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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                ----------------
                                    FORM 10-K
                                ----------------
       (Mark One)

   [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
       SECURITIES EXCHANGE ACT OF 1934

                   For the Fiscal Year Ended December 31, 2002

                                       OR

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

                 For the transition period from_______to_______.

                           Commission File No. 0-11674

                             LSI LOGIC CORPORATION
            (Exact name of registrant as specified in its charter)

<TABLE>
<S>                                                 <C>
                  Delaware                              94-2712976
       (State or other jurisdiction of                (IRS Employer
        incorporation or organization)              Identification No.)

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

</TABLE>

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

           Securities registered pursuant to Section 12(b) of the Act:

<TABLE>
<S>                                        <C>
                                            Name of each Exchange
        Title of each class                  on which registered
 -------------------------------           ------------------------
 Common Stock, $0.01 par value             New York Stock Exchange
 Preferred Share Purchase Rights           New York Stock Exchange
</TABLE>

           Securities registered pursuant to Section 12(g) of the Act:
                                      NONE
                                (Title of class)

     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 [X] No [ ]

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

     The aggregate market value of the voting and non-voting common stock held
by non-affiliates of the Registrant, based upon the closing price of the Common
Stock on June 30, 2002, as reported on the New York Stock Exchange, was
approximately $8.75. Shares of Common Stock held by each executive officer and
director and by each person who owns more than 5% of the outstanding Common
Stock have been excluded in that such persons may be deemed to be affiliates.
This determination of affiliate status is not necessarily a conclusive
determination for other purposes.

     As of March 7, 2003, the Registrant had 375,208,474 shares of Common Stock
outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

     Parts of the following document are incorporated by reference into Part
III of this Form 10-K Report: Proxy Statement for Registrant's 2003 Annual
Meeting of Stockholders.

     Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) YES [X] No [ ]
================================================================================
<PAGE>

                          FORWARD-LOOKING STATEMENTS

     This Annual Report on Form 10-K 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. Actual results could differ materially from
those projected in the forward-looking statements as a result of a number of
risks and uncertainties, including the risk factors set forth below and
elsewhere in this Report. See "Risk Factors" in Part I, Item 1 and "Factors
that may Affect Future Results" in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in Part II, Item 7 below.
Statements made herein are as of the date of the filing of this Form 10-K with
the Securities and Exchange Commission and should not be relied upon as of any
subsequent date. We expressly disclaim any obligation to update information
presented herein, except as may otherwise be required by law.

                                    PART I

Item 1. Business

General
     LSI Logic Corporation (together with its subsidiaries collectively
referred to as "LSI Logic" or the "Company" and referred to as "we", "us" and
"our") is a leader in the design, development, manufacture and marketing of
complex, high-performance integrated circuits and storage systems. We are
focused on four markets: communications, consumer products, storage components
and storage systems. Our integrated circuits are used in a wide range of
communication devices, including devices used for wireless and broadband data
networking applications. We also provide other types of integrated circuit
products and board-level products for use in consumer applications,
high-performance storage controllers and systems for storage area networks.

     We operate in two segments -- the Semiconductor segment and the Storage
Systems segment -- in which we offer products and services for a variety of
electronic systems applications. Our products are marketed primarily to
original equipment manufacturers ("OEMs") who sell products targeted for
applications in our major markets.

     In the Semiconductor segment, we use advanced process technologies and
comprehensive design methodologies to design, develop, manufacture and market
highly complex integrated circuits ("ICs"). These system-on-a-chip solutions
include both application specific integrated circuits, commonly referred to as
ASICs, and standard products. Semiconductor segment product offerings also
include redundant array of independent disks ("RAID") host bus adapters and
related products and services. ASICs are designed for specific applications
defined by the customer, whereas standard products are for market applications
that we define. See also "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in Item 7 of Part II.

     We have developed methods of designing integrated circuits based on a
library of building blocks of industry-standard electronic functions,
interfaces and protocols. Among these is our CoreWare[RegTM] design
methodology. Our advanced submicron manufacturing process technologies allow
our customers to combine one or more CoreWare library elements with memory and
their own proprietary logic to integrate a highly complex, system-level
solution on a single chip. We have developed and use complementary metal oxide
semiconductor ("CMOS") process technologies to manufacture our integrated
circuits.

     In the Storage Systems segment, our enterprise storage systems are
designed, manufactured and sold by our wholly owned subsidiary -- LSI Logic
Storage Systems, Inc. Our high-performance, highly scalable open storage area
network systems and storage solutions are available through leading OEMs and a
specialized network of resellers. Products and solutions distributed through
these channels may exclude LSI Logic Storage Systems' brand identification.
When included, LSI Logic Storage Systems' brand identity may appear alone or in
tandem with OEM brand identification.

     LSI Logic Corporation was incorporated in California on November 6, 1980,
and was reincorporated in Delaware on June 11, 1987. Our principal offices are
located at 1621 Barber Lane, Milpitas, California 95035, and our telephone
number at that location is (408) 433-8000. Our home page on the Internet is
www.lsilogic.com. The contents of this website are not incorporated in or
otherwise to be regarded as part of this annual report on Form 10-K. Copies of
this and other annual reports, quarterly reports on Form 10-Q, current reports
on Form 8-K and all amendments to these reports are available free of charge on
our website as soon as reasonably practical after such documents are filed
electronically with the Securities and Exchange Commission.

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Business Strategy

Semiconductor Business Strategy

     Our objective is to continue our industry leadership in the design,
development, manufacture and marketing of highly integrated, complex integrated
circuits and other electronic components and system-level products that provide
our customers with silicon-based system-level solutions. To achieve this
objective, our business strategy includes the following key elements:

     - Target Growth Markets and Selected Customers. We concentrate our sales
and marketing efforts on leading OEM customers in targeted growth markets,
including communications, consumer and storage components applications. Our
engineering expertise is focused on developing technologies that will meet the
needs of leading-edge customers in order to succeed in these market areas.

     - Emphasize CoreWare Methodology and System-on-a-Chip Capability. Our
CoreWare design methodology enables the integration of one or more pre-designed
circuit elements with customer-specified elements and memory to create system
capabilities on a single chip. This results in higher product functionality,
higher performance, greater differentiation and faster time to market. We also
have used this design methodology to develop proprietary standard products.

     -Promote Highly Integrated Design and Manufacturing Technology. We use
proprietary and leading third-party electronic design automation, or EDA,
software design tools. Our design tool environment is highly integrated with
our manufacturing process requirements so that it will accurately simulate
product performance. This integration reduces design time and project cost. We
continually evaluate and, as appropriate, develop expertise with third-party
EDA tools from leading and emerging suppliers of such products.

     - Provide Flexibility in Design Engineering. We engage with customers of
our semiconductor products under various arrangements whereby the extent of the
engineering support we provide will be determined in accordance with the
customer's requirements. For example, a customer may primarily use its own
engineers for substantial development of its product design and retain our
support for silicon-specific engineering work. We also enter into engineering
design projects, including those on a "turn-key" basis.

     - Maintain High-Quality and Cost-Effective Manufacturing. We operate our
own manufacturing facilities in order to control our deployment of advanced
wafer fabrication technology, our manufacturing costs and our response to
customer delivery requirements. We also use independent wafer foundry services
when appropriate. We perform substantially all of our packaging, assembly and
final test operations through subcontractors in Asia. Our production operations
in Gresham, Oregon, and Tsukuba, Japan, are ISO-9002 and ISO-14000 certified
and our assembly and test subcontractors in Asia are ISO-9002 certified, which
are important international measures for quality and environmental stewardship.

     - Leverage Alliances with Key Partners. We are continually seeking to
establish relationships with key partners in a diverse range of semiconductor
technologies to promote new products, services, operating standards and
manufacturing capabilities and to avail ourselves of cost efficiencies that may
be obtained through collaborative development.

     - Develop and Drive Industry Standards to Achieve Market Advantage. We are
a leader in developing and promoting important industry standard architectures,
functions, protocols and interfaces. We believe that this strategy will enable
us to quickly launch new standard-based products, allowing our customers to
achieve time-to-market and other competitive advantages.

     - Operate Worldwide. We market our products and engage with our customers
on a worldwide basis through direct sales, marketing and field technical staff
and through independent sales representatives and distributors. Our network of
design centers located in major markets allows us to provide customers with
highly experienced engineers, to interact with customer engineering management
and system architects, to develop designs for new products and to provide
continuing after-sale customer support.

Storage Systems Business Strategy

     - Highly Leveraged Core Competencies. In the Storage Systems market, we
leverage expertise used to develop our semiconductors, storage input/output
components, storage management software and storage systems in the

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<PAGE>

development of scalable storage solutions. We use the full scope of our
technical expertise to design and develop interoperable, easy-to-manage,
leading price/performance products.

     - Modular Design Philosophy. Our flexible approach to storage system
design allows elements of a system to be configured and/or customized together
or separately to meet customer requirements. Benefits to our customers include
investment protection, reduced support costs and a common management interface
and features. This allows customers to start with pilot projects and later
scale to full implementation.

