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 o 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, 2009, there were 653,157,525 shares of the registrant’s Common Stock, $.01 par value, outstanding.

 

 

LSI CORPORATION
Form 10-Q
For the Quarter Ended October 4, 2009
INDEX

		Page
		No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements			3
Condensed Consolidated Balance Sheets as of October 4, 2009 and December 31, 2008 (unaudited)			3
Condensed Consolidated Statements of Operations for the three and nine months ended October 4, 2009 and September 28, 2008 (unaudited)			4
Condensed Consolidated Statements of Cash Flows for the nine months ended October 4, 2009 and September 28, 2008 (unaudited)			5
Notes to Unaudited Condensed Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			23
Item 3. Quantitative and Qualitative Disclosures about Market Risk			33
Item 4. Controls and Procedures			33
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			33
Item 1A. Risk Factors			33
Item 6. Exhibits			35
Signatures			36
Exhibit Index			37
EX-31.1
EX-31.2
EX-32.1
EX-32.2

FORWARD-LOOKING STATEMENTS

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

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

LSI CORPORATION

		October 4,				December 31,
		2009				2008
ASSETS
Cash and cash equivalents		$	705,385			$	829,301
Short-term investments			201,742				289,841
Accounts receivable, less allowances of $7,831 and $9,627, respectively			307,191				303,971
Inventories			155,521				220,535
Prepaid expenses and other current assets			140,225				155,814
Total current assets			1,510,064				1,799,462
Property and equipment, net			215,932				235,963
Identified intangible assets, net			781,814				889,995
Goodwill			188,862				175,624
Other assets			228,517				243,150
Total assets		$	2,925,189			$	3,344,194
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable		$	193,653			$	201,035
Accrued salaries, wages and benefits			93,267				114,730
Other accrued liabilities			197,656				236,661
Current portion of long-term debt			350,000				245,107
Total current liabilities			834,576				797,533
Long-term debt, net of current portion			—				350,000
Pension, postretirement and other benefits			432,054				451,079
Income taxes payable — non-current			158,229				193,590
Other non-current liabilities			100,317				111,070
Total long-term obligations and other liabilities			690,600				1,105,739
Commitments and contingencies (Note 16)
Stockholders’ equity:
Preferred stock, $.01 par value: 2,000 shares authorized; none outstanding			—				—
Common stock, $.01 par value: 1,300,000 shares authorized; 652,271 and 648,132 shares outstanding, respectively			6,523				6,481
Additional paid-in capital			6,123,059				6,058,786
Accumulated deficit			(4,473,320	)			(4,360,775	)
Accumulated other comprehensive loss			(256,249	)			(263,570	)
Total stockholders’ equity			1,400,013				1,440,922
Total liabilities and stockholders’ equity		$	2,925,189			$	3,344,194

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

LSI CORPORATION

		Three Months Ended								Nine Months Ended
		October 4, 2009				September 28, 2008				October 4, 2009				September 28, 2008
Revenues		$	578,419			$	714,308			$	1,581,363			$	2,067,118
Cost of revenues			352,833				416,891				1,004,812				1,225,252
Gross profit			225,586				297,417				576,551				841,866
Research and development			151,047				169,551				455,250				509,383
Selling, general and administrative			82,175				103,744				247,659				307,267
Restructuring of operations and other items, net			4,745				1,586				35,960				26,869
(Loss)/income from operations			(12,381	)			22,536				(162,318	)			(1,653	)
Interest expense			(3,899	)			(8,993	)			(17,999	)			(26,930	)
Interest income and other, net			3,535				8,028				15,742				30,879
(Loss)/income before income taxes			(12,745	)			21,571				(164,575	)			2,296
(Benefit)/provision for income taxes			(65,230	)			10,200				(52,030	)			18,200
Net income/(loss)		$	52,485			$	11,371			$	(112,545	)		$	(15,904	)
Net income/(loss) per share:
Basic		$	0.08			$	0.02			$	(0.17	)		$	(0.02	)
Diluted		$	0.08			$	0.02			$	(0.17	)		$	(0.02	)
Shares used in computing per share amounts:
Basic			651,865				643,849				650,183				648,519
Diluted			658,963				647,418				650,183				648,519

