days after December 4, 2006. The value of the options and restricted units assumed was reduced by the fair value of unvested options and restricted stock units assumed, based on the price of a share of LSI common stock on April 2, 2007. LSI also guaranteed Agere’s 6.5% Convertible Subordinated Notes due December 15, 2009, the fair value of which was $370 million as of April 2, 2007.

     The merger was accounted for as a purchase. Accordingly, the results of operations of Agere and estimated fair value of assets acquired and liabilities assumed were included in the Company’s consolidated financial statements from April 2, 2007, the acquisition date.

     The total purchase price of the acquisition was as follows (in thousands):

Fair value of LSI common shares issued		$	3,647,021
(a) Fair value of stock awards assumed			218,713
(b) Fair value of unvested stock awards assumed			(168,555	)
(a)-(b) Fair value of the vested options assumed			50,158
Direct transaction costs			22,970
Total estimated purchase price		$	3,720,149

Purchase Price Allocation:

     The allocation of the purchase price to Agere’s tangible and identifiable intangible assets acquired and liabilities assumed was based on their estimated fair values. Further adjustments may be included in the final allocation of the purchase price of Agere, if the adjustments are determined within the purchase price allocation period (up to twelve months from the closing date). The excess of the purchase price over the tangible and identifiable intangible assets acquired and liabilities assumed has been allocated to goodwill. None of the goodwill recorded is expected to be deductible for tax purposes except the tax deductible goodwill LSI inherited from Agere. The purchase price has been allocated as follows as of April 2, 2007 (in thousands):

Cash		$	540,140
Accounts receivable			222,169
Inventory			120,848
Assets held for sale			122,756
Property and equipment			162,047
Accounts payable			(167,947	)
Pension and postretirement liabilities			(214,607	)
Convertible Notes			(370,249	)
Other liabilities			(183,359	)
Net assets acquired			231,798
Identifiable intangible assets			1,727,700
In-process research and development			176,400
Goodwill			1,584,251
Total estimated purchase price		$	3,720,149

     Note 4 contain information related to the cost of restructuring programs related to Agere. The costs were included as part of other liabilities assumed as of April 2, 2007.

     The following table sets forth the components of the identifiable intangible assets, which are being amortized over their estimated useful lives, some on a straight-line basis and others on an accelerated basis:

						Weighted Average
Identifiable Intangible Assets		Fair Value				Useful Life
		(In thousands)				(In years)
Current technology		$	844,500				8.5
Customer base			513,000				10
Patent licensing			317,200				10
Order backlog			53,000				0.5
Total acquired identifiable intangible assets		$	1,727,700

Acquired In-Process Research and Development:

     The Company recorded a charge of $176.4 million associated with acquired in-process research and development, or IPR&D, associated with the merger with Agere during the second quarter of 2007. The Company’s methodology for allocating the purchase price in purchase acquisitions to IPR&D involves established valuation techniques in the high-technology industry and with the assistance of third party service providers. Each project in process was analyzed by discounting forecasted cash flows directly related to the products expected to result from the subject research and development, net of returns on contributory assets including working capital, fixed assets, customer relationships, trade name, and assembled workforce. IPR&D was expensed upon acquisition because technological feasibility had not been established and no future alternative uses existed. The fair value of technology under development is determined using the income approach, which discounts expected future cash flows to present value. A discount rate is used for the projects to account for the risks associated with the inherent uncertainties surrounding the successful development of the IPR&D, market acceptance of the technology, the useful life of the technology, the profitability level of such technology and the uncertainty of technological advances, which could impact the estimates recorded. The discount rates used in the present value calculations are typically derived from a weighted-average cost of capital analysis. These estimates did not account for any potential synergies realizable as a result of the acquisition and were in line with industry averages and growth estimates. The details of each IPR&D project measured as of April 2, 2007, the acquisition date, are summarized in the table below.