     - Flexible Business Models. Our strategy is to provide flexible,
customizable solutions with room for value-added components, software and
services provided by the channel. In addition to providing engineering
services, we provide sales training and marketing assistance both to our OEM
customers and to their end-customers. Our modular product set allows OEMs and
resellers to devise a solution to best meet their needs and to satisfy
customers.

     - Leveraged Alliances. In January 2002, the Company and Storage Technology
Corporation ("StorageTek") announced an alliance under which StorageTek became
the worldwide master distributor of co-branded open storage products.

     - Expanded Opportunities through Acquisitions. In August 2002, we
completed the asset purchase of the Mylex business unit of IBM Corporation
("IBM"). The acquisition expanded the engineering capacity and expertise of the
Company to develop new products in the expanding entry-level storage systems
space. We also gained access to the Mylex sales channels and an expanded
customer base in new geographic markets.

Technology, Products and Services

ASIC Technology

     Our CoreWare design methodology offers a comprehensive design approach for
creating a system-on-a-chip efficiently, predictably and rapidly. Our CoreWare
libraries include high-level intellectual property building blocks created
around industry standards. Our CoreWare cells are connected electronically with
other memory and logic elements to form an entire system on a single chip.
These system-on-a-chip solutions serve our customers in the communications,
consumer and storage markets.

     Our continued emphasis on cell-based product lines reflects the market
preference for use of this methodology to develop advanced integrated circuits.
Customers obtain greater flexibility in the design of system-level products
using our cell-based technology than they do with other technologies.

     We have expanded our technology product offerings to include the
RapidChipTM product in addition to our cell-based product lines. Introduced in
the third quarter of 2002, our new RapidChip product addresses a growing market
need for flexible, cost-effective and a fast time-to-market solution with
performance comparable to cell-based ASICs and at a cost significantly lower
than field programmable gate arrays ("FPGAs"). RapidChip is an innovative
semiconductor platform set to reshape the way complex chips are designed and
manufactured. A key feature of RapidChip is the customer-friendly interface
that dramatically simplifies the underlying complexity of the design tools and
flows associated with system-on-a-chip design. Rule sets automatically manage
architectural design, verification and physical design. As a result, design
schedules for high-performance chips can be very predictable.

     LSI works with customers to pre-define RapidSlicesTM applicable to the
communications, consumer and storage market segments to provide the basis for
rapid personalization of the RapidChip to help meet the customer product
objectives. A slice is a pre-manufactured chip in which all silicon-based
layers have been built, leaving the top metal layers to be completed with the
customer's unique intellectual property. In January 2003, we introduced the
first offering in the RapidChip configurable product family. Featuring 20
gigabits per second of full-duplex throughput, StreamSlice targets, high-end
switches, routers and other communications system applications. We believe the
RapidChip platform product fills a growing gap between the traditional ASIC and
FPGA solutions, complementing our ASIC product offerings.

     Typically, the ASIC design process involves participation by both LSI
Logic and customer engineers. We engage our customers early in their new system
product development process and accept large design assignments where we share
development costs with the customer. We provide advice on the product design
strategies to optimize

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product performance and suitability for the targeted application. In addition,
our capabilities include support in the areas of architecture and system-level
design simulation, verification and synthesis used in the development of
complex integrated circuits.

     Our software design tool environment supports and automatically performs
key elements of the design process from circuit concept to physical layout of
the circuit design. The design tool environment features a combination of
internally developed proprietary software and third-party tools that are highly
integrated with our manufacturing process requirements. The design environment
includes expanded interface capabilities with a range of third-party tools from
leading EDA vendors and features hardware/software co-verification capability.
We provide a suite of MIPS cores and ARM processors, in addition to
industry-standard bus interface cores such as USB, IEEE 1394, and PCI.

     After completion of the ASIC engineering design effort, we produce and
test prototype circuits for shipment to the customer. We then begin volume
production of integrated circuits that have been developed through one or more
of the arrangements described above in accordance with the customer's quantity
and delivery requirements.

Semiconductor Products

     In our semiconductor components business, we design, manufacture and
supply ASICs, standard products, host adapter boards and RAID host adapter
board software to customers competing in global communications, consumer and
storage markets.

     ASICs are semiconductors that are designed for unique, customer-specified
applications. Standard products are developed for market applications we define
and are targeted to be sold to multiple customers. Both ASIC and standard
products are sold to customers for incorporation into system level products and
may incorporate our intellectual property building blocks. Our ASICs and
standard products are predominantly designed and manufactured using our
proprietary process technologies.

     Communications

     LSI Logic offers highly integrated, high-performance, system-on-a-chip
silicon solutions for use in the design of communications equipment. We focus
on serving customers who develop systems for the Enterprise, Metropolitan, and
Wide Area Network sectors.

     Leading edge switches and routers require multi-gigabit throughput
capability. LSI Logic's HyperPHY[RegTM] SERDES (Serializer-Deserializer)
technology enables chip-to-chip and back-plane connectivity at speeds in excess
of 3Gbits/second. We also provide our customers with CoreWare intellectual
property in support of key industry standard interconnect technologies
including RapidIO, HyperTransport, SPI-4, 5, SFI-4, 5, NPSI and 10/100/1G/  10G
Ethernet.

     In addition to customer logic, our solutions incorporate embedded ARM,
MIPS, digital signal processors ("DSPs") as well as memory structures and
mixed-signal cores. We provide each customer with the opportunity to deliver
unique value in a custom silicon device.

     Consumer Products. For the consumer market, we offer a broad array of
products, including both standard products and custom solutions.

   o Consumer standard products. We design, develop, manufacture and market
     semiconductor devices, software and reference designs for digital video
     and audio applications, enabling new digital video and audio applications.
     We are focused on providing solutions into rapidly growing applications
     such as DVD players, digital set-top boxes, cable modems, broadcast
     encoders, video editing systems, as well as emerging applications such as
     DVD recorders, home servers, residential gateways and personal video
     recorders.

   o Consumer custom solutions. We also offer systems-on-a-chip for consumer
     applications. We focus on consumer market segments employing our
     intellectual property portfolio, design methodology and turn-key product
     offerings (including manufacturing, assembly and test) to provide a
     customized solution. Our main focus is in the video game console market.
     Other market opportunities include digital cameras and camcorders,
     portable digital audio and video, automobile infotainment (GPS, digital
     radio and backseat

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     entertainment), personal digital assistant multimedia products and other
     emerging multimedia applications where an effective standard solution is
     not currently available.

   o DSL products. We provide standard products, device and applications
     software and reference designs for DSL modems, Home Gateways and embedded
     DSL applications. We are focused on the network-centric modem market for
     which we provide a complete reference platform. We also provide a variety
     of home connectivity solutions, both wired and wireless, based on this
     platform.

     Storage Components

     Our ASIC and standard product solutions offered to customers in worldwide
storage component markets make possible data storage and transmission between a
host computer and peripheral devices such as magnetic and optical disk drives,
scanners, printers and disk and tape-based storage systems. We offer industry
leading standard products in Fibre Channel and SCSI, including host adapter ICs
for motherboard or adapter applications, SCSI expander ICs, PCI-based host
adapter boards and LSI's Fusion-MPTTM software drivers for these product
families.

     In addition, we offer a wide range of RAID storage solutions, including
our IDEal software-based RAID product, integrated RAID in our Fusion-MPT
based-storage IC and adapter products, MegaRAID[RegTM], RAID on Motherboard
single chip solutions, and a family of PCI-RAID host adapters featuring ATA,
Serial ATA, SCSI and Fibre Channel interfaces, along with fully featured
software and utilities for storage configuration and management.

     We also offer solutions using our ASIC technology to customers who develop
Fibre Channel storage area network ("SAN") switches and host adapters, storage
systems, hard disk drive and tape peripherals. Our Fibre Channel offerings
include the GigaBlaze high performance serial transceiver supporting Fibre
Channel, Serial ATA, Gigabit Ethernet, Infiniband, Serial Attach SCSI and
PCI-Express industry standards and the Merlin[RegTM] family of high-performance
Fibre Channel protocol controllers.

     In August 2002, we completed an asset purchase of IBM's Mylex business
unit. Through this acquisition, the Mylex PCI-RAID products and technologies
became a part of the Storage Components group and enhanced our presence in the
storage market.

Storage Systems Products

     In the Storage Systems segment, we offer a broad line of network storage
that spans customer enterprises from workgroup to data center. Our product
lines range from intelligent controller and drive modules to complete storage
systems. These offerings allow our products to be integrated on a component
basis or configured into a complete storage solution, increasing OEM
flexibility in creating differentiated products. Modular products also allow
our indirect channel partners to customize solutions, bundling our products
with value-added components, software and services.

     - Storage Systems. Our complete storage systems are based on highly
available and scalable hardware and software components integrated into fully
tested SAN solutions for the enterprise market.

   o E-Series Branded. Our E-Series storage systems for SANs combine Fibre
     Channel performance with our proprietary multi-pathing architecture to
     deliver high performance for a wide variety of applications. Highly
     available and fully redundant dual-active controllers, efficiently managed
     with SANtricityTM Storage Manager software, differentiate our storage
     products from those of our competitors.