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

LSI CORPORATION

		Nine Months Ended
		October 4, 2009				September 28, 2008
Operating activities:
Net loss		$	(112,545	)		$	(15,904	)
Adjustments:
Depreciation and amortization			198,918				239,945
Stock-based compensation expense			49,804				54,292
Non-cash restructuring of operations and other items, net			690				(3,163	)
Gain on redemption of convertible subordinated notes			(149	)			—
Write-down of debt and equity securities, net of gain on sale of equity securities			1,529				4,500
(Gain)/loss on sale of property and equipment			(220	)			14
Non-cash foreign exchange loss			315				6,988
Deferred taxes			(253	)			4,397
Changes in assets and liabilities, net of assets acquired and liabilities assumed in business combinations:
Accounts receivable, net			(3,217	)			5,237
Inventories			78,406				30,884
Prepaid expenses and other assets			48,272				9,192
Accounts payable			(6,581	)			(92,323	)
Accrued and other liabilities			(127,246	)			(64,194	)
Net cash provided by operating activities			127,723				179,865
Investing activities:
Purchases of debt securities available-for-sale			(10	)			(158,601	)
Proceeds from maturities and sales of debt securities available-for-sale			77,640				131,719
Purchases of equity securities			(9,534	)			(8,500	)
Proceeds from sales of equity securities			165				—
Purchases of property, equipment and software			(68,738	)			(95,005	)
Proceeds from sale of property and equipment			2,749				11,400
Acquisition of businesses and companies, net of cash acquired			(46,981	)			(95,137	)
Decrease/(increase) in non-current assets and deposits			13,501				(13,300	)
Proceeds from maturity of notes receivable associated with sale of semiconductor operations in Thailand			10,000				—
Proceeds received from the resolution of a pre-acquisition income tax contingency			—				4,821
Net cash used in investing activities			(21,208	)			(222,603	)
Financing activities:
Redemption of convertible subordinated notes			(244,047	)			—
Issuances of common stock			10,040				36,370
Purchases of common stock under repurchase programs			—				(229,231	)
Net cash used in financing activities			(234,007	)			(192,861	)
Effect of exchange rate changes on cash and cash equivalents			3,576				(1,060	)
Decrease in cash and cash equivalents			(123,916	)			(236,659	)
Cash and cash equivalents at beginning of year			829,301				1,021,569
Cash and cash equivalents at end of period		$	705,385			$	784,910

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 2009 and 2008 consisted of 13 weeks each and ended on October 4, 2009 and on September 28, 2008, respectively. The first nine months of 2009 and 2008 consisted of approximately 39 weeks each. The results of operations for the quarter ended October 4, 2009 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 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 of operations and other items, net, as discussed in Note 3), necessary to state fairly the financial information included herein. While the Company believes that the disclosures are adequate to make the information not misleading, these financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

     The Company has evaluated subsequent events through November 10, 2009, the date that the financial statements were issued.

Recent Accounting Pronouncements

     Pronouncements not yet Effective:

     In December 2008, the Financial Accounting Standards Board (“FASB”) issued guidance on additional disclosures about plan assets of a defined benefit pension or other postretirement plan. The new disclosures focus on fair value by category of plan assets including the factors that are pertinent to an understanding of investment policies and strategies. This guidance is effective for annual periods ending after December 15, 2009. The adoption of this guidance is not expected to have any impact on the Company’s results of operations or financial position.

     In June 2009, the FASB issued guidance which 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 adoption of this guidance is not expected to have a significant impact on the Company’s results of operations or financial position.

     In August 2009, the FASB issued additional guidance on measuring liabilities at fair value to reduce ambiguity in financial reporting. This guidance is effective for the first reporting period, including interim periods, beginning after the issuance of this update. The Company is currently evaluating the impact of the adoption of this guidance on its results of operations and financial position.

     In September 2009, the FASB issued guidance on how to use the net asset value per share provided by an investee to estimate the fair value of an alternative investment. This guidance is effective for the first reporting period, including interim periods, ending after December 15, 2009. The Company is currently evaluating the impact of the adoption of this guidance on its results of operations and financial position.

     In October 2009, the FASB issued guidance on multiple-deliverable arrangements to address how to separate deliverables and how to measure and allocate arrangement consideration. This guidance requires vendors to develop the best estimate of selling price for each deliverable and allocate the arrangement consideration using this selling price. This guidance also expands the disclosure requirements to include both quantitative and qualitative information. This guidance is effective for fiscal years beginning after June 15, 2010. The Company is currently evaluating the impact of the adoption of this guidance on its results of operations and financial position.

     In October 2009, the FASB issued guidance which clarifies that the tangible products containing software components and non-software components that function together to deliver a product’s essential functionality would be considered non-software deliverables and will be scoped out of the software revenue recognition guidance. This guidance is effective for the fiscal years beginning after June 15, 2010. The Company is currently evaluating the impact of the adoption of this guidance on its results of operations and financial position.

     Pronouncement Adopted during the Third Quarter of 2009:

     In June 2009, the FASB issued the FASB Accounting Standards Codification (“Codification”) as the single source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by FASB to be applied by non-governmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of the federal securities laws are also sources of authoritative GAAP for SEC registrants. The Codification is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company adopted the Codification in the third quarter of 2009, and the adoption did not have any impact on its results of operations or financial position.

