This management's discussion and analysis should be read in conjunction with the other sections of this Form 10-K, including Part 1, Item 1- "Business"; Part I, Item 1A- "Risk Factors"; Part II, Item 6- "Selected Financial Data"; and

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

OVERVIEW

We design, develop and market complex, high-performance storage and networking semiconductors. We offer a broad portfolio of capabilities including custom and standard product integrated circuits that are used in hard disk drives, solid state drives, high-speed communications systems, computer servers, storage systems and personal computers. We deliver our products to our customers as stand-alone integrated circuits as well as incorporated onto circuit boards that offer additional functionality. We also license our intellectual property to other entities.

On January 3, 2012, we acquired SandForce, Inc. a provider of flash storage processors for enterprise and client flash solutions and solid state drives, for total consideration of approximately $346.4 million, net of cash acquired. We acquired SandForce to enhance our competitive position in the PCIe ® flash adapter market where LSI's products already used SandForce flash storage processors. Additionally, the combination of LSI's custom capability and SandForce's standard product offerings allows us to offer a full range of products aimed at the growing flash storage processor market for ultrabook, notebook and enterprise solid state drives and flash solutions.

On May 6, 2011, we sold our external storage systems business to NetApp, Inc. for $480.0 million in cash. That business sold external storage systems, primarily to original equipment manufacturers, or OEMs, who resold these products to end customers under their own brand name. The external storage systems business is reflected as discontinued operations in our consolidated statements of operations and, as such, the results of that business have been excluded from all line items other than "Income from discontinued operations" for all periods presented.

We derive the majority of our revenues from sales of products for the hard disk and solid state drive, server and networking equipment end markets and our revenues depend on market demand for these types of products. We believe that these markets offer us attractive opportunities because of the growing demand to create, store, manage and move digital content. We believe that this growth is occurring as a result of a number of trends, including:

• The increasing popularity of mobile devices, such as smart phones and media tablets, and the increasing use of the internet for streaming media, such as videos and music, which together are driving the need for more network capacity;

• Consumer and business demand for hard disks to store increasing amounts of digital data, including music, video, pictures and medical and other business records; and

• Enterprises refreshing their data centers to provide higher levels of business support and analytics, which drives demand for new servers and storage systems and associated equipment.

Our products are sold primarily to OEMs in the server, storage and networking industries. We also sell some of our products through a network of resellers and distributors.

The markets in which we operate are highly competitive and our revenues depend on our ability to compete successfully. We face competition not only from makers of products similar to ours, but also from competing technologies.

In 2012, we reported revenues of $2,506.1 million compared to $2,044.0 million in 2011. In 2012, we reported net income of $196.2 million, or $0.34 per diluted share, compared to $331.5 million, or $0.55 per diluted share, in 2011. Net income for 2011 included a $260.1 million gain on the sale of our external storage systems business while our results in 2012 reflect the acquisition of SandForce.

Our board of directors authorized stock repurchase programs of up to $750.0 million on March 9, 2011 and an additional $500.0 million on August 1, 2012. During 2012, we repurchased 36.0 million shares for $272.6 million and completed the 2011 program. As of December 31, 2012, $478.6 million remained available for stock repurchases. Future purchases under the 2012 program are expected to be funded with available cash, cash equivalents and short term investments. We ended 2012 with cash and cash equivalents, together with short-term investments, of $676.0 million, a decline from $935.5 million at the end of 2011 which was primarily attributable to the cash we used for the acquisition of SandForce.

A number of hard disk drive manufacturers have production facilities in Thailand. In the fall of 2011, flooding there forced many of these facilities to stop production, which had an adverse impact on our revenues from semiconductors for hard disk drives. As the industry recovered in early 2012, our revenues benefited. More recently, we believe that there has been weakness in sales of personal computers, which has affected sales of hard disk and solid state drives and our revenues from semiconductors for hard disk and solid state drives. We believe that general economic weakness has also affected our revenues, including networking revenues, which has been affected by weak capital spending by wireless telecommunications carriers.