     The E-Series storage family supports all high-use operating systems,
     including Windows NT, SolarisTM, HP-UX, AIX, SGI, IRIX, NetWare and Linux
     platforms. Our products allow customers to dynamically increase storage
     capacity from 72 gigabytes (billions of information bytes) to as much as 33
     terabytes (trillions of information bytes) per system. Customers can expand
     storage to their computer applications, maintain redundant records and
     change configurations even when their systems are operating. The result is
     a growth-oriented, highly available and easy to manage system.

   o Unbranded. Our unbranded storage systems for SANs provide similar
     performance and features found in the branded family, but are marketed and
     sold through OEM relationships.

   o Storage Controller Modules. Our storage controller modules support medium
     (1 Gbit/second) and high speed (2 Gbits/second) Fibre channel interfaces.
     The controllers deliver superior performance for both high

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     transaction volumes and large data block workloads. Combined with our
     drive modules, each controller module manages scalable capacity up to 33
     terabytes. Modules are available in either rack-mounted or desk side
     configurations. Other features include HotScale technology for dynamic
     system expansion and reconfiguration, redundant dual-active controllers
     and automatic fail-over for maximum data availability.

   o Storage Drive Modules. Our storage drive modules increase storage
     capacity and performance as needs change. Drive modules use on-board
     intelligence to monitor power, temperature and fans, and to relay
     information back to the controller. Advanced technology from industry disk
     drive vendors is integrated into the modules to maximize capacity and
     minimize floor space requirements

     - SANtricity Storage Manager Software. This storage management software
enables users to consolidate storage through the SANshare storage-partitioning
feature. In addition, this software provides a single management interface and
remote access capabilities, allowing centralized management of all MetaStor
storage. An enhanced graphical user interface makes the software quite easy to
use. Other features provide for automatic device discovery and one-button
configuration.

     - Storage Virtualization. The ContinuStor[RegTM] Director is an
intelligent storage management system that provides storage virtualization,
heterogeneous storage, host support and local and remote mirroring
capabilities. Storage virtualization is an emerging method of managing storage
without regard to its physical characteristics, enabling the interoperability
of storage devices from different manufacturers in a more efficient manner.
This generally results in a significant reduction of storage management
complexity, improvements in capacity utilization and more cost-effective
business continuance and disaster recovery implementations with respect to data
storage.

     As a major open storage vendor, we deliver storage systems that operate
within the Windows NT, UNIX, Solaris, NetWare, and Linux operating-system
environments. These products are targeted at key data storage applications,
including: Internet servers, electronic commerce, data warehousing, on-line
transaction processing, video delivery, editing and production and high
performance computing applications.

     In 2002, LSI Logic Storage Systems, Inc. enhanced its entire product line
when it introduced the E4600, the E5600 and E5600HPCx and SANtricity Storage
Manager 8.30 software. These new products extend the range of applicability to
better serve market segments that demand the highest levels of connectivity,
performance and storage capacity.

     In August 2002, we completed an asset purchase of IBM's Mylex business
unit. The acquisition expanded our entry-level product portfolio for storage
systems.

     We offer a toll-free 24 hours-a-day, 7 days-a-week technical support
hotline for customers worldwide using the E-Series line of enterprise storage
systems. We also offer a number of flexible services and support programs that
allow customers to choose the level of telephone and onsite support appropriate
to their needs.

Marketing and Distribution

Semiconductor Marketing and Distribution

     The highly competitive semiconductor industry is characterized by rapidly
changing technology, short product cycles and emerging standards. Our marketing
strategy requires that we accurately forecast trends in the evolution of
product and technology development. We must then act upon this knowledge in a
timely manner to develop competitively priced products offering superior
performance. As part of this strategy, we are active in the formulation and
adoption of critical industry standards that influence the design
specifications of our products. Offering products with superior price and
performance characteristics is essential to satisfy the rapidly changing needs
of our customers in the dynamic communications, consumer and storage markets.

     Our semiconductor products and design services are primarily sold through
our network of direct sales and marketing and field engineering offices located
in North America, Europe, Japan and elsewhere in Asia. Our sites are
interconnected by means of advanced computer networking systems that allow for
the continuous, uninterrupted exchange of information that is vital for the
proper execution of our sales and marketing activities. International sales are
subject to risks common to export activities, including governmental
regulations, geopolitical risks, tariff increases and other trade barriers and
currency fluctuations.

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     We rely primarily on direct sales and marketing, but we also work with
independent distributors and manufacturers' representatives in North America,
Europe, Japan and elsewhere in Asia. Some of our distributors possess
engineering capabilities, and design and purchase both ASICs and standard
products from us for resale to their customers. Other distributors focus solely
on the sale of standard products. Our agreements with distributors generally
grant limited rights to return standard product inventory and we defer revenue
for such inventory until the distributor sells the product to a third party.

Storage Systems Marketing and Distribution

     Storage systems products are sold worldwide both on a direct basis to OEMs
and through indirect channels to end-users. The LSI Logic E-Series brand of
scalable storage systems is exclusively marketed through a network of
specialized value-added resellers, system integrators and distributors. We
closely manage these relationships to meet the diverse needs of end-users. Our
marketing efforts are driven by an industry-wide trend towards the
implementation of storage area networks to maximize performance, availability
and efficiency.

     Our direct sales force provides customized storage systems solutions
generally to large, well-known manufacturers of computer equipment. Our product
development strategy focuses on implementing the latest storage technologies to
improve the performance of our hardware and software storage solutions. As a
pioneer in the development of RAID technology, and as a member of the Fibre
Channel Industry Association and Storage Networking Industry Association, we
are continually driving industry standards for Fibre Channel and storage
systems solutions.

     In January 2002, LSI Logic and StorageTek announced an alliance under
which StorageTek became the worldwide master distributor of co-branded open
storage products for LSI Logic Storage Systems. Further, the companies agreed
to market a full line of scalable, high performance, high availability disk
storage systems that will be engineered and manufactured by LSI Logic Storage
Systems and sold, installed and supported by StorageTek.

Customers
     We seek to leverage our expertise in the fields of communications,
consumer, storage components and storage systems by marketing our products and
services to market leaders. Our strategic-account focus is on larger,
well-known companies that produce high-volume products incorporating our
semiconductors and storage system products. We recognize that this strategy may
result in increased dependence on a limited number of customers for a
substantial portion of our revenues. It is possible that we will not achieve
significant sales volumes from one or more of the customers we have selected.
While this could result in lower revenues and higher unit costs owing to an
under-utilization of our resources, we believe this strategy provides us with
the greatest opportunity to drive further growth in sales and unit volumes.

     We operate in a rigorous competitive environment and our continued success
requires that we consistently develop and manufacture products that meet the
needs of our customers. There is no assurance that we will achieve significant
sales revenues from one or more of our strategic customers. This could result
in lower revenues for us.

     In 2002, Sony accounted for approximately 18% of our consolidated
revenues. No other customer accounted for greater than 10% of consolidated
revenues.

Manufacturing

Semiconductor Manufacturing

     Our semiconductor manufacturing operations convert a design into packaged
silicon chips and support customer requirements for volume production.
Manufacturing begins with fabrication of custom-diffused silicon wafers. Layers
of metal interconnects are deposited onto the wafer and patterned using
customized photo masks. Wafers are then tested and cut into die. Typically, die
that pass initial tests are then sent to the assembly process where the
fabricated circuits are assembled into plastic package or laminate substrate
ball grid array. The finished devices undergo additional testing and quality
assurance before shipment. Dedicated computer systems are used in this
comprehensive testing sequence. The test programs use the basic functional test
criteria from the design simulation. The customer specifies the functional test
criteria for ASIC circuits.

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<PAGE>

     We own and operate manufacturing operations in the United States and
Japan. In addition, we utilize external wafer foundries located in Taiwan and
Malaysia. We use high-performance CMOS process technologies in the volume
manufacture of our products. The production operations are fully
computer-integrated to increase efficiency and reduce costs.

     Semiconductor process technologies are identified in terms of the size of
channel length within the transistors, measured in millionths of a meter called
"microns" or billionths of a meter called "nanometers." The measurement of the
channel length is expressed in two ways: effective electrical channel length
and drawn gate length. The effective electrical channel length is smaller than
the drawn gate length. Although we have used the convention of the effective
electrical channel length in the past, the drawn gate length measurement is now
believed to be more commonly used for the most advanced technologies.
Accordingly, in this Report on Form 10-K, we use only the drawn gate length to
identify our process technologies and have conformed all references to our
process technologies to reflect this change.

     Our advanced submicron manufacturing processes are capable of producing
products with a drawn gate length as small as 0.18-micron in our G12[RegTM]
technology. Our 0.25-micron (G11[RegTM] process technology) allows up to 24
million usable gates on a single chip. Our G10[RegTM] process technology
utilizes 0.35-micron gate lengths. We have introduced our 0.13-micron GflxTM
technology through a joint development with our leading edge foundry partner,
Taiwan Semiconductor Manufacturing Company ("TSMC"). This new and flexible
process technology is capable of combining all of the system functions to
create totally new classes of products on a single chip. The Gflx technology is
more than twice as dense as the previous generation G12 process technology,
allowing designers to incorporate added functions onto a single chip. The
0.13-micron Gflx process technology offers 78 million usable logic gates. The
next generation is the 90-nanometer process technology. We have completed the
definition of a 90-nanometer system-on-a-chip process platform, which we call
G90, in participation with TSMC and other leading edge technology companies.
These advanced process technologies allow for greater circuit density and
increased functionality on a single chip.