Note 2 — Stock-Based Compensation

     On March 31, 2009, the Compensation Committee of the Board of Directors of the Company adopted an amendment to the Company’s Employee Stock Purchase Plan (“ESPP”) to increase the maximum number of shares that a participant can purchase in a single purchase period from 1,000 shares to 2,000 shares. The increase will be effective November 15, 2009.

     The following table summarizes stock-based compensation expense related to the Company’s stock options, ESPP and restricted stock unit awards for the three and nine months ended October 4, 2009 and September 28, 2008. Stock-based compensation costs capitalized to inventory and software for the three and nine months ended October 4, 2009 and September 28, 2008 were not significant.

		Three Months Ended								Nine Months Ended
Stock-Based Compensation Expense Included In:		October 4, 2009				September 28, 2008				October 4, 2009				September 28, 2008
		(In thousands)
Cost of revenues		$	1,697			$	2,252			$	5,732			$	6,885
Research and development			6,386				6,593				21,443				21,985
Selling, general and administrative			6,729				8,005				22,629				25,422
Total stock-based compensation expense		$	14,812			$	16,850			$	49,804			$	54,292

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

Stock Options

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

		Three Months Ended								Nine Months Ended
		October 4, 2009				September 28, 2008				October 4, 2009				September 28, 2008
Weighted average estimated grant date fair value per share		$	1.93			$	2.63			$	1.41			$	2.06
Weighted average assumptions in calculation:
Expected life (years)			3.90				4.38				4.26				4.37
Risk-free interest rate			2	%			3	%			2	%			3	%
Volatility			58	%			53	%			67	%			52	%

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

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

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

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

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

     The following table summarizes changes in stock options outstanding during the nine months ended October 4, 2009:

						Weighted Average				Weighted Average
						Exercise				Remaining				Aggregate
		Number of				Price Per				Contractual				Intrinsic
		Shares				Share				Term				Value
		(In thousands)								(In years)				(In thousands)
Options outstanding at December 31, 2008			85,113			$	12.62				—				—
Options granted			22,865				3.10				—				—
Options exercised			(692	)			4.89				—				—
Options canceled			(10,718	)			14.54				—				—
Options outstanding at October 4, 2009			96,568			$	10.21				4.05			$	49,365
Options exercisable at October 4, 2009			53,788			$	14.39				2.75			$	2,046

     As of October 4, 2009, the total unrecognized compensation expense related to nonvested stock options, net of estimated forfeitures, was $69.9 million and is expected to be recognized over the next 2.7 years on a weighted average basis. For the three months and nine months ended October 4, 2009, the total intrinsic value of options exercised was $0.3 million. For the three and nine months ended October 4, 2009, the cash received from stock option exercises was $3.4 million.

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

Employee Stock Purchase Plan

     Compensation expense for the Company’s ESPP is calculated using the fair value of the employees’ purchase rights under the Black-Scholes model. A total of 2.5 million shares and 2.2 million shares were issued under the ESPP during the three months ended July 5, 2009 and June 29, 2008, respectively. No shares related to the ESPP were issued during the three months ended October 4, 2009 and September 28, 2008. The following table summarizes the assumptions that went into the calculation of the fair value for the May 2009 and May 2008 grants:

		Three Months Ended
		July 5, 2009				June 29, 2008
Weighted average estimated grant date fair value per share		$	1.39			$	2.13
Weighted average assumptions in calculation:
Expected life (years)			0.5				0.8
Risk-free interest rate			0.3	%			2	%
Volatility			78	%			44	%

Restricted Stock Unit Awards

     The cost of restricted stock unit awards is determined using the fair value of the Company’s common stock on the date of grant. The following table summarizes changes in restricted stock units outstanding during the nine months ended October 4, 2009:

		Number of Units
		(In thousands)
Non-vested restricted stock units at December 31, 2008			6,391
Granted			363
Vested			(1,458	)
Forfeited			(502	)
Non-vested restricted stock units at October 4, 2009			4,794

     As of October 4, 2009, the total unrecognized compensation expense related to restricted stock units, net of estimated forfeitures, was $18.9 million and is expected to be recognized over the next 1.1 years on a weighted average basis. The fair value of shares vested during the three and nine months ended October 4, 2009 was $1.5 million and $4.9 million, respectively.

Note 3 — Restructuring of Operations and Other Items

     The Company recorded a charge of $4.7 million in restructuring of operations and other items, net, for the three months ended October 4, 2009, consisting of $3.2 million in charges for restructuring of operations and $1.5 million in charges for other items. Of the total charge, $3.0 million and $1.7 million were recorded in the Semiconductor segment and the Storage Systems segment, respectively. The Company recorded a charge of $36.0 million in restructuring of operations and other items, net, for the nine months ended October 4, 2009, consisting of $28.2 million in charges for restructuring of operations and $7.8 million in charges for other items. Of the total charge, $32.8 million and $3.2 million were recorded in the Semiconductor segment and the Storage Systems segment, respectively. For a complete discussion of the 2008 restructuring actions, see Note 2 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

Restructuring

     First Quarter of 2009:

     The $19.3 million charge was the result of the following:

	•		A charge of $14.0 million primarily related to an accrual for remaining payments to be made under a licensing arrangement for design tools that will no longer be used by the Company;
	•		A charge of $4.5 million for severance and termination benefits for employees; and
	•		A charge of $0.8 million primarily for the change in time value of accruals for previously accrued facility lease exit costs.