														Revenue
														projections by
						Estimated cost				Discount				project extend
		IPR&D				to complete				rate				through
Project		(In millions)				(In millions)
Storage – read channel and preamps		$	36.2			$	17.8				13.8	%			2016
Mobility – HSPDA for 3G		$	31.2			$	144.2				13.8	%			2016
Networking–modems, Firewire, serdes, media gateway, VoIP, network processors, Ethernet, mappers and framers		$	109.0			$	68.0				13.8	%			2021

     The actual development timelines and costs were in line with original estimates as of September 30, 2007. However, development of the technology remains a substantial risk to the Company due to factors including the remaining effort to achieve technical feasibility, rapidly changing customer needs and competitive threats from other companies. Failure to bring these products to market in a timely manner could adversely affect sales and profitability of the Company in the future. Additionally, the value of other intangible assets acquired may become impaired.

Pro Forma Results:

     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 periods presented. The summary combines the results of operations as if Agere had been acquired as of the beginning of the earliest period presented.

     The summary includes the impact of certain adjustments such as amortization of intangibles, stock compensation charges and charges in interest expense because of Agere’s notes that the Company guaranteed. Additionally, IPR&D associated with the Agere acquisition has been excluded from the periods presented. The $101.2 million of restructuring charges recorded in the quarter ended September 30, 2007 and referred to in Note 4 did not relate to the merger with Agere and accordingly were included.

		Three Months Ended				Nine Months Ended
		October 1, 2006				September 30, 2007				October 1, 2006
		($ in thousands except per share amounts)
Revenues		$	849,410			$	2,197,613			$	2,533,113
Net loss		$	(5,599	)		$	(309,374	)		$	(120,648	)
Basic loss per share		$	(0.01	)		$	(0.41	)		$	(0.16	)
Diluted loss per share		$	(0.01	)		$	(0.41	)		$	(0.16	)

Acquisition of SiliconStor, Inc.

     On March 13, 2007, the Company completed the acquisition of SiliconStor, Inc. Pro forma statements of earnings information has not been presented because this acquisition was not material. The table below provides information about this acquisition (dollars in millions).

Fair Value of

Entity Name;

Tangible Net

Segment Included in;

Total

Assets/

In-Process

Description of

Purchase

Type of

(Liabilities)

Amortizable

Research and

Acquired Business

Acquisition Date

Price

Consideration

Acquired

Goodwill

Intangible Assets

Development

SiliconStor, Inc.;

Semiconductor segment;

Silicon solutions for enterprise storage based on SAS and FC-SATA

March 13, 2007

$

56.4

$56.4 cash

$

1.5

$

37.8

$

10.6

$

6.5

     There were no material acquisitions for the nine months ended October 1, 2006.

NOTE 4 — RESTRUCTURING AND OTHER ITEMS

     The Company recorded a charge of $101.2 million and $119.1 million in restructuring of operations and other items for the three and nine months ended September 30, 2007, respectively. A charge of $100.9 million and $114.9 million was recorded in the Semiconductor segment, and a charge of $0.3 million and $4.2 million was recorded in the Storage Systems segment for the three and nine months ended September 30, 2007, respectively. The Company recorded a charge of $2.6 million and a net credit of $13.4 million in restructuring of operations and other items during the three and nine months ended October 1, 2006, respectively. A charge of $2.7 million and a credit of $14.6 million were recorded in the Semiconductor segment, and a credit of $0.1 million and a charge of $1.2 million were recorded in the Storage Systems segment for the three and nine months ended October 1, 2006, respectively. For a complete discussion of the 2006 restructuring actions, please refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

Restructuring and Impairment of Long-Lived Assets

First Quarter of 2007:

     The credit of $8.1 million resulted from the following items:

	•		$10.4 million net gain was recorded for the sale of land in Colorado, which had a net book value of $2.0 million. Total proceeds from the sale were $12.4 million. The gain was offset in part by a charge of $0.2 million associated with certain other asset write-offs;
	•		A credit of $0.5 million was recorded for changes in sublease assumptions for previously accrued facility lease exit costs;
	•		An expense of $0.7 million was recorded to reflect the change in time value of accruals for facility lease exit costs; and
	•		An expense of $1.9 million was recorded for severance and termination benefits for employees.