We believe that the weakness in both personal computer sales and general economic conditions is continuing into early 2013. In light of this environment, we are working to manage our operating expenses while at the same time continuing work on products under development. We are focusing our research and development operations on products that we believe provide favorable growth opportunities for our business. We are also working to expand our sales of products in newer areas such as flash memory-based server adapter cards, where we are working directly with large, internet-based datacenter operators, in addition to our more traditional customer base of OEMs and distributors.

RESULTS OF OPERATIONS

Revenues

Revenues increased by $462.1 million, or 22.6%, in 2012 as compared to 2011, driven by higher unit sales of semiconductors used in storage applications, such as hard disk drives, as the hard disk drive industry recovered from the flooding in Thailand in late 2011, and the ramping of new products to existing customers. The increase also reflects $159.7 million of revenues from flash storage processors as a result of the acquisition of SandForce. These increases were offset in part by a decrease in unit sales of legacy networking products.

Revenues increased by $174.3 million, or 9.3%, in 2011 as compared to 2010. The increase was primarily attributable to higher unit sales of semiconductors used in storage applications to existing customers and higher revenues from the licensing of our intellectual property. These increases were offset in part by a decrease in unit sales of legacy networking products.

Significant Customers:

The following table provides information about sales to Seagate Technology, which was our only customer that accounted for 10% or more of our consolidated revenues in each of 2012, 2011 and 2010:

Year Ended December 31, 2012 2011 2010 Percentage of consolidated revenues 31 % 25 % 19 %

Revenues by Geography:

The following table summarizes our revenues by geography based on the ordering
location of our customer. Because we sell our products primarily to other
sellers of technology products and not to end users, the information in the
table below may not accurately reflect geographic end-user demand for our
products.



                                                Year Ended December 31,
                                           2012          2011          2010
                                                     (In millions)
           North America*                $   635.9     $   520.2     $   431.2
           Asia:
           China (including Hong Kong)       788.1         569.7         402.8
           Singapore                         306.0         256.8         283.5
           Taiwan                            290.3         272.1         296.0
           Other                             300.7         224.9         240.8

           Total Asia                      1,685.1       1,323.5       1,223.1
           Europe and the Middle East        185.1         200.3         215.4

           Total                         $ 2,506.1     $ 2,044.0     $ 1,869.7

* Primarily the United States.

Revenues in Asia and North America increased by $361.6 million, or 27.3%, and $115.7 million, or 22.2%, respectively, in 2012 as compared to 2011. The increases in both regions were primarily attributable to higher unit sales of semiconductors used in storage applications, such as hard disk drives, as the hard disk drive industry recovered from the flooding in Thailand in late 2011, and the ramping of new products to existing customers. The increases were also due to higher unit sales of flash storage processors as a result of the acquisition of SandForce. The increases were offset in part by a decrease in unit sales of legacy networking products. Revenues in Europe and the Middle East decreased by $15.2 million, or 7.6%, in 2012 as compared to 2011. The decrease was primarily attributable to a decrease in unit sales of legacy networking products.

Revenues in North America increased by $89.0 million, or 20.6%, in 2011 as compared to 2010. The increase was primarily attributable to higher unit sales of semiconductors used in storage applications, and higher revenues from the licensing of our intellectual property. Revenues in Asia increased by $100.4 million, or 8.2%, in 2011 as compared to 2010. The increase was primarily attributable to higher unit sales of semiconductors used in storage applications, partially offset by a decrease in unit sales of legacy networking products. Revenues in Europe and the Middle East decreased by $15.1 million, or 7.0%, in 2011 as compared to 2010. The decrease was primarily attributable to a decrease in unit sales of semiconductors used in storage applications.