     Second Quarter of 2009:

     The $5.7 million charge was the result of the following:

	•		A charge of $4.5 million for severance and termination benefits for employees; and
	•		A charge of $1.2 million primarily for the change in time value of accruals for previously accrued facility lease exit costs.

     Third Quarter of 2009:

     The $3.2 million charge was the result of the following:

	•		A charge of $2.3 million primarily for changes in estimates and sublease assumptions and for the change in time value of accruals for previously accrued facility lease exit costs; and
	•		A charge of $0.9 million primarily related to the write-off of an asset.

     Restructuring reserves are included within other accrued liabilities and other non-current liabilities in the condensed consolidated balance sheets. The following table summarizes the activities affecting the restructuring accruals since December 31, 2008:

		Balance at				(Income)/				Utilized				Balance at				(Income)/				Utilized				Balance at								Utilized				Balance at
		December 31,				Expense				During				April 5,				Expense				During				July 5,				Expense				During				October 4,
		2008				Q1 2009				Q1 2009				2009				Q2 2009				Q2 2009				2009				Q3 2009				Q3 2009				2009
		(In thousands)
Write-down of excess assets and other liabilities		$	83			$	(83	)		$	—			$	—			$	(8	)		$	8			$	—			$	699			$	(699	)		$	—
Lease terminations (a)			44,555				14,878				(10,323	)			49,110				1,166				(1,260	)			49,016				2,332				(6,559	)			44,789
Payments to employees for severance (b)			28,031				4,518				(17,347	)			15,202				4,546				(7,374	)			12,374				132				(7,134	)			5,372
Total		$	72,669			$	19,313			$	(27,670	)		$	64,312			$	5,704			$	(8,626	)		$	61,390			$	3,163			$	(14,392	)		$	50,161

Other Items

     The Company recorded a net charge of $7.8 million for the nine months ended October 4, 2009, primarily related to litigation costs.

Assets Held for Sale

     Assets held for sale were included within prepaid expenses and other current assets in the condensed consolidated balance sheets as of October 4, 2009 and December 31, 2008. As of October 4, 2009 and December 31, 2008, assets held for sale were $17.2 million and $17.3 million, respectively, which primarily consisted of $16.8 million related to land in Gresham, Oregon.

     Assets classified as held for sale are recorded at the lower of their carrying amount or fair value less cost to sell and are not depreciated. The Company reassesses its ability to realize the carrying value of these assets at the end of each reporting period until the assets are sold or otherwise disposed of and, therefore, additional adjustments may be necessary.

Note 4 — Business Combinations

3ware RAID Storage Adapter Business

     On April 21, 2009, the Company completed the acquisition of the assets and certain associated intellectual property of the 3ware RAID storage adapter business of Applied Micro Circuits Corporation. 3ware products include SAS and SATA RAID adapters and high-capacity storage solutions for a broad range of applications. The acquisition is intended to enhance the Company’s competitive position in server RAID adapter solutions for distributors and system builders. The acquisition was accounted for as a purchase business combination. For reporting purposes, the 3ware business is included as part of the Storage Systems segment.

     The following table summarizes the purchase price allocation information:

Entity Name or Type of Technology;

Fair Value of

Net

Segment Included in;

Total

Type of

Tangible

Identified

Description of Acquired Business

Acquisition Date

Consideration

Consideration

Assets

Intangible Assets

Goodwill

(Dollars in millions)

3ware RAID storage adapter business; Storage Systems segment;

Server RAID adapters and storage solutions

April 21, 2009

$

21.5

Cash

$

12.3

$

5.0

$

4.2

     The goodwill of $4.2 million represents the excess of the purchase price over the fair value of the net tangible and identified intangible assets acquired. The Company recorded a purchase acquisition adjustment of $0.6 million in goodwill in the third quarter of 2009 in addition to the $3.6 million of goodwill recorded upon the acquisition in the second quarter of 2009. The goodwill was assigned to the Storage Systems segment and is not expected to be deductible for tax purposes.

     The following table summarizes the components of the identified intangible assets associated with this acquisition. These assets will be amortized over the periods during which they are expected to contribute to the Company’s future cash flows.