Second Quarter of 2007:

     On June 27, 2007, the Company announced the signing of a definitive agreement to sell the Consumer group to Magnum Semiconductor and a reduction in workforce of approximately 900 positions (inclusive of the Consumer group) or 13 percent of the Company’s non-production workers across all business and functional areas worldwide. In connection with the restructuring actions, the Company recorded a charge of approximately $21.6 million during the quarter ended July 1, 2007, which represents future cash expenditures for termination-related benefits paid primarily in the third quarter of 2007. The sale of the Consumer group closed on July 27, 2007. The Company received approximately $22.6 million in cash on July 27, 2007. In addition, the Company received a promissory note for $18 million due in 2010 and a warrant to purchase preferred shares of Magnum Semiconductor stock. See the discussion below for the third quarter of 2007 for additional charges associated with the transaction.

     On July 25, 2007, the Company announced that it had signed a definitive agreement to sell its semiconductor assembly and test operations in Thailand to STATS ChipPAC Ltd. (“STATS ChipPAC”) for approximately $100 million with $50 million due upon closing and a $50 million note payable over four years. The sale of the semiconductor assembly and test operations in Thailand was completed on October 2, 2007. STATS ChipPAC offered employment to substantially all of the LSI manufacturing employees associated with the facility. The Company also entered into additional agreements with STATS ChipPAC, including a multi-year wafer assembly and test agreement and a transition services agreement. The Company also announced that it would transition semiconductor and storage systems assembly and test operations performed at its facilities in Singapore and Kansas to current manufacturing partners. As part of these actions, the Company expects to eliminate approximately 2,100 production positions worldwide. In connection with the restructuring for Kansas, the Company recorded a charge of approximately $2.5 million during the quarter ended July 1, 2007, which represents future cash expenditures for termination-related benefits expected to be paid primarily by the end of the second quarter of 2008. The restructuring costs associated with the Thailand and Singapore assembly and test facilities were recorded as liabilities assumed as part of the merger with Agere on April 2, 2007. See the discussion below under “Restructuring Actions Associated with the Agere Merger”. See discussion below for the third quarter of 2007 for additional charges associated with the sale of the Thailand operations.

     For the quarter ended July 1, 2007, a charge of $25.9 million was recorded, resulting from the following items:

•

An expense of $24.1 million was recorded for severance and termination benefits for employees as a result of the actions discussed above — $11.9 million was related to the Consumer restructuring action, $9.7 million related to the workforce reduction announced on June 27, 2007, and $2.5 million related to the transition of Wichita manufacturing operations to manufacturing partners;

	•		An expense of $0.3 million was recorded for changes in sublease assumptions for previously accrued facility lease exit costs;
	•		An expense of $0.7 million was recorded to reflect the change in time value of accruals for facility lease exit costs; and
	•		An expense of $0.8 million was recorded for certain asset write-offs and merger related costs.

Third Quarter of 2007:

     On August 20, 2007, the Company announced that it had signed a definitive agreement to sell its Mobility Products Group (“MPG”) to Infineon Technologies AG (“Infineon”) for $450 million in cash, plus a performance-based payment of up to $50 million payable in the first quarter of 2009. MPG designs semiconductors and software for cellular telephone handsets and complete chip-level solutions for satellite digital audio radio applications. The MPG sale closed on October 24, 2007. The Company will be providing services to Infineon during a transition period and will be leasing space in its Allentown, PA facility to Infineon.