     A majority of our wafers are fabricated in our factories in Gresham,
Oregon and Tsukuba, Japan. The rest of the wafers are manufactured at external
wafer foundries in Taiwan and Malaysia. The factories in Gresham and Tsukuba
are ISO-9002 and ISO-14000 certified, which are important internationally
recognized standards for quality and environmental stewardship.

     Our most advanced manufacturing facility is located in Gresham, Oregon on
325 acres outside of Portland. This facility is equipped for advanced
manufacturing operations and is designed to accommodate our expansion
requirements well into the foreseeable future. The plant is equipped to produce
eight-inch wafers hosting products manufactured in accordance with the G10,
G11, G12 and Gflx processes.

     In January 2002, we announced a set of actions to reduce costs and
streamline operations, including a worldwide workforce reduction and downsizing
the Japan manufacturing facility. We recorded a restructuring charge for
severance of approximately 1,150 employees worldwide and exit costs primarily
associated with cancelled contracts and operating leases. As a result of the
restructuring actions, we recorded fixed asset write-downs due to impairment in
the United States and Japan that will be disposed of by sale.

     In April 2001, we announced a co-development and foundry supply agreement
with TSMC. This agreement is part of our strategy to outsource, by which we
intend to procure a larger portion of our wafer requirements from external
sources. As a result of our joint development efforts with TSMC, we anticipate
purchasing, consistent with our outsourcing strategy, such portion of our wafer
volume requirements based on our Gflx process technology that we do not
manufacture ourselves. In addition, we anticipate being able to defer the need
to expand our manufacturing capacity for our Gflx process technology beyond the
time when products designed for that technology would begin volume production.
As described earlier, we have completed the definition of our newest technology
at the 90-nanometer technology node in participation with TSMC and other
leading edge technology companies. This technology is in the final stages of
development with prototype deployment expected in 2004.

     Our fixed costs for manufacturing are high and are expected to remain high
because we continually make significant capital expenditures and access new
advanced capacity in order to remain competitive. If demand for our products
does not absorb the additional capacity, the increase in fixed costs and
operating expenses related to

                                       8
<PAGE>

increases in production capacity may result in a material adverse impact on our
operating results and financial condition. Additional risk factors are set
forth in the Risk Factors section below.

     We offer a wide range of packaging solutions for system-on-a-chip designs.
We have also developed a high-performance, high-density interconnect packaging
technology, known as flip chip, which essentially replaces the wires that
connect the edge of the die to a package with solder bumps spread over the
entire external surface of the die. This technology enables us to reach
exceptional performance and lead-count levels in packages required for process
technologies of 0.18-micron and smaller geometries. We also offer a mini-ball
grid array package that features a smaller package size without sacrificing
electrical and thermal performance. In addition, we offer a wide array of
plastic wire-bond packaging options.

     Final assembly (i.e., assembly in a plastic or laminate substrate package)
and test operations are performed through independent subcontractors in the
Philippines, Malaysia, South Korea, Taiwan, Hong Kong and China. We also
utilize subcontractors in Thailand for the assembly and test of our host
adapter boards and RAID storage adapter controllers.

     Both manufacturing and selling our semiconductor products may be impacted
by political and economic conditions abroad. Protectionist trade legislation in
either the United States or foreign countries, such as a change in the current
tariff structures, export compliance laws or other trade policies, could
adversely affect our ability to manufacture or sell products in or into foreign
markets. We cannot guarantee that current arrangements with our component
suppliers or assembly, testing and packaging subcontractors will continue, and
we do not maintain an extensive inventory of assembled components. The failure
to secure assembly and test capacity could affect our sales and result in a
material adverse impact on our operating results and financial condition.

     Development of advanced manufacturing technologies in the semiconductor
industry frequently requires that critical selections be made as to those
vendors from which essential equipment (including future enhancements) and
after-sales services and support will be purchased. Some of our equipment
selections require that we procure certain specific types of materials or
components specifically designed to our specifications. Therefore, when we
implement specific technology choices, we may become dependent upon certain
sole-source vendors. Accordingly, our capability to switch to other
technologies and vendors may be substantially restricted and a switch may
involve significant expense and could delay our technology advancements and
decrease manufacturing capabilities.

     We use a wide range of parts and raw materials in the production of our
semiconductors, host adapter boards and storage systems, including silicon
wafers, processing chemicals and electronic and mechanical components. We do
not generally have guaranteed supply arrangements with our suppliers and do not
maintain an extensive inventory of parts and materials for manufacturing. We
purchase some of these parts and materials from a limited number of vendors and
some from a single supplier. While such parts and materials have been available
to us, we have, on occasion, experienced difficulty in procuring certain parts
and materials. In 2002, we did not experience a shortage in the availability of
parts and raw materials.

     The semiconductor equipment and materials industries also include a number
of vendors that are relatively small and have limited resources. Several of
these vendors supply us with equipment and/or services. We do not have
long-term supply or service agreements with vendors of certain critical items,
and shortages could occur in various essential materials due to interruption of
supply or increased demand in the industry. Given the limited number of
suppliers of certain of the materials and components used in our products, if
we experience difficulty in obtaining essential materials in the future, we
cannot be assured that alternative suppliers will be available to meet our
needs. Such disruptions could materially affect our operations, which could
have a material adverse impact on our operating results and financial
condition.

     The primary raw materials used in the manufacturing of semiconductors
include raw wafers and certain chemicals used in the processing of
semiconductors. The raw wafers are obtained primarily from suppliers in Japan
and their U.S. subsidiaries, whereas other material inputs are obtained on a
local basis. Our operations also depend upon a continuing adequate supply of
electricity, natural gas and water. These energy sources have historically been
available on a continuous basis and in adequate quantities for our needs. An
interruption in the supply of raw materials or energy inputs for any reason
would have an adverse effect on our manufacturing operations.

                                       9
<PAGE>

     Our manufacturing facilities incorporate sophisticated computer integrated
manufacturing systems, which depend upon a mix of our proprietary software and
systems and software purchased from third parties. Failure of these systems
would cause a disruption in the manufacturing process and could result in a
delay in completion and shipment of products.

Storage Systems Manufacturing

     The manufacturing of storage systems products involves the assembly and
testing of components, including our semiconductors, which are then integrated
into final products.

     Storage systems product and manufacturing designs are highly modularized
for flexibility. Our manufacturing operations include configure-to-order and
assemble-to-order capabilities. These processes have been implemented in an
effort to reduce requisite lead times for the delivery of product.

     - US Manufacturing. Our US manufacturing facility in Wichita, Kansas,
assembles and tests high performance array controllers, rack-mount modules and
complete storage systems.

     ISO-9001 certification at our Kansas manufacturing facility has been
maintained since April 1992. This facility has been certified ISO-9001:2000
compliant as of October 2001. Product quality is achieved through employee
training, automated testing and sample auditing. Supply line management extends
quality through the component and sub-assembly supplier base with continuous
reporting and supplier/product qualification programs.

     - European Manufacturing. We maintain a manufacturing facility in Cork,
Ireland through an agreement with Flextronics International Ltd. This facility
is capable of assembly and testing of high performance array controllers,
rack-mount modules and complete storage systems.

     The Irish site was established to provide flexibility in satisfying
European demand and to serve as a backup site in the event natural or
human-made disasters affect the manufacturing capacity of the Wichita, Kansas
facility. The Irish site is certified as ISO 9001:2000 compliant as of December
2001.

     Our storage systems manufacturing operations are based primarily on an
integrated enterprise resource planning ("ERP") manufacturing application
system purchased from a third party. This ERP system is augmented with several
of our proprietary software tools that support the production process through
automated product configuration and automated electronic testing. Failure of
these systems would cause a disruption in the manufacturing process and could
result in delays of product shipments and/or customer billings.

     Our manufacturing facility in Wichita, Kansas depends upon a continuous
supply of electricity from a single utility provider. Any natural or man made
disruptions could materially affect our operating results and financial
condition.

Backlog

Semiconductor Backlog

     In the Semiconductor segment, we generally do not have long-term volume
purchase contracts with our customers. Instead, customers place purchase orders
that are subject to acceptance by us. The timing of the design activities for
which we receive payment and the placement of orders included in our backlog at
any particular time is generally within the control of the customer. For
example, there could be a significant time lag between the commencement of
design work and the delivery of a purchase order for the units of a developed
product. Also, customers may from time to time revise delivery quantities or
delivery schedules to reflect their changing needs. For these reasons, our
backlog as of any particular date may not be a meaningful indicator of future
sales.

Storage Systems Backlog

     In the Storage Systems segment, our large customers, who are OEMs, place
orders that are subject to acceptance by us in accordance with their
requirements and our delivery lead time capabilities. In our reseller channel,
we typically receive requests for product to be delivered within two weeks or
less. Accordingly, our backlog as of any particular date may not be a
meaningful indicator of future sales.