						Weighted
		Fair Value				Average Life
		(In millions)				(In years)
Current technology		$	1.5				2
Customer base			3.2				5
Trade names			0.3				2
Total acquired identified intangible assets		$	5.0

ONStor, Inc.

     On July 27, 2009, the Company acquired privately-held ONStor, Inc. (“ONStor”), which provided clustered network-attached storage solutions designed to help enterprises consolidate, protect and manage the accelerating growth of unstructured data. The acquisition is intended to further advance the Company’s storage systems business. The acquisition was accounted for as a purchase business combination. For reporting purposes, the ONStor business is included as part of the Storage Systems segment.

     The following table summarizes the purchase price allocation information:

Acquired

Entity Name or Type of Technology;

Fair Value of

Net

In-Process Research

Segment Included in;

Total

Type of

Tangible

Identified

& Development

Description of Acquired Business

Acquisition Date

Consideration

Consideration

Assets

Intangible Assets

(“IPR&D”)

Goodwill

(Dollars in millions)

ONStor;

Storage Systems segment;

Clustered network-attached storage solutions

July 27, 2009

$

25.5

Cash

$

0.7

$

15.0

$

0.8

$

9.0

     The goodwill of $9.0 million represents the excess of the purchase price over the fair value of the net tangible and identified intangible assets acquired. The goodwill was assigned to the Storage Systems segment and is not expected to be deductible for tax purposes.

     The following table summarizes the components of the identified intangible assets associated with this acquisition. These assets will be amortized over the periods during which they are expected to contribute to the Company’s future cash flows.

						Weighted
		Fair Value				Average Life
		(In millions)				(In years)
Current technology		$	12.7				6
Customer base			2.1				2
Trade names			0.2				2
Total acquired identified intangible assets		$	15.0

     The condensed consolidated financial statements include the operating results of each acquired business from the date of acquisition. Pro forma results of operations for the acquisitions completed during the three and nine months ended October 4, 2009 have not been presented because the effects of the acquisitions, individually or in the aggregate, were not material to the Company’s financial results.

Note 5 — 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 a defined benefit plan and are based on either an adjusted career average pay or dollar per month formula or on 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 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 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 postretirement life insurance coverage for former Agere employees. The Company provided postretirement medical benefits for former Agere employees until December 31, 2008. Participants in the cash balance program and management employees hired after June 30, 2003 are not covered under the postretirement life insurance. The Company also has pension plans covering certain international employees.

     Effective April 6, 2009, the Company froze the U.S. management pension plan, which covers active participants who joined the Company from Agere. Participants under the adjusted career average pay program will not earn any future accruals after that date. Participants under 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 set forth the components of the net periodic benefit credit for the periods indicated:

		Three Months Ended
		October 4, 2009								September 28, 2008
		Pension				Postretirement				Pension				Postretirement
		Benefits				Benefits				Benefits				Benefits
		(In thousands)
Service cost		$	416			$	20			$	1,298			$	25
Interest cost			18,435				606				18,947				745
Expected return on plan assets			(19,198	)			(1,219	)			(20,701	)			(1,258	)
Amortization of prior service cost			11				—				4				—
Net actuarial gain recognized			(21	)			—				—				(30	)
Total benefit credit		$	(357	)		$	(593	)		$	(452	)		$	(518	)

		Nine Months Ended
		October 4, 2009								September 28, 2008
		Pension				Postretirement				Pension				Postretirement
		Benefits				Benefits				Benefits				Benefits
		(In thousands)
Service cost		$	1,373			$	60			$	4,201			$	77
Interest cost			55,311				1,818				56,084				2,278
Expected return on plan assets			(57,601	)			(3,657	)			(61,865	)			(3,775	)
Amortization of prior service cost			34				—				12				—
Net actuarial gain recognized			(67	)			—				(1	)			(89	)
Total benefit credit		$	(950	)		$	(1,779	)		$	(1,569	)		$	(1,509	)

     During the nine months ended October 4, 2009, the Company contributed $17.0 million to its pension plans and $1.9 million to its postretirement benefit plans. The Company expects to contribute an additional $3.4 million to its pension plans for the remainder of 2009.

Note 6 — Balance Sheet Details

		October 4,				December 31,
		2009				2008
		(In thousands)
Inventories:
Raw materials		$	28,002			$	44,208
Work-in-process			28,395				52,242
Finished goods			99,124				124,085
Total inventories		$	155,521			$	220,535

						Interest				Conversion				October 4,				December 31,
		Maturity				Rate				Price				2009				2008
														(In thousands)
Debt:
4% Convertible Subordinated Notes			2010				4.00	%		$	13.4200			$	350,000			$	350,000
6.5% Convertible Subordinated Notes			2009				6.50	%		$	15.3125				—				243,002
Accrued debt premium															—				7,405
Amortization of accrued debt premium															—				(5,300	)
Total debt															350,000				595,107
Current portion of long-term debt															(350,000	)			(245,107	)
Long-term debt, net of current portion														$	—			$	350,000

     During the nine months ended October 4, 2009, the Company redeemed all of the outstanding principal amount of $243.0 million of 6.5% Convertible Subordinated Notes due in December 2009 at a price of 100.43% of the principal amount of each note plus accrued interest to the date of redemption. A net pre-tax gain of $0.1 million was recognized and included in interest income and other, net. The pre-tax gain is net of the write-off of the unamortized accrued debt premium as of the redemption date.