     For the quarter ended September 30, 2007, a charge of $101.2 million in restructuring of operations and other items, net resulted from the following items:

•

A $93.6 million charge was recorded related to the sale of MPG to Infineon. The components of this charge are as follows:

	o		A charge of $15.1 million for the difference between the proceeds of $450 million received at closing and the $465.1 million net book value of MPG as of September 30, 2007;
	o		A charge of $27.5 million for future credits Infineon will receive from the Company on purchases of finished goods inventory;
	o		A charge of $21.8 million for future inventory pricing benefits Infineon will receive for products manufactured at Silicon Manufacturing Partners Pte. Ltd. (“SMP”), a joint venture LSI has with Chartered Semiconductor Manufacturing Ltd. (“Chartered Semiconductor”). See Note 12.
	o		A charge of $15.5 million for the acceleration of stock awards previously granted to MPG employees whose positions will be eliminated as part of the sale of MPG to Infineon;
	o		A charge of $4.5 million for MPG-related lease termination costs not assumed by Infineon, a $4.5 million charge for estimated transaction costs, a $2.9 million charge for severance and termination benefits for employees and a charge of $1.8 million for the write-off of Mobility fixed assets not acquired by Infineon.

	•		A charge of $3.0 million related to the sale of Thailand assets to STATS ChipPAC Ltd. to adjust the carrying value of the assets held for sale to fair market value;
	•		A charge of $2.1 million related to the sale of the Consumer group. The components of this charge are as follows:

	o		A credit of $1.3 million for the difference between the $22.6 million received and the $21.3 million net book value of the assets as of the date the transaction closed;
	o		A  $2.5 million charge related to facility lease termination costs not assumed by Magnum; and
	o		A $0.9 million charge recorded for severance and termination benefits for employees due to a change in estimates.

	•		A charge of $1.7 million was recorded for the change in assumptions and time value of accruals for previously recorded facility lease exit costs;
	•		A charge of $0.8 million was recorded for severance and termination benefits for employees of which $0.3 million related to the transition of Kansas manufacturing operations to manufacturing partners and $0.5 million related to the general workforce reduction action announced June 27, 2007.

     The following table sets forth the Company’s restructuring reserves as of December 31, 2006 and September 30, 2007, which are included in other accrued liabilities in the balance sheet, and the activities affecting the reserves during the nine months ended September 30, 2007:

		Balance at				Restructuring				Utilized				Balance at				Restructuring				Utilized				Balance at				Restructuring				Utilized				Balance at
		December 31,				Expense				during Q1				April 1,				Expense				during Q2				July 1,				Expense				during Q3				September 30,
		2006				Q1 2007				2007				2007				Q2 2007				2007				2007				Q3 2007				2007				2007
		(In thousands)
Write-down of excess assets and other liabilities (a)		$	—			$	(10,143	)		$	10,143			$	—			$	785			$	(323	)		$	462			$	72,646			$	(72,883	)		$	225
Lease terminations (b)			23,169				189				(2,952	)			20,406				1,027				(2,082	)			19,351				8,526				(2,387	)			25,490
Payments to employees for severance (c)			342				1,874				(449	)			1,767				24,108				(1,917	)			23,958				20,059				(19,740	)			24,277
Total		$	23,511			$	(8,080	)		$	6,742			$	22,173			$	25,920			$	(4,322	)		$	43,771			$	101,231			$	(95,010	)		$	49,992

     Assets held for sale were $581.3 million and $20.1 million as of September 30, 2007 and December 31, 2006, respectively. The $561.2 million increase in assets held for sale during the nine months ended September 30, 2007 was primarily attributable to MPG assets and Thailand and Singapore assembly and test facilities being classified as assets held for sale. Assets classified as held for sale are recorded at the lower of their carrying amount or fair value less cost to sell and not depreciated. The fair values of impaired equipment and facilities were researched and estimated by management. The Company reassesses the realizability of 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.

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 EITF 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination.”

     The reserves established as of April 2, 2007 included the following:

•

A reserve of $50 million for severance and termination benefits for employees as a result of the restructuring actions related to the Thailand and Singapore assembly and test facilities mentioned above;

	•		A reserve of $14 million for facility lease exit costs, primarily in Singapore and Europe;
	•		A reserve of $29 million for stock related compensation for employees whose positions were eliminated.