                                       10
<PAGE>

Competition

Semiconductor Competitors

     The semiconductor industry is intensely competitive and characterized by
constant technological change, rapid product obsolescence, evolving industry
standards and price erosion. Many of our competitors are larger, diversified
companies with substantially greater financial resources. Some of these are
also customers who have internal semiconductor design and manufacturing
capacity. We also compete with smaller and emerging companies whose strategy is
to sell products into specialized markets or to provide a portion of the
products and services that we offer.

     Our major competitors include large companies such as Agere Systems, Inc.,
IBM Corporation, Philips Electronics, N.V., STMicroelectronics, Texas
Instruments, Inc. and Toshiba Corporation. Other competitors in strategic
markets include Adaptec, Inc., Agilent Technologies, Inc., Broadcom
Corporation, Mediatek Corp. and NEC Corporation.

     The principal competitive factors in the industry include:

     - design capabilities;

     - differentiating product features;

     - product performance characteristics;

     - time to market;

     - price;

     - manufacturing processes; and

     - utilization of emerging industry standards.

     We believe that we presently compete favorably with respect to these
factors. It is possible, however, that our competitors will develop other
design solutions that could have a material adverse impact on our competitive
position. Our competitors may also decide from time to time to aggressively
lower prices of products that compete with us in order to sell related products
or achieve strategic goals. Due to their customized nature, ASICs are not as
susceptible to price fluctuations as standard products. However, strategic
pricing by competitors can place strong pricing pressure on our products in
certain transactions, resulting in lower selling prices and lower gross profit
margins for those transactions.

     The markets into which we sell our semiconductor products are subject to
severe price competition. We expect to continue to experience declines in the
selling prices of our semiconductor products over the life cycle of each
product. In order to offset or partially offset declines in the selling prices
of our products, we continue to reduce the costs of products through product
design changes, manufacturing process changes, yield improvements or
procurement of wafers from outsourced manufacturing partners. We do not believe
that we can continually achieve cost reductions that fully offset the price
declines of our products. Therefore, gross profit margin percentages will
generally decline for existing products over their life cycles.

     We are increasingly emphasizing our CoreWare design methodology and
system-on-a-chip capability. Competitive factors that are important to the
success of this strategy include:

     - selection, quantity and quality of our CoreWare library elements;

     - our ability to offer our customers system-level expertise; and

     - quality of software to support system-level integration.

     Although there are other companies that offer similar types of products
and related services, we believe that we currently compete favorably with those
companies. However, competition in this area is increasing, and there is no
assurance that our CoreWare methodology approach and product offerings will
continue to receive market acceptance. Customers in our targeted markets
frequently require system-level solutions. Our ability to deliver complete
solutions may also require that we succeed in obtaining licenses to necessary
software and integrating this software with our semiconductors.

                                       11
<PAGE>

Storage Systems Competitors

     The storage systems market is characterized by many of the same pressures
found in the semiconductor industry. We believe that important competitive
factors in the storage systems market include the following:

     - product performance and price;

     - support for new industry and customer standards;

     - scalability;

     - interoperability with other network devices;

     - features and functionality;

     - availability;

     - reliability, technical service and support;

     - quality of system integration;

     - existence and accessibility of differentiating features; and

     - quality and availability of supporting software.

     Our failure to compete successfully with respect to any of these or other
factors could have a material adverse effect on our results of operations and
financial condition. Our storage systems products compete primarily with
products from independent storage providers such as EMC Corporation and Hitachi
Data Systems Corporation, as well as offerings from major server vendors, such
as Hewlett Packard Company, IBM Corporation and Sun Microsystems, Inc. In
addition, many of our current and potential customers in this market have
internal storage divisions that produce products that compete directly or
indirectly with our storage systems products. There is no assurance that these
customers, which include IBM Corporation, NCR Corporation, Silicon Graphics,
Inc., Storage Technology Corporation and Sun Microsystems, Inc., will continue
to purchase our storage systems products.

Patents, Trademarks and Licenses
     We maintain a patent program, and believe that our patents and other
intellectual property rights have value to our business. We have filed a number
of patent applications and currently hold more than 2,200 issued U.S. patents
and additional issued foreign patents, expiring from 2004 to 2022, relating to
certain of our products and technologies in both the Semiconductor and the
Storage Systems segments. In both segments, we also maintain trademarks for
certain of our products and services and claim copyright protection for certain
proprietary software and documentation. Patents, trademarks and other forms of
protection for our intellectual property are important, but we believe our
future success principally depends upon the technical competence and creative
skills of our employees.

     In the Semiconductor segment, we also protect our trade secrets and other
proprietary information through agreements with our customers, suppliers,
employees and consultants, and through other security measures. We have entered
into certain cross-license agreements that generally provide for the
non-exclusive licensing of rights to design, manufacture and sell products and,
in some cases, for cross-licensing of future improvements developed by either
party.

     We continue to expand our portfolio of patents and trademarks. We offer a
staged incentive to engineers to identify, document and submit invention
disclosures. We have developed an internal review procedure to maintain a high
level of disclosure quality and to establish priorities and plans for filings
both in the United States and abroad. The review process is based solely on
engineering and management judgment, with no assurance that a specific filing
will issue, or if issued, will deliver any lasting value to us. There is no
assurance that the rights granted under any patent will provide competitive
advantages to us or will be adequate to safeguard and maintain our proprietary
rights. Moreover, the laws of certain countries in which our products are or
may be manufactured or sold may not protect our products and intellectual
property rights to the same extent as the U.S. legal system.

     As is typical in the high technology industry, from time to time, we have
received communications from other parties asserting that certain of our
products, processes, technologies or information infringe upon their patent
rights, copyrights, trademark rights or other intellectual property rights. We
regularly evaluate such assertions. In light of industry practice,

                                       12
<PAGE>

we believe, with respect to existing or future claims, that any licenses or
other rights that may be necessary can generally be obtained on commercially
reasonable terms. Nevertheless, there is no assurance that licenses will be
obtained on acceptable terms or that a claim will not result in litigation or
other administrative proceedings.

     In the Storage Systems segment, we own a portfolio of patents and patent
applications concerning a variety of storage technologies. We also maintain
trademarks for certain of our products and services and claim copyright
protection for certain proprietary software and documentation. Similar to the
Semiconductor segment, we protect our trade secrets and other proprietary
information through agreements and other security measures, and have
implemented internal procedures to identify patentable inventions and pursue
protection in selected jurisdictions.

     Please see Item 3, Legal Proceedings for information regarding pending
patent litigation against LSI. Please also refer to the additional risk factors
set forth in the Risk Factors section and Note 13 of the Notes to the
Consolidated Financial Statements for additional information.

Research and Development
     Our industry is characterized by rapid changes in products, design tools
and process technologies. We must continue to improve our existing products,
design-tool environment and process technologies, and to develop new ones in a
cost-effective manner to meet changing customer requirements and emerging
industry standards. If we are not able to successfully introduce new products,
design tools and process technologies or to achieve volume production of
products at acceptable yields using new manufacturing processes, there could be
a material adverse impact on our operating results and financial condition.

     We operate the majority of our research and development facilities in
California, Colorado, Georgia, Kansas, Maryland, Minnesota, Oregon, Texas,
Canada, Germany and the United Kingdom. The following table shows our
expenditures on research and development activities for each of the last three
fiscal years (in thousands).

<TABLE>
<CAPTION>
Year                                              Amount      Percent of Revenue
----                                              ------      ------------------
<S>                                               <C>                 <C>
   2002 .............................             $457,351            25%
   2001 .............................             $503,108            28%
   2000 .............................             $378,936            14%
</TABLE>

     Research and development expenses primarily consist of salaries and
related costs of employees engaged in ongoing research, design and development
activities and subcontracting costs.

Working Capital
     Information regarding our working capital practices is incorporated herein
by reference from Item 7 of Part II hereof under the heading "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Financial Condition, Capital Resources and Liquidity."

Financial Information about Geographic Areas
     This information is included in Note 12 ("Segment and Geographic
Information Reporting") of the Notes to the Consolidated Financial Statements,
which information is incorporated herein by reference from Item 8 of Part II.

     For a discussion of various risks attendant to foreign operations, see (1)
"Risk Factors" in this Item 1, in particular "We are exposed to fluctuations in
foreign currency exchange rates," "We procure parts and raw materials from
limited domestic and foreign sources," and "Our global operations expose the
Company to numerous international business risks," and (2) the section in Item
7A of Part II entitled "Foreign Currency Exchange Risk." This information is
incorporated herein by reference.

Environmental Regulation
     Federal, state and local regulations, in addition to those of other
nations, impose various environmental controls on the use and discharge of
certain chemicals and gases used in semiconductor and storage product
processing. Our facilities have been designed to comply with these regulations
through the implementation of environmental management systems. We believe that
our activities conform to current environmental regulations. However,
increasing public attention has been focused on the environmental impact of
electronics and semiconductor

                                       13
<PAGE>

manufacturing operations. While to date, we have not experienced any material
adverse impact on our business from environmental regulations, we cannot
provide assurance that such regulations will not be amended so as to impose
expensive obligations on us in the future. In addition, violations of
environmental regulations or impermissible discharges of hazardous substances
could result in the necessity for the following actions:

     -    additional capital improvements to comply with such regulations or to
          restrict discharges;

     -    liability to our employees and/or third parties; and/or

     -    business interruptions as a consequence of permit suspensions or
          revocations or as a consequence of the granting of injunctions
          requested by governmental agencies or private parties.