Revenues by Product Groups:

The following table presents our revenues by product groups:



                                            Year Ended December 31,
                                       2012          2011          2010
                                                 (In millions)
               Storage products      $ 1,994.4     $ 1,487.1     $ 1,302.1
               Networking products       407.2         453.7         473.3
               Other                     104.5         103.2          94.3

               Total                 $ 2,506.1     $ 2,044.0     $ 1,869.7

Revenues from storage products increased by $507.3 million, or 34.1%, in 2012 as compared to 2011. The increase was primarily attributable to higher unit sales of semiconductors used in hard disk drives, as the hard disk drive industry recovered from the flooding in Thailand in late 2011 and an increase in sales of new products to existing customers. The increase was also the result of higher unit sales of flash storage processors due to the

acquisition of SandForce. Revenues from storage products increased by $185.0 million, or 14.2%, in 2011 as compared to 2010. The increase was primarily attributable to increased unit demand for semiconductors used in hard disk drives, server RAID adapters and storage area network applications.

Revenues from networking products decreased by $46.5 million, or 10.2%, in 2012 as compared to 2011. The decrease was primarily the result of lower unit sales of semiconductors used in legacy networking products. Revenues from networking products decreased by $19.6 million, or 4.1%, in 2011 as compared to 2010. The decrease was primarily due to lower unit sales of legacy networking products.

Other revenues consist primarily of fees from the licensing of our intellectual property. Therefore, such revenues are typically expected to remain relatively consistent over time and any fluctuations may result from new or expiring license agreements.

Gross Profit Margin



                                             Year Ended December 31,
                                         2012          2011         2010
                                              (Dollars in millions)
              Gross profit             $ 1,231.9      $ 962.5      $ 880.6
              Percentage of revenues        49.2 %       47.1 %       47.1 %

Various factors affect and may continue to affect our product gross margin. These factors include, but are not limited to, changes in our production mix and volume of product sales, the timing of production ramps and margin structures of new products, the positions of our products in their respective life cycles, the effects of competition, the price of commodities used in our products, provisions for excess and obsolete inventories, changes in the costs charged by foundry, assembly and test subcontractors, and amortization of acquired intangible assets.

Gross profit margin as a percentage of revenues increased by 2.1% in 2012 as compared to 2011. The increase was primarily attributable to favorable product mix, that is, more sales of higher margin products, and higher revenues enabling better absorption of fixed costs. The increases were offset in part by a 0.6% adverse effect on gross profit margin resulting from fair valuing inventories acquired from SandForce.

Gross profit margin as a percentage of revenues remained flat in 2011 as compared to 2010. Decreased amortization of intangible assets benefited our gross margin in 2011, which was offset by higher costs of commodities used in our products, a one-time inventory charge of $7.5 million as a result of the flooding in Thailand, an unfavorable shift in product mix, and the absence of a gross margin benefit recognized in 2010 upon termination of a contract associated with our former Mobility Products Group.

Research and Development



                                              Year Ended December 31,
                                          2012         2011         2010
                                               (Dollars in millions)
              Research and development   $ 690.3      $ 576.0      $ 563.0
              Percentage of revenues        27.5 %       28.2 %       30.1 %

R&D expense consists primarily of employee salaries, contractor expenses and materials used in product development, costs related to third-party design tools and materials used in the design of custom silicon and standard products, as well as depreciation of capital equipment and facilities-related expenditures. In addition to the significant resources we devote to hardware development, we also devote resources to the development of software for our products.

R&D expense increased by $114.3 million, or 19.8%, in 2012 as compared to 2011. The increase was primarily attributable to higher compensation-related expense, which includes stock-based compensation, resulting from headcount additions associated with the acquisition of SandForce and headcount additions to support our ongoing product development efforts, higher performance-based compensation expense as a result of improved financial performance and increased spending to support new design wins.

R&D expense increased by $13.0 million, or 2.3%, in 2011 as compared to 2010. The increase was primarily attributable to higher compensation-related expense and facilities-related expenditures as a result of headcount additions and increased material costs for R&D projects, offset in part by lower costs for shared development engineering projects due to higher contributions from customers associated with existing R&D projects.