     During the nine months ended October 4, 2009, the 4% Convertible Subordinated Notes became due within 12 months. As such, the balance was reclassified to the current portion of long-term debt. As of October 4, 2009, the estimated fair value of the 4% Convertible Subordinated Notes was $355.3 million, based on market data.

Note 7 — Identified Intangible Assets and Goodwill

Identified Intangible Assets

     Identified intangible assets by reportable segment were comprised of the following:

		October 4, 2009								December 31, 2008
		Gross				Accumulated				Gross				Accumulated
		Carrying Amount				Amortization				Carrying Amount				Amortization
		(In thousands)
Semiconductor:
Current technology		$	894,808			$	(591,744	)		$	894,808			$	(524,120	)
Trademarks			26,657				(26,657	)			26,657				(26,657	)
Customer base			399,508				(189,493	)			399,508				(160,925	)
Non-compete agreements			1,949				(1,949	)			1,949				(1,888	)
Existing purchase orders			200				(200	)			200				(200	)
Supply agreement			100				(100	)			100				(100	)
Patent licensing			312,800				(90,348	)			312,800				(63,243	)
Order backlog			41,300				(41,300	)			41,300				(41,300	)
Workforce			3,567				(1,705	)			3,567				(1,258	)
Trade names			2,248				(2,248	)			2,248				(2,248	)
Subtotal			1,683,137				(945,744	)			1,683,137				(821,939	)
Storage Systems:
Current technology			178,580				(140,744	)			164,339				(136,104	)
Trademarks			7,150				(7,150	)			7,150				(7,150	)
Customer base			10,301				(5,422	)			5,010				(5,010	)
Non-compete agreements			1,600				(1,600	)			1,600				(1,600	)
Supply agreement			8,147				(8,147	)			8,147				(8,147	)
Trade names			1,350				(404	)			800				(238	)
IPR&D			760				—				—				—
Subtotal			207,888				(163,467	)			187,046				(158,249	)
Total identified intangible assets		$	1,891,025			$	(1,109,211	)		$	1,870,183			$	(980,188	)

     The following table summarizes amortization expenses and weighted average lives of identified intangible assets:

		Weighted				Nine Months Ended
		Average Life				October 4, 2009				September 28, 2008
		(In months)				(In thousands)
Current technology			57			$	72,264			$	100,833
Trademarks			83				—				37
Customer base			45				28,980				45,020
Non-compete agreements			27				61				918
Patent licensing			36				27,105				27,183
Workforce			72				447				447
Trade names			68				166				366
Total			50			$	129,023			$	174,804

     The estimated annual future amortization expenses related to identified intangible assets are as follows:

		Amount
		(In thousands)
Fiscal Year:
2009 (October 5 through December 31, 2009)		$	42,571
2010			160,943
2011			126,690
2012			106,497
2013 and thereafter			344,353
Total		$	781,054

Goodwill

     The following table summarizes changes in the carrying amount of goodwill, all of which related to the Company’s Storage Systems segment, for the nine months ended October 4, 2009:

		Storage Systems
		Segment
		(In thousands)
Balance as of December 31, 2008		$	175,624
Additions as a result of acquisitions during the period *			13,238
Balance as of October 4, 2009		$	188,862

Note 8 — Cash, Cash Equivalents and Investments

     The following table shows the breakdown of the Company’s cash, cash equivalents and investments at the end of each period:

		October 4,				December 31,
		2009				2008
		(In thousands)
Cash and cash equivalents:
Cash in financial institutions		$	128,176			$	77,372
Cash equivalents:
Overnight deposits and money market funds			577,209				744,430
Commercial paper			—				1,085
U.S. government and agency securities			—				6,414
Total cash equivalents			577,209				751,929
Total cash and cash equivalents		$	705,385			$	829,301
Available-for-sale debt securities: *
Asset-backed and mortgage-backed securities		$	146,947			$	184,511
U.S. government and agency securities			49,947				88,504
Corporate and municipal debt securities			4,848				16,826
Total short-term investments		$	201,742			$	289,841
Long-term investments in equity securities: **
Marketable available-for-sale equity securities		$	1,408			$	566
Non-marketable equity securities			51,954				46,141
Total long-term investments in equity securities		$	53,362			$	46,707

Investments in Available-for-Sale Securities

     Contractual maturities of available-for-sale debt securities as of October 4, 2009 were as follows:

		Amount
		(In thousands)
Due within one year		$	23,135
Due in 1-5 years			35,150
Due in 5-10 years			16,776
Due after 10 years			126,681
Total		$	201,742

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

     The following table shows the breakdown of the estimated fair value of the Company’s available-for-sale securities at the end of each period:

		October 4, 2009
		Amortized				Gross Unrealized				Gross Unrealized
		Cost				Gain				Loss				Fair Value
		(In thousands)
Short-term debt securities:
Asset-backed and mortgage-backed securities		$	141,906			$	6,214			$	(1,173	)		$	146,947
U.S. government and agency securities			47,886				2,061				—				49,947
Corporate and municipal debt securities			4,712				177				(41	)			4,848
Total short-term debt securities		$	194,504			$	8,452			$	(1,214	)		$	201,742
Long-term marketable equity securities		$	111			$	1,297			$	—			$	1,408

		December 31, 2008
		Amortized				Gross Unrealized				Gross Unrealized
		Cost				Gain				Loss				Fair Value
		(In thousands)
Short-term debt securities:
Asset-backed and mortgage-backed securities		$	183,385			$	1,829			$	(703	)		$	184,511
U.S. government and agency securities			85,426				3,078				—				88,504
Corporate and municipal debt securities			17,183				54				(411	)			16,826
Total short-term debt securities		$	285,994			$	4,961			$	(1,114	)		$	289,841
Long-term marketable equity securities		$	155			$	413			$	(2	)		$	566

     The following table shows 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 as of October 4, 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		$	9,054			$	(1,142	)		$	1,394			$	(31	)
Corporate and municipal debt securities			1,311				(41	)			—				—
Total		$	10,365			$	(1,183	)		$	1,394			$	(31	)

     If the fair value of a debt security is less than its amortized cost basis, the Company assesses whether the impairment is other than temporary. If the Company does not intend to sell and it is not more likely than not that the Company will be required to sell the debt securities before the expected recovery of the amortized cost, then the Company recognizes in earnings the amount of the other than temporary impairment representing the credit loss and all other amounts in other comprehensive income (“OCI”). Credit loss represents the present value of cash flows expected to be collected less the amortized cost of the debt security. The Company evaluates both qualitative and quantitative factors such as duration and severity of the unrealized loss, credit ratings, prepayment speeds, default and loss rates of the underlying collateral, structure and credit enhancements to determine if a credit loss may exist.

     During the three and nine months ended September 28, 2008, the Company recognized impairment charges of $1.7 million and $3.8 million, respectively, for certain available-for-sale debt securities after determining that the decline in their fair value was other than temporary. During the three and nine months ended October 4, 2009, there was no other than temporary impairment charge for available-for-sale debt securities for which the Company does not expect to recover the entire amortized cost. There are no other than temporary impairments recognized in OCI.

     Net realized gain or loss on sales of available-for-sale debt and equity securities for the three and nine months ended October 4, 2009 and September 28, 2008 was not significant.

Note 9 — Derivative Instruments

     The Company has foreign subsidiaries that operate and sell the Company’s products in various global markets. As a result, the Company is exposed to changes in foreign currency exchange rates. The Company utilizes 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 OCI and is subsequently reclassified into earnings when the hedged expense is recognized within the same line item on 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 4, 2009, the total notional value of the Company’s outstanding forward contracts, designated as foreign currency cash flow hedges for forecasted Euro, Pound Sterling and Indian Rupee payment transactions, was $23.3 million.

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 3 months. Changes in 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 4, 2009, 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, Singapore Dollar, Korean Won and Indian Rupee, was $182.4 million.

Fair Values of Derivative Instruments

     The fair value and balance sheet classification of foreign exchange forward contract derivatives are as follows:

		October 4, 2009
		(In thousands)
Prepaid expenses and other current assets:
Derivative assets designated as hedging instruments:
Foreign exchange forward contracts		$	1,194
Derivative assets not designated as hedging instruments:
Foreign exchange forward contracts		$	290
Other accrued liabilities:
Derivative liabilities designated as hedging instruments:
Foreign exchange forward contracts		$	116
Derivative liabilities not designated as hedging instruments:
Foreign exchange forward contracts		$	147

Effect of Derivative Instruments on OCI and Statements of Operations

     The following tables summarize the after-tax effect of foreign exchange forward contract derivatives, by (a) cash flow hedges and (b) other foreign currency hedges, on OCI and the statements of operations for the three and nine months ended October 4, 2009:

     (a) Cash Flow Hedges:

		Three Months Ended				Nine Months Ended
		October 4, 2009				October 4, 2009
		(In thousands)
Accumulated gain/(loss) in OCI, beginning of period		$	262			$	(905	)
Net unrealized gain recorded in OCI (effective portion)			178				310
(Gain)/loss reclassified from accumulated OCI to research and development expenses (effective portion)			(61	)			327
(Gain)/loss reclassified from accumulated OCI to selling, general and administrative expenses (effective portion)			(235	)			412
Accumulated gain in OCI, end of period		$	144			$	144

     (b) Other Foreign Currency Hedges:

		Three Months Ended				Nine Months Ended
		October 4, 2009				October 4, 2009
		(In thousands)
Gain recognized in interest income and other, net		$	10,808			$	6,406

Note 10 — Fair Value Measurements

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

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

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

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

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

     The following table summarizes assets and liabilities measured at fair value on a recurring basis as of October 4, 2009:

		Fair Value Measurements as of October 4, 2009
		Level 1				Level 2				Level 3				Total
		(In thousands)
Short-term investments in debt securities and cash equivalents		$	627,156			$	151,795				—			$	778,951
Long-term investments in marketable equity securities		$	1,408				—				—			$	1,408
Derivative assets, net			—			$	1,221				—			$	1,221
Rabbi Trust *— invested in money market funds and mutual funds		$	9,831				—				—			$	9,831

Note 11 — Reconciliation of Basic and Diluted Income/(Loss) per Share

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

		Three Months Ended
		October 4, 2009												September 28, 2008
										Per-Share												Per-Share
		Income*				Shares+				Amount				Income*				Shares+				Amount
		(In thousands except per share amounts)
Basic:
Net income available to common stockholders		$	52,485				651,865			$	0.08			$	11,371				643,849			$	0.02
Stock options, employee stock purchase rights and restricted stock unit awards			—				7,098				—				—				3,569				—
Diluted:
Net income available to common stockholders		$	52,485				658,963			$	0.08			$	11,371				647,418			$	0.02

		Nine Months Ended
		October 4, 2009												September 28, 2008
										Per-Share												Per-Share
		Loss*				Shares+				Amount				Loss*				Shares+				Amount
						(In thousands except per share amounts)
Basic:
Net loss available to common stockholders		$	(112,545	)			650,183			$	(0.17	)		$	(15,904	)			648,519			$	(0.02	)
Stock options, employee stock purchase rights and restricted stock unit awards			—				—				—				—				—				—
Diluted:
Net loss available to common stockholders		$	(112,545	)			650,183			$	(0.17	)		$	(15,904	)			648,519			$	(0.02	)

     Options to purchase 72,912,095 and 81,303,421 weighted average shares were excluded from the computation of diluted shares for the three and nine months ended October 4, 2009, respectively, because of their antidilutive effect on net income or loss per share. Options to purchase 80,902,022 and 87,628,269 weighted average shares were excluded from the computation of diluted shares for the three and nine months ended September 28, 2008, respectively, because of their antidilutive effect on net income or loss per share.

     For the three and nine months ended October 4, 2009, 26,080,460 and 35,648,004, respectively, weighted average potentially dilutive shares associated with convertible notes were excluded from the calculation of diluted shares because of their antidilutive effect on net income or loss per share. For the three and nine months ended September 28, 2008, 49,698,093 and 49,698,418, respectively, weighted average potentially dilutive shares associated with convertible notes were excluded from the calculation of diluted shares because of their antidilutive effect on net income or loss per share.

Note 12 — Segment and Geographic Information

     The Company operates in two reportable segments — the Semiconductor segment and the Storage Systems segment.

Summary of Operations by Segment

     The following is a summary of operations by segment for the periods indicated:

		Three Months Ended								Nine Months Ended
		October 4, 2009				September 28, 2008				October 4, 2009				September 28, 2008
		(In thousands)
Revenues:
Semiconductor		$	371,834			$	500,432			$	1,040,654			$	1,421,244
Storage Systems			206,585				213,876				540,709				645,874
Total		$	578,419			$	714,308			$	1,581,363			$	2,067,118
(Loss)/income from operations:
Semiconductor		$	(20,084	)		$	8,892			$	(152,411	)		$	(47,371	)
Storage Systems			7,703				13,644				(9,907	)			45,718
Total		$	(12,381	)		$	22,536			$	(162,318	)		$	(1,653	)

Significant Customers

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

		Three Months Ended								Nine Months Ended
		October 4, 2009				September 28, 2008				October 4, 2009				September 28, 2008
Semiconductor segment:
Number of significant customers			1				1				1				1
Percentage of segment revenues			24	%			26	%			24	%			27	%
Storage Systems segment:
Number of significant customers			2				4				3				2
Percentage of segment revenues			49%, 13	%			46%, 12%, 10%, 10	%			47%, 12%, 10	%			45%, 15	%
Consolidated:
Number of significant customers			2				2				2				2
Percentage of consolidated revenues			20%, 16	%			18%, 15	%			18%, 16	%			19%, 15	%