Employees
     As of December 31, 2002, we had 5,281 full-time employees.

     In January 2002, we announced a series of restructuring actions to tailor
the Company to our lower level of revenues. These actions included reducing the
worldwide workforce by approximately 1,150 positions or 16 percent of the
Company's workforce.

     In February 2003, in an effort to further streamline operations and better
align operating expenses with projected revenues, the Company terminated
approximately 210 employees primarily involved in manufacturing operations,
research and development, marketing, and sales.

     Our future success depends upon the continued service of our key technical
and management personnel and on our ability to continue to attract and retain
qualified employees, particularly those highly skilled design, process and test
engineers involved in the manufacture of existing products and the development
of new products and processes. We currently have favorable employee relations,
but the competition for such personnel is intense, and the loss of key
employees or the inability to hire such employees when needed could have a
material adverse impact on our business and financial condition.

Seasonality
     The Company's business is largely focused on the information technology
and consumer products markets. Due to seasonality in these markets, the Company
typically expects to see stronger growth in the last two quarters of the year.

                                 RISK FACTORS

     Keep these risk factors in mind when you read "forward-looking" statements
elsewhere in this Form 10-K and in the documents incorporated herein by
reference. These are statements that relate to our expectations for future
events and time periods. Generally, the words, "anticipate," "expect," "intend"
and similar expressions identify forward-looking statements. Forward-looking
statements involve risks and uncertainties, and actual results could differ
materially from those anticipated in the forward-looking statements.

     A continued general economic weakness may further reduce our revenues. The
semiconductor industry is cyclical in nature and is characterized by wide
fluctuations in product supply and demand. Since 2001, the Company's financial
condition and results of operations have been significantly adversely affected
by the continuing weakness in the US economy. In addition, the Company's
results of operations are becoming increasingly dependent on the global
economy. Any geopolitical factors such as additional terrorist activities or
armed conflict, may adversely affect the global economy, which may affect the
recovery of the Company in 2003 and adversely impact its operating results and
financial condition. In addition, goodwill and other long-lived assets could be
impacted by a further decline in revenues because an impairment is measured
based upon estimates of future cash flows. These estimates include assumptions
about future conditions within our company and industry. See "Critical
Accounting Policies" in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in Part II, Item 7.

     Our product and process development activities occur in a highly
competitive environment characterized by rapid technological change. The
Semiconductor and Storage Systems segments in which we conduct business

                                       14
<PAGE>

are characterized by rapid technological change, short product cycles and
evolving industry standards. We believe our future success depends, in part, on
our ability to improve on existing technologies and to develop and implement
new ones in order to continue to reduce semiconductor chip size and improve
product performance and manufacturing yields. We must also be able to adopt and
implement emerging industry standards and to adapt products and processes to
technological changes. If we are not able to implement new process technologies
successfully or to achieve volume production of new products at acceptable
yields, our operating results and financial condition may be adversely
impacted.

     In addition, we must continue to develop and introduce new products that
compete effectively on the basis of price and performance and that satisfy
customer requirements. We continue to emphasize engineering development and
acquisition of CoreWare building blocks and integration of our CoreWare
libraries into our design capabilities. Our cores and standard products are
intended to be based upon industry standard functions, interfaces and protocols
so that they are useful in a wide variety of systems applications. Development
of new products and cores often requires long-term forecasting of market
trends, development and implementation of new or changing technologies and a
substantial capital commitment. We cannot provide assurance that the cores or
standard products that we select for investment of our financial and
engineering resources will be developed or acquired in a timely manner or will
enjoy market acceptance.

     We operate highly complex and costly manufacturing facilities. The
manufacture and introduction of our products is a complicated process. We
confront challenges in the manufacturing process that require us to:

     -    maintain a competitive manufacturing cost structure;

     -    implement the latest process technologies required to manufacture new
          products;

     -    exercise stringent quality control measures to ensure high yields;

     -    effectively manage the subcontractors engaged in the wafer
          fabrication, test and assembly of products; and

     -    update equipment and facilities as required for leading edge
          production capabilities.

     We do not control the timing or size of orders for our products. We
generally do not have long-term volume production contracts with our customers.
There is a risk that we will be unable to meet sudden increases in demand
beyond our current manufacturing capacity, which may result in additional
capital expenditures and production costs. On the other hand, order volumes
below anticipated levels may result in the under-utilization of our
manufacturing facilities, resulting in higher per unit costs, which could
adversely affect our operating results and financial condition.

     Our manufacturing facilities are subject to disruption. Our wafer
fabrication site located in Gresham, Oregon is a highly complex,
state-of-the-art facility. Anticipated production rates depend upon the
reliable operation and effective integration of a variety of hardware and
software components. There is no assurance that all of these components will be
fully functional or successfully integrated on time or that the facility will
achieve the forecasted yield targets. The capital expenditures required to
bring the facility to full operating capacity may be greater than we anticipate
and result in lower margins.

     Operations at any of our primary manufacturing facilities, or at any of
our wafer fabrication, test and assembly subcontractors, may be disrupted for
reasons beyond our control, including work stoppages, fire, earthquake, floods
or other natural disasters. California has experienced power shortages and any
future shortages could subject us to electrical "blackouts" or other
unscheduled interruptions of electrical power.

     We outsource a substantial portion of wafers manufactured. The Company has
developed outsourcing arrangements for the manufacture of some of its products
based on process technology that is unique to the supplier. There is no
assurance that the third party manufacturer will be able to produce and deliver
wafers that meet the Company's specifications or that it will be able to
provide successfully the process technology it has committed. If the third
party is not able to deliver products and process technology on a timely and
reliable basis, the Company's results of operations could be adversely
affected. During periods of third party manufacturing capacity shortages, wafer
prices increase and may affect product margins.

     We have significant capital requirements to maintain and grow our
business. We continue to make significant investments in our facilities and
capital equipment. We also seek to obtain access to advanced

                                       15
<PAGE>

manufacturing capacities through strategic supplier alliances with wafer
foundries. In general, we seek to optimally allocate the manufacture of our
products between our facilities and those of our foundry suppliers.
Nonetheless, a high level of capital expenditures in our facilities results in
relatively high fixed costs. If demand for our products does not absorb the
available capacity, the fixed costs and operating expenses related to our
production capacity could have a material adverse impact on our operating
results and financial condition.

     We finance our capital expenditure needs from operating cash flows, bank
financing and capital market financing. As of December 31, 2002, we had
convertible notes outstanding of approximately $1.2 billion. As of December 31,
2002, we have two operating leases financed by several commercial banks. We may
need to seek additional equity or debt financing from time to time and cannot
be certain that additional financing will be available on favorable terms.
Moreover, any future equity or equity linked financing may dilute the equity
ownership of existing stockholders.

     We are exposed to fluctuations in foreign currency exchange rates. We have
international subsidiaries and distributors that operate and sell our products
globally. Further, we purchase a portion of our raw materials and manufacturing
equipment from foreign suppliers, and incur labor and other operating costs in
foreign currencies, particularly in our Japanese manufacturing facilities. As a
result, we are exposed to the risk of changes in foreign currency exchange
rates or declining economic conditions in these countries.

     We procure parts and raw materials from limited domestic and foreign
sources. We do not maintain an extensive inventory of parts and materials for
manufacturing. We purchase a portion of our requirements for parts and raw
materials from a limited number of sources and some from a single supplier. On
occasion, we have experienced difficulty in securing an adequate volume and
quality of parts and materials. There is no assurance that, if we have
difficulty in obtaining parts or materials in the future, alternative suppliers
will be available, or that these suppliers will provide parts and materials in
a timely manner or on favorable terms. As a result, we may be adversely
affected by delays in new and current product shipments. If we cannot obtain
adequate materials for manufacture of our products, there could be a material
adverse impact on our operating results and financial condition.

     We operate in highly competitive markets. We compete in markets that are
intensely competitive and that exhibit both rapid technological change and
continual price erosion. Our competitors include many large domestic and
foreign companies that have substantially greater financial, technical and
management resources than we do. Several major diversified electronics
companies offer ASIC products and/or other standard products that are
competitive with our product lines. Other competitors are specialized, rapidly
growing companies that sell products into the same markets that we target. Some
of our large customers may develop internal design and production capabilities
to manufacture their own products, thereby displacing our products. There is no
assurance that the price and performance of our products will be superior
relative to the products of our competitors. As a result, we may experience a
loss of competitive position that could result in lower prices, fewer customer
orders, reduced revenues, reduced gross profit margins and loss of market
share. To remain competitive, we continually evaluate our worldwide operations,
looking for additional cost savings and technological improvements.