Third Quarter of 2007:

     For the quarter ended September 30, 2007, a credit of $1.0 million resulted from the following items:

	•		A net credit of $1.4 million was recorded for changes in estimated payments to employees for severance previously recorded for Thailand and other restructuring actions;
	•		A net credit of $0.5 million was recorded, which included a $1.5 million credit relating to changes in assumptions for Singapore lease termination costs offset by an expense of $0.5 million related to contract termination costs and an expense of $0.5 million which was recorded to reflect the change in time value of accruals for facility lease termination costs;
	•		$0.9 million recorded for additional stock compensation charges for employees whose positions were eliminated.

The offsets to the changes in these liability estimates were recorded to goodwill. See Note 6.

     The following table sets forth restructuring reserves related to the Agere merger as of September 30, 2007, which are included in other accrued liabilities in the balance sheet, and the activities affecting the reserves during the period from April 2, 2007 to September 30, 2007.

		Balance at				Utilized				Balance at				Changes in				Utilized				Balance at
		April 2,				during Q2				July 1,				estimates				during Q3				September 30,
		2007				2007				2007				Q3 2007				2007				2007
		(in thousands)
Lease terminations (a)		$	14,464			$	—			$	14,464			$	(533	)		$	(547	)		$	13,384
Payments to employees for severance (b)			50,087				(4,070	)			46,017				(1,428	)			(12,252	)			32,337
Stock compensation charges in accordance with FAS 123R (c)			28,841				—				28,841				951				(2,276	)			27,516
Total		$	93,392			$	(4,070	)		$	89,322			$	(1,010	)		$	(15,075	)		$	73,237

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.

Net Periodic Benefit Cost

		Three months ended								Nine months ended
		September 30, 2007								September 30, 2007
						Postretirement								Postretirement
		Pension Benefits				Benefits				Pension Benefits				Benefits
		(In thousands)
Service cost		$	1,867			$	41			$	3,734			$	82
Interest cost			18,395				932				36,791				1,863
Expected return on plan assets			(21,026	)			(1,235	)			(41,885	)			(2,429	)
Amortization of prior service cost			—				—				—				—
Recognized net actuarial loss			—				—				—				—
Net periodic benefit cost			(764	)			(262	)			(1,360	)			(484	)
Curtailment gain			—				—				—				—
Settlement charges			—				—				—				—
Total benefit cost		$	(764	)		$	(262	)		$	(1,360	)		$	(484	)

     Amounts recognized in the consolidated balance sheet consist of the following:

		September 30, 2007
						Postretirement
		Pension Benefits				Benefits
		(In thousands)
Accrued benefit liability		$	(196,363	)		$	(1,465	)
Accumulated other comprehensive loss			—				—
Net amount realized		$	(196,363	)		$	(1,465	)

     In connection with the Agere merger on April 2, 2007, the Agere pension and postretirement obligations were remeasured and recorded at fair value. As of September 30, 2007, the total accrued pension benefit liability was $196 million, of which $2 million was included in other current liabilities and $194 million was included as a non-current liability. The net accrued postretirement benefit liability as of September 30, 2007 was $1 million, consisting of $15 million in current liabilities and $10 million in non-current liabilities, offset by $24 million in other assets.

     The actuarial assumptions for the principal pension and postretirement plans for 2007 are as follows:

		Pension				Postretirement				Postretirement
		Benefits				Health Benefits				Life Benefits
Discount rate to determine net periodic cost			6.0	%			6.0	%			6.0	%
Discount rate to determine the benefit obligation as of April 2, 2007			6.0	%			6.0	%			6.0	%
Rate of compensation increase			4.0	%			N/A				4.0	%
Expected average rate of return on plan assets			8.25% / 8.0	%*			N/A				7.75	%

     The long-term rates of return on assets were based on the asset mix of the portfolios as noted below. The rates used are adjusted for any current or anticipated shifts in the investment mix of the plans. The rates also factor in the historic performance of the plans’ assets.

