Updated from 6:36 PM EST

SAN FRANCISCO -- LSI ( LSI) said strong demand and a tight rein on expenses boosted its fourth-quarter financial results ahead of its expectations.

But the Milpitas, Calif., chipmaker wrote off a major chunk of its business operations, sending the chipmaker deeply into the red.

LSI shares were up a penny at $4.02 in extended trading Wednesday.

"Our strong fourth-quarter results were driven by higher-than-expected seasonal demand for our storage products," said CEO Abhi Talwalkar in a statement.

"In our core focus areas of storage and networking, revenue increased more than 12% sequentially, reflecting greater than 25% growth in storage systems and double-digit growth in storage semiconductors," Talwalkar said.

In the fourth quarter, LSI recorded a net loss of $2 billion, or $2.88 a share, vs. net income of $59 million, or 14 cents a share at this time last year.

The loss included $2.1 billion in special charges, with $2 billion goodwill impairment charge, which LSI said it was taking to reflect the reduced value of its semiconductor business unit in light a sharp decline in the company's stock value. LSI's stock is down about 62% from its 52-week high of $10.68.

LSI is the second chipmaker to take a massive write off this earnings season. Last week Advanced Micro Devices ( AMD) wrote off $1.6 billion in goodwill for its $5.4 billion acquisition of Canadian graphics chipmaker ATI.

LSI said that revenue in the three months ended Dec. 31 totaled $741 million. That's below the combined $896 million that the then separate operations of LSI and Agere generated at this time last year (the two chipmakers merged early in 2007 in a $4 billion deal).

Still, LSI's fourth-quarter revenue beat Wall Street expectations as well as its own guided range of $700 million to $730 million.

Similarly, the company's adjusted EPS, excluding the charges, came in at 13 cents a share. The average analyst expectation called for 7 cents adjusted EPS.

LSI said its gross margin in the quarter, excluding special items, was 46.7%, up more than three percentage points sequentially. And the company's chip business posted a 49.2% gross margin.

LSI said the improved profitability was due to an improved mix of products and the revenue upside.

Since merging with Agere, LSI has divested various businesses, such as its cell phone chip group and its consumer electronics business, to focus almost predominantly on storage chips and systems.

Speaking in a post-earnings conference call, Talwalkar said LSI's increased focus on storage means the company's strongest part of the year will now be in the third and fourth quarters.

"We're looking at overall first half of this year sort of being flattish, with growth consistent with seasonality in the second half," said Talwalkar.

LSI projected first-quarter sales between $620 million and $650 million, vs. the average analyst expectation of $644.5 million.

LSI said its adjusted EPS in the current quarter will range between 5 cents and 9 cents. Wall Street was looking for 5 cents adjusted EPS.

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