     Our future competitive performance depends on a number of factors,
including our ability to:

     -    properly identify target markets;

     -    accurately identify emerging technological trends and demand for
          product features and performance characteristics;

     -    develop and maintain competitive products;

     -    enhance our products by adding innovative features that differentiate
          our products from those of our competitors;

     -    bring products to market on a timely basis at competitive prices;

     -    respond effectively to new technological changes or new product
          announcements by others;

     -    adapt products and processes to technological changes; and

     -    adopt and/or set emerging industry standards.

                                       16
<PAGE>

     We may not meet our design, development and introduction schedules for new
products or enhancements to our existing and future products. In addition, our
products may not achieve market acceptance or sell at favorable prices.

     We are dependent on a limited number of customers. We are increasingly
dependent on a limited number of customers for a substantial portion of
revenues as a result of our strategy to focus our marketing and selling efforts
on select, large-volume customers. Sony represented 18% of our total
consolidated revenues for the year ended December 31, 2002. In the
Semiconductor segment, one customer represented 22% of total Semiconductor
revenues for the year ended December 31, 2002. In the Storage Systems segment,
there were three customers with revenues representing 36%, 15% and 13% of total
Storage Systems revenues, respectively, for the year ended December 31, 2002.

     Our operating results and financial condition could be significantly
affected if:

     -    we do not win new product designs from major customers;

     -    major customers reduce or cancel their existing business with us;

     -    major customers make significant changes in scheduled deliveries; or

     -    there are declines in the prices of products that we sell to these
          customers.

     We utilize indirect channels of distribution over which we have limited
control. We derive a material percentage of product revenues from independent
reseller and distributor channels. Our financial results could be adversely
affected if our relationship with these resellers or distributors were to
deteriorate or if the financial condition of these resellers or distributors
were to decline. Given the current economic environment, the risk of
distributors going out of business is significantly increased. In addition, as
our business grows, we may have an increased reliance on indirect channels of
distribution. There can be no assurance that we will be successful in
maintaining or expanding these indirect channels of distribution. This could
result in the loss of certain sales opportunities. Furthermore, the partial
reliance on indirect channels of distribution may reduce our visibility with
respect to future business, thereby making it more difficult to accurately
forecast orders.

     Our operations are affected by cyclical fluctuations. The Semiconductor
and Storage Systems segments in which we compete are subject to cyclical
fluctuations in demand. In 2002, we experienced declines in sales and/or the
prices of our products as a result of the following:

     -    rapid technological change, product obsolescence and price erosion in
          our products;

     -    maturing product cycles in our products or products sold by our
          customers;

     -    increases in worldwide manufacturing capacity for semiconductors,
          resulting in declining prices;

     -    reduced product demand;

     -    excess inventory within the supply chain; and

     -    continued weakness of the United States and worldwide economy, causing
          declines in our product markets or the markets of our suppliers and
          customers.

     The semiconductor industry has in the past experienced periods of rapid
expansion of production capacity. Even when the demand for our products remains
constant, the availability of additional excess production capacity in the
industry creates competitive pressure that can degrade pricing levels, which
can reduce revenues. Furthermore, customers who benefit from shorter lead times
may defer some purchases to future periods, which could affect our demand and
revenues in the short term. As a result, we may experience downturns or
fluctuations in demand in the future and experience adverse effects on our
operating results and financial condition.

     We engage in acquisitions and alliances giving rise to economic and
technological risks. We intend to continue to make investments in companies,
products and technologies, either through acquisitions or strategic alliances.
Acquisitions and investment activities often involve risks, including the need
to:

     -    acquire timely access to needed capital for investments related to
          acquisitions and alliances;

     -    conduct acquisitions that are timely, relative to existing business
          opportunities;

     -    successfully prevail over competing bidders for target acquisitions at
          an acceptable price;

                                       17
<PAGE>

     -    invest in companies and technologies that contribute to the growth of
          our business;

     -    retain the key employees of the acquired operation;

     -    incorporate acquired operations into our business and maintain uniform
          standards, controls and procedures; and

     -    develop the capabilities necessary to exploit newly acquired
          technologies.

     Mergers and acquisitions of high-technology companies bear inherent risks.
No assurance can be given that our previous or future acquisitions will be
successful and will not materially adversely affect our business, operating
results or financial condition. We must manage any growth effectively. Failure
to manage growth effectively and to integrate acquisitions could adversely
affect our operating results and financial condition.

     There is uncertainty associated with our research and development
investments. Our research and development activities are intended to maintain
and enhance our competitive position by utilizing the latest advances in the
design and manufacture of semiconductors and storage systems. Technical
innovations are inherently complex and require long development cycles and the
commitment of extensive engineering resources. We must incur substantial
research and development costs to confirm the technical feasibility and
commercial viability of a product that in the end may not be successful. If we
are not able to successfully and timely complete our research and development
programs, we may face competitive disadvantages. There is no assurance that we
will recover the development costs associated with such programs or that we
will be able to secure the financial resources necessary to fund future
research and development efforts.

     The price of our securities may be subject to wide fluctuations. Our stock
has experienced substantial price volatility, particularly as a result of
quarterly variations in results, the published expectations of analysts and
announcements by our competitors and us. In addition, the stock market has
experienced price and volume fluctuations that have affected the market price
of many technology companies and that have often been unrelated to the
operating performance of such companies. The price of our securities may also
be affected by general global, economic and market conditions. While we cannot
predict the individual effect that these and other factors may have on the
price of our securities, these factors, either individually or in the
aggregate, could result in significant variations in price during any given
period of time. These fluctuations in our stock price also impact the price of
our outstanding convertible securities and the likelihood of the convertible
securities being converted into cash or equity. If our stock price is below the
conversion price of our convertible bonds on the date of maturity, they may not
convert into equity and we may be required to redeem the convertible securities
for cash. However, in the event they do not convert to equity, we believe that
our current cash position and expected future operating cash flows will be
adequate to meet these obligations as they mature.

     We may rely on capital and bank markets to provide liquidity. In order to
finance strategic acquisitions, capital assets needed in our manufacturing
facilities and other general corporate needs, we may rely on capital and bank
markets to provide liquidity. Historically, we have been able to access capital
and bank markets, but this does not necessarily guarantee that we will be able
to access these markets in the future or at terms that are acceptable to us.
The availability of capital in these markets is affected by several factors,
including geopolitical risk, the interest rate environment and the condition of
the economy as a whole. In addition, our own operating performance, capital
structure and expected future performance impacts our ability to raise capital.
We believe that our current cash, cash equivalents, short-term investments and
future cash provided by operations will be sufficient to fund our needs in the
foreseeable future. This includes repaying our existing convertible debt when
due. However, if our operating performance falls below expectations, we may
need additional funds.

     We design and develop highly complex cell-based ASICs. As technology
advances to 0.13 micron and smaller geometries, there are increases in the
complexity, time and expense associated with the design, development and
manufacture of ASICs. These increases create opportunities into different
offerings, which include products such as RapidChip. This new offering
addresses a growing market need for cost-effective and fast time-to-market
solutions. However, this product is a new offering and has not generated any
revenues to date. Therefore, the Company cannot guarantee that such alternative
offerings will result in market acceptance.

     Our global operations expose the Company to numerous international
business risks. We have substantial business activities in Asia and Europe.
Both manufacturing and sales of our products may be adversely impacted

                                       18
<PAGE>

by changes in political and economic conditions abroad. A change in the current
tax laws, tariff structures, export laws, regulatory requirements or trade
policies in either the United States or foreign countries could adversely
impact our ability to manufacture or sell our products in foreign markets.
Moreover, a significant decrease in sales by our customers to end users in
either Asia or Europe could result in a decline in orders.

     We subcontract wafer manufacturing, test and assembly functions to
independent companies located in Asia. A reduction in the number or capacity of
qualified subcontractors or a substantial increase in pricing could cause
longer lead times, delays in the delivery of products to customers or increased
costs.

     The high technology industry in which we operate is prone to intellectual
property litigation. Our success is dependent in part on our technology and
other proprietary rights, and we believe that there is value in the protection
afforded by our patents, patent applications and trademarks. However, the
industry is characterized by rapidly changing technology and our future success
depends primarily on the technical competence and creative skills of our
personnel. In addition, the Company has a program whereby it actively protects
its intellectual property by acquiring patent and other intellectual property
rights.

     As is typical in the high technology industry, from time to time we have
received communications from other parties asserting that certain of our
products, processes, technologies or information infringe upon their patent
rights, copyrights, trademark rights or other intellectual property rights. We
regularly evaluate such assertions. In light of industry practice, we believe,
with respect to existing or future claims, that any licenses or other rights
that may be necessary can generally be obtained on commercially reasonable
terms. Nevertheless, there is no assurance that licenses will be obtained on
acceptable terms or that a claim will not result in litigation or other
administrative proceedings. Resolution of whether the Company's product or
intellectual property has infringed on valid rights held by others could have a
material adverse effect on the Company's financial position or results of
operations and may require material changes in production processes and
products.

     See "Legal Matters" in Note 13 ("Commitments and Contingencies") of Notes
to the Consolidated Financial Statements.