Selling, General and Administrative



                                                    Year Ended December 31,
                                                2012         2011         2010
                                                     (Dollars in millions)
         Selling, general and administrative   $ 354.9      $ 295.4      $ 279.1
         Percentage of revenues                   14.2 %       14.5 %       14.9 %

SG&A expense consists primarily of compensation related expenditures for sales, marketing and administrative employees, costs related to third party services, depreciation and facilities-related expenditures.

SG&A expense increased by $59.5 million, or 20.1%, in 2012 as compared to 2011. The increase was primarily attributable to higher compensation-related expense, which includes stock-based compensation, resulting from headcount additions associated with the acquisition of SandForce and headcount additions to support revenue growth, along with higher performance-based compensation expense as a result of improved financial performance.

SG&A expense increased by $16.3 million, or 5.8%, in 2011 as compared to 2010. The increase was primarily due to an increase in litigation costs and higher sales and marketing expenses, including higher compensation-related expenses as a result of headcount additions, to support increased revenues and design activity. These increases were partially offset by lower stock-based compensation and decreases in general and administrative expenses as a result of our continuing focus on control of expenses.

Restructuring of Operations and Other Items, net

In 2012, 2011 and 2010, we initiated restructuring plans designed to focus our business on targeted end markets and to improve operational efficiency and financial results. These plans primarily involved the termination of employees and consolidation of facilities. The restructuring charges recorded in conjunction with these plans primarily represented severance and costs related to the continuation of certain employee benefits, exit costs for facility consolidations and closures, contract termination costs, research and development program cancellations and asset impairment charges. Other items included expenses related to acquisitions and dispositions as well as certain other non-recurring items described below.

The following table summarizes items included in restructuring of operations and other items, net:

                                                             Year Ended December 31,
                                                      2012            2011             2010
                                                                  (In millions)
Lease and contract terminations                      $ 10.3 (a)      $  6.2 (a)       $  3.7 (a)
Employee severance and benefits                         8.2            11.3              8.2
Other exit costs                                        4.5 (b)        (1.0 )(c)           -

Total restructuring expenses                           23.0            16.5             11.9
Other items, net                                       26.1 (d)         7.2 (e)         (2.7 )(f)

Total restructuring of operations and other
items, net                                           $ 49.1          $ 23.7           $  9.2

(a) Includes lease obligation costs for facilities that we ceased to use, changes in estimates, changes in time value and on-going expenditures related to previously vacated facilities. The 2012 amount includes $6.2 million related to our former headquarters.

(b) Consists of a $2.7 million loss on the sale of property in the U.S. and $1.8 million of other asset impairment and exit costs.

(d) Primarily consists of $9.3 million in litigation settlements, $8.4 million of SandForce acquisition-related costs, and $6.8 million of costs related to the transition service agreements associated with the sale of the external storage systems business.

(e) Primarily consists of $12.2 million of transition service agreement costs associated with the sale of the external storage systems business, a $4.5 million intellectual property write-off, $3.4 million of litigation settlements and a $2.2 million loss on the disposition of fixed assets, substantially offset by a $15.5 million reversal of a sales and use tax related liability.

(f) Primarily consists of a $4.4 million reversal of litigation accruals due to a favorable court ruling, offset in part by $1.6 million of depreciation for assets reclassified from held for sale to held and used.

Interest Expense, Interest Income and Other, net

The following table summarizes interest expense and components of interest
income and other, net:



                                          Year Ended December 31,
                                        2012          2011       2010
                                               (In millions)
                  Interest expense    $      -       $    -     $ (5.6 )
                  Interest income          6.6         11.1       13.7
                  Other income, net       31.1         15.4        0.1

                  Total               $   37.7       $ 26.5     $  8.2

Interest expense decreased by $5.6 million in 2011 as compared to 2010 as a result of the repayment of our 4% Convertible Subordinated Notes in May 2010.

