LSI Corp. (LSI) Chief Executive Abhi Talwalkar on Friday stressed that chip makers need to be able to support hardware developments with software prowess when designing and selling semiconductors to customers.

"We wanted complex silicon and complex software," Talwalkar said, describing his software strategy in an interview with Dow Jones Newswires. It's part, he said, of LSI's goal to deliver richer experiences for customers through its semiconductor products.

To support LSI's chip designs, currently half of the Milpitas, Calif., company's engineers work in software, he said.

Talwalkar's comments come as many chip makers are recognizing the importance of developing software in addition to semiconductors in order to optimize chip performance. Intel Corp. (INTC) has been particularly active recently as it attempts to push its popular netbook chip Atom into new markets, developing a Linux-based operating system called Moblin and Thursday entering into an agreement to buy embedded software maker Wind River Systems Inc. (WIND) for about $884 million.

LSI makes chips used in the networking and storage devices in company data centers which allow the quick flow of information from one area to another. Over his tenure, Talwalkar has focused the company on these two markets he sees as continuing to converge.

LSI has struggled along with the rest of the chip sector amid the recession, posting losses in the last two quarters as corporate tech spending slowed.

The stock is down more than 40% over the past year, trading as low as $2.36 last November. In the past three months, though, shares have rallied, jumping more than 60% as investors hope the worst is behind the chip sector.

LSI shares were recently up 1.2% to $4.35.

Talwalkar said that there have been signs of stabilization recently in the market, but that Wall Street could be getting ahead of itself if it becomes too positive.

The fourth-quarter of 2008 saw precipitous drops in chip sales as customers halted purchases, but chip buyers may have over-corrected earlier this year when moving to replenish inventories, he said.

Talwalkar said the market will take time to figure out the right level of inventory to meet end-demand.

"You're going to have that oscillation until things stabilize," he said.

Still, he voiced optimism that business spending on technology would rebound. Demand has been building, he said, as companies delay purchases to cut costs.

"You can only stop for so long," he said, a point he made by offering his own company's tech spending plans: "We are starting to spend again in servers and storage systems."

-By Jerry A. DiColo; Dow Jones Newswires; 201-938-5670; jerry.dicolo@dowjones.com