		Allocation as of April 2, 2007
		Pension				Postretirement
		Benefits				Benefits
Equity Securities			54	%			40	%
Debt Securities			46	%			60	%

Benefit Payments

     The following table reflects the benefit payments, which include expected future service, that the Company expects the plans to pay in the periods noted:

		Pension				Postretirement
		Benefits				Benefits
		(In thousands)
April 2 through December 31, 2007		$	65,774			$	16,335
Year ended December 31, 2008		$	89,261			$	17,929
Year ended December 31, 2009		$	86,048			$	1,355
Year ended December 31, 2010		$	85,954			$	1,472
Year ended December 31, 2011		$	85,817			$	1,591
Years ended December 31, 2012 through December 31, 2016		$	433,612			$	10,002

     The Company does not currently plan to make contributions to its pension plans during the year ending December 31, 2007.

NOTE 6 — INTANGIBLE ASSETS AND GOODWILL

Intangible Assets

		September 30,				December 31,
		2007				2006
		(In thousands)
Semiconductor segment		$	1,205,149			$	16,701
Storage Systems segment			36,830				42,783
Total intangible assets, net of accumulated amortization		$	1,241,979			$	59,484

     On March 13, 2007, the Company acquired SiliconStor, and on April 2, 2007, the Company completed the acquisition of Agere.

     Intangible assets by reportable segment are comprised of the following:

		September 30, 2007								December 31, 2006
		Gross				Accumulated				Gross				Accumulated
		Carrying Amount				Amortization				Carrying Amount				Amortization
		(In thousands)
Semiconductor:
Current technology		$	833,358			$	(276,773	)		$	240,458			$	(232,716	)
Trademarks			26,785				(26,255	)			26,285				(25,446	)
Customer base			363,488				(15,318	)			8,788				(4,394	)
Non-compete agreements			1,949				(1,007	)			849				(625	)
Existing purchase orders			200				(200	)			200				(200	)
Supply agreement			100				(100	)			—				—
Patent licensing			314,126				(18,259	)			—				—
Order backlog			41,300				(41,300	)			—				—
Workforce			3,567				(512	)			3,567				(65	)
Subtotal			1,584,873				(379,724	)			280,147				(263,446	)
Storage Systems:
Current technology			164,339				(128,925	)			164,339				(124,618	)
Trademarks			7,150				(7,150	)			7,150				(7,120	)
Customer base			5,010				(5,010	)			5,010				(5,010	)
Non-compete agreements			1,600				(889	)			1,600				(33	)
Supply agreement			8,147				(8,147	)			8,147				(7,472	)
Trade names			800				(95	)			800				(10	)
Subtotal			187,046				(150,216	)			187,046				(144,263	)
Total intangible assets		$	1,771,919			$	(529,940	)		$	467,193			$	(407,709	)

     Amortization expense and the weighted average lives of intangible assets are as follows:

						Nine Months Ended				Year Ended
		Weighted				September 30,				December 31,
		Average Lives				2007				2006				2005
		(In months)				(In thousands)
Current technology			58			$	65,392			$	25,129			$	53,185
Trademarks			83				839				4,119				5,001
Customer base			44				13,809				2,359				2,427
Non-compete agreements			27				1,238				182				281
Supply agreement			32				775				225				1,590
Patent licensing			36				18,259				—				—
Order backlog			2				53,000				—				—
Workforce			72				447				65				—
Trade names			84				86				10				—
Total			50			$	153,845			$	32,089			$	62,484

     The estimated future amortization expense related to intangible assets as of September 30, 2007 is as follows:

Fiscal Year:		Amount:
		(In thousands)
2007 (October 1, 2007 through December 31, 2007)		$	37,361
2008			218,285
2009			210,213
2010			169,268
2011 and thereafter			606,852
Total		$	1,241,979

     The changes in the carrying amount of goodwill for the nine months ended September 30, 2007 are as follows:

		Semiconductor				Storage Systems
		segment				segment				Total
		(In thousands)
Balance as of January 1, 2007		$	756,699			$	175,624			$	932,323
Goodwill acquired during the year*			1,622,041				—				1,622,041
Adjustment to goodwill acquired in a prior year for the resolution of a pre-acquisition income tax contingency			(2,442	)			—				(2,442	)
Reduction in goodwill associated with the sale of Mobility			(53,300	)			—				(53,300	)
Adjustment to goodwill related to changes in estimates of EITF 95-3 liabilities initially recorded as of April 2, 2007 and fair value adjustments			(3,381	)			—				(3,381	)
Adjustment to goodwill related to FIN 48			(35,822	)			—				(35,822	)
Balance as of September 30, 2007		$	2,283,795			$	175,624			$	2,459,419

     The Company monitors the recoverability of goodwill recorded in connection with acquisitions annually or sooner if events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment, if any, would be measured by comparing the implied fair value against the carrying value of goodwill. See the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 for further discussion.

NOTE 7 — OTHER BALANCE SHEET DETAILS

		September 30,				December 31,
		2007				2006
		(In thousands)
Cash and cash equivalents:
Cash in financial institutions		$	74,966			$	50,478
Cash equivalents			674,967				277,322
Total cash and cash equivalents		$	749,933			$	327,800
Available-for-sale debt securities:
Asset and mortgage-backed securities		$	209,109			$	363,723
U.S. government and agency securities			104,958				272,287
Corporate and municipal debt securities			33,925				45,127
Total short-term investments		$	347,992			$	681,137
Long-term investments in equity securities:
Marketable equity securities available-for-sale		$	2,353			$	2,827
Non-marketable equity securities			18,080				12,973
Total long-term investments in equity securities		$	20,433			$	15,800
Inventories:
Raw materials		$	26,712			$	44,151
Work-in-process			83,235				52,497
Finished goods			108,469				112,822
Total inventories		$	218,416			$	209,470

						Interest				Conversion				September 30,				December 31,
		Maturity				Rate				Price				2007				2006
														(In thousands)
Long-term debt:
2003 Convertible Subordinated Notes		May 2010					4.0	%		$	13.42			$	350,000			$	350,000
2002 Convertible Subordinated Notes		December 2009					6.5	%		$	15.31				361,660				—
Accrued debt premium *															8,589				—
														$	720,249			$	350,000
Amortization of accrued debt premium															(1,524	)			—
Total long-term debt														$	718,725			$	350,000

NOTE 8 — RECONCILIATION OF BASIC AND DILUTED (LOSS)/INCOME PER SHARE

     A reconciliation of the numerators and denominators used in the basic and diluted net (loss)/income per share computations are as follows:

		Three Months Ended
		September 30, 2007												October 1, 2006
										Per-Share												Per-Share
		Loss*				Shares+				Amount				Income*				Shares+				Amount
		(In thousands except per share amounts)
Basic EPS:
Net (loss)/income available to common stockholders		$	(140,600	)			715,733			$	(0.20	)		$	43,610				399,613			$	0.11
Stock options, employee stock purchase rights and restricted stock unit awards			—				—				—				—				4,102				—
Diluted EPS:
Net (loss)/income available to common stockholders		$	(140,600	)			715,733			$	(0.20	)		$	43,610				403,715			$	0.11

		Nine Months Ended
		September 30, 2007												October 1, 2006
		(In thousands except per share amounts)
										Per-Share												Per-Share
		Loss*				Shares+				Amount				Income*				Shares+				Amount
Basic EPS:
Net (loss)/income available to common stockholders		$	(488,621	)			623,692			$	(0.78	)		$	110,625				397,408			$	0.28
Stock options, employee stock purchase rights and restricted stock unit awards			—				—				—				—				6,371				—
Diluted EPS:
Net (loss)/income available to common stockholders		$	(488,621	)			623,692			$	(0.78	)		$	110,625				403,779			$	0.27