The $4.5 million decrease in interest income in 2012 as compared to 2011 primarily resulted from the absence of interest income in 2012 on a note we received in connection with the sale of a business in 2007 and lower interest rates in 2012 than in 2011. The $2.6 million decrease in interest income in 2011 as compared to 2010 primarily resulted from lower interest rates in 2011 than in 2010.

Other income, net in 2012 primarily included $10.8 million of insurance proceeds for covered losses from the 2011 Thailand flooding, $6.4 million of transition services income related to the external storage systems disposition, a $5.8 million gain on our pre-acquisition equity interest in SandForce, and a $2.6 million gain on sale of non-marketable securities. Other income, net in 2011 primarily included $13.6 million of transition services income related to the external storage systems disposition.

Benefit from/ Provision for Income Taxes

During 2012, we recorded an income tax benefit of $21.0 million, which represents an effective tax rate of approximately (12.0) % on our income before income taxes of $175.3 million. This rate differs from the U.S. statutory rate primarily due to the benefit realized from deferred tax assets not previously recognized in the U.S. and lower tax rates in foreign jurisdictions. The income tax benefit in 2012 included a tax benefit of approximately $42.4 million due to the release of valuation allowance resulting from the net deferred tax liabilities recorded as part of the SandForce purchase price allocation. The income tax benefit in 2012 also included a reversal of $18.9 million in liabilities for uncertain tax positions, which included previously unrecognized tax benefits of $9.4 million and interest and penalties of $9.5 million, as a result of the expiration of statutes of limitations in multiple jurisdictions. Management continues to monitor the realizability of our deferred tax assets. Historically, we have sustained losses from our U.S. operations, however, based on recent and projected trends of profitability, it is reasonably possible we will determine that a significant portion of our U.S. deferred tax assets are more likely than not to be realized in the foreseeable future.

The American Taxpayers Relief Act of 2012 was signed into law on January 2, 2013. The act retroactively extends research credits for a two year period beginning January 1, 2012 through December 31, 2013. The provisions of the act are not expected to have a material impact on our effective tax rate.

During 2011, we recorded an income tax provision of $3.8 million, which represents an effective tax rate of approximately 4% on our income before income taxes of $93.8 million. This rate differs from the U.S. statutory rate primarily due to the benefit realized from deferred tax assets not previously recognized in the U.S. and lower tax rates in foreign jurisdictions. In addition, the income in discontinued operations resulted in an intraperiod allocation of tax benefit of $11.7 million related to a loss in the domestic continuing operations for the year ended December 31, 2011. The income tax provision in 2011 included $24.2 million of additional accrual for uncertain tax positions, offset by a reversal of $18.1 million in liabilities for uncertain tax positions, which included interest and penalties as a result of the expiration of statutes of limitations in multiple jurisdictions.

During 2010, we recorded an income tax provision of $3.2 million, which represents an effective tax rate of approximately 9% on our income before income taxes of $37.6 million. This rate differs from the U.S. statutory rate primarily due to lower tax rates in foreign jurisdictions offset by certain foreign earnings taxed in the U.S. and an increase in valuation allowance against the U.S. deferred tax assets. The income tax provision in 2010 included $14.1 million of additional accrual for uncertain tax positions, offset by a reversal of $31.8 million in liabilities for uncertain tax positions, which included interest and penalties as a result of the expiration of statutes of limitations in multiple jurisdictions.

With the exception of certain foreign jurisdictions, we believe it is not more likely than not that the future benefit of deferred tax assets will be realized.

Discontinued Operations

Discontinued operations consists of the external storage systems business that
we sold in 2011. Following is selected financial information included in income
from discontinued operations:



                                                              Year Ended December 31,
                                                              2011                2010
                                                                   (In millions)
Revenues                                                   $     210.6          $   700.4
(Loss)/income before gain on sale of external storage
. . .