     We must attract and retain key employees in a highly competitive
environment. Our employees are vital to our success and our key management,
engineering and other employees are difficult to replace. We do not generally
have employment contracts with our key employees. We do, however, maintain key
person life insurance for one of our employees. The expansion of high
technology companies in Silicon Valley, Colorado, Kansas, Oregon and elsewhere
where we operate our business has increased demand and competition for
qualified personnel and, despite the economic slowdown, competition for these
personnel is intense. Our continued growth and future operating results will
depend upon our ability to attract, hire and retain significant numbers of
qualified employees.

     See also the Critical Accounting Policies contained in Part II, Item 7 of
the "Management's Discussion and Analysis of Financial Condition and Results of
Operations."

Item 2. Properties
     The Company's 642,425 square foot Milpitas, California facilities are
leased and contain the Company's corporate executive headquarters (for both the
Semiconductor segment and the Storage Systems segment), administration and
engineering offices. The Company maintains 229,100 square feet of leased
facilities in Fremont, California, housing engineering offices, logistics and
warehouses and 95,760 square feet of leased facilities in San Jose, California
housing engineering offices (of which the Company subleases 39,624 square
feet).

     The Company owns the land and buildings housing its manufacturing
facilities for the Semiconductor segment in Gresham, Oregon, Tsukuba, Japan,
Fort Collins, Colorado, and owns the logistics center in Tsuen Wan, Hong Kong.
The Company closed the Colorado Springs semiconductor manufacturing facility in
October 2001 and is in the process of disposing of its assets.

     The Company's U.S. semiconductor manufacturing operations are consolidated
in a 492,000 square foot facility at Gresham, Oregon. The Santa Clara
manufacturing facility, which closed in 2001, is being decommissioned in
preparation for the expiration of the lease to that facility in June 2003.

     In the Storage Systems segment, the Company owns the manufacturing and
executive offices site in Wichita, Kansas, which includes 330,000 square feet
of space. The Company also leases 15,000 square feet of additional office
facilities at this location.

                                       19
<PAGE>

     In addition, the Company maintains leased sales and engineering offices,
regional office space for its field sales, marketing and design center offices
for both its Semiconductor segment and its Storage Systems segment at various
locations in North America, Europe, Japan and elsewhere in Asia. The Company
also maintains leased executive offices, design centers and sales offices in
Bracknell, United Kingdom and Tokyo, Japan. Leased facilities described above
are subject to operating leases that expire in 2003 through 2011. (See Note 13
of the Notes to the Consolidated Financial Statements.)

     Currently, we utilize 60% to 85% of our facilities' capacities. We have
plans to acquire additional equipment for some of the above facilities, but we
believe that our existing facilities and equipment are well maintained, in good
operating condition, suitable for our operations and are adequate to meet our
current requirements.

Item 3. Legal Proceedings
     This information is included in Note 13 ("Commitments and Contingencies")
of Notes to the Consolidated Financial Statements, which information is
incorporated herein by reference from Item 8 of Part II hereof.

Item 4. Submission of Matters to a Vote of Security Holders
     Not applicable.

Executive officers of the Company
     The executive officers of the Company, who are elected by and serve at the
discretion of the Board of Directors, are as follows.

<TABLE>
<CAPTION>
Name                                   Age                           Position
----                                   ---                           --------
<S>                                   <C>     <C>
   Wilfred J. Corrigan ............   65      Chairman and Chief Executive Officer
   John D'Errico ..................   59      Executive Vice President, Storage Components
   Thomas Georgens ................   43      Executive Vice President, Storage Systems
   Jon R. Gibson ..................   56      Vice President, Human Resources
   Christopher L. Hamlin ..........   60      Senior Vice President, Chief Technology Officer
   Bryon Look .....................   49      Executive Vice President and Chief Financial Officer
   W. Richard Marz ................   59      Executive Vice President, Communications & ASIC
                                              Technology
   David G. Pursel ................   57      Vice President, General Counsel and Corporate
                                              Secretary
   Giuseppe Staffaroni ............   51      Executive Vice President, Consumer Products
   Frank A. Tornaghi ..............   48      Executive Vice President, Worldwide Sales
   Joseph M. Zelayeta .............   56      Executive Vice President, Worldwide Operations
</TABLE>

     Mr. Corrigan has been associated with the Company in his present position
for more than the past five years. Mr. Corrigan is also a member of the Board
of Directors of FEI Company, a semiconductor equipment and solutions provider.

     John D'Errico was named Executive Vice President, Storage Components in
August 2000. Mr. D'Errico joined us in 1984 and has held various senior
management and executive positions at our manufacturing facilities in the U.S.
and Japan. Mr. D'Errico served as Vice President and General Manager, Pan-Asia
from April 1997 to August 1998. From August 1998 to August 2000, he was Vice
President, Colorado Operations.

     Thomas Georgens serves as Executive Vice President, Storage Systems
(formerly called Storage Area Network Systems). He was named to this position
in November 2000. In August 1998, upon the acquisition of Symbios, Inc., a
storage company, he was named Senior Vice President and General Manager,
Storage Systems. Mr. Georgens joined Symbios in 1996, where he served as Vice
President and General Manager of Storage Systems until its acquisition by LSI
Logic.

     Jon Gibson was named Vice President, Human Resources in November 2001. He
joined LSI in September 1984 as Employee Relations Manager. Mr. Gibson was
named Director of Human Resources in October 1987. From March 1999 until
November 2001, Mr. Gibson served as Senior Director of Human Resources.

                                       20
<PAGE>

     Dr. Christopher Hamlin joined the Company in May 2000, as Senior Vice
President and Chief Technology Officer. From December 1998 until he joined LSI
Logic, Dr. Hamlin was Chief Technology Officer and Vice President of New
Technologies for Western Digital Corporation, a storage company. He served as
Chief Technology Officer of Ridge Technologies, a storage company, from
September 1997 until that company was acquired by Adaptec Inc., a storage
company, in May 1998.

     Bryon Look was named Executive Vice President and Chief Financial Officer
in November 2000. Mr. Look joined us in March 1997 as Vice President, Corporate
Development and Strategic Planning.

     W. Richard Marz was named Executive Vice President, Communications and
ASIC Technology in January 2002. He joined the Company in September 1995 as
Senior Vice President, North American Marketing and Sales, and was named
Executive Vice President, Geographic Markets in May 1996, a position he held
until July 2001. He served as Executive Vice President, ASIC Technology from
July 2001 to January 2002. Mr. Marz is a member of the board of directors of
Perceptron, Inc., a measurement and control systems company, where he also
serves on the nominating and compensation committees.

     David G. Pursel was named Vice President, General Counsel and Corporate
Secretary in June 2000. He joined LSI Logic in February 1996 as Associate
General Counsel, Chief Intellectual Property Counsel and Assistant Secretary.

     Giuseppe Staffaroni was named Executive Vice President, Consumer Products
in January 2002. Prior to that, he was named Executive Vice President,
Broadband Communications Group, in November 2000, having served as Vice
President and General Manager of the Broadband Communications Group since
November 1999. Mr. Staffaroni joined LSI Logic in 1990 as Director of
Engineering in the Company's Milan, Italy, design center. From January 1996 to
October 1997, he was a Director of the Wireless business unit, and from
November 1997 to October 1999, he was Vice President and General Manager of the
Communications Products Division.

     Frank A. Tornaghi was named Executive Vice President, Worldwide Sales in
July 2001. Since joining the Company in 1984, Mr. Tornaghi has held several
management positions in sales at LSI Logic and was named a vice president in
1993. He served as Vice President, North America Sales, from May 1993 to July
2001.

     Mr. Zelayeta has been associated with the Company in his present position
for more than the past five years. Mr. Zelayeta joined LSI Logic in 1981 and
has held various management positions with the Company, including Senior Vice
President of U.S. Manufacturing and General Manager Gresham Operations, Vice
President of Research and Development and Vice President of U.S. Operations.

     There are no family relationships between any executive officers and
directors.

                                    PART II

Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
     Our stock trades on the New York Stock Exchange under the symbol "LSI."
The high and low closing sales prices for the stock for each full quarterly
period within the two most recent fiscal years as reported on the Exchange are:

<TABLE>
<CAPTION>
                                      2002                  2001
                              -------------------   -------------------
                                   High - Low            High - Low
                              -------------------   -------------------
<S>                           <C>                   <C>
   First Quarter ..........     $ 18.58 - 13.95       $ 24.99 - 15.73
   Second Quarter .........     $ 17.35 -  7.89       $ 22.76 - 13.97
   Third Quarter ..........     $  8.75 -  6.23       $ 24.81 - 10.80
   Fourth Quarter .........     $  8.54 -  4.14       $ 19.24 - 11.19
                                ---------------       ---------------
   Year ...................     $ 18.58 -  4.14       $ 24.99 - 10.80
                                ===============       ===============
</TABLE>

     At March 7, 2003, there were approximately 4,433 owners of record of our
common stock.

     We have never paid cash dividends on our common stock. It is presently our
policy to reinvest our earnings, and we do not anticipate paying any cash
dividends to stockholders in the foreseeable future.

     The table set forth in Part III, Item 12 of this Form 10-K is herby
incorporated by reference into this Part II, Item 5.

                                       21
<PAGE>

Item 6. Selected Financial Data

Five Year Consolidated Summary

<TABLE>
<CAPTION>
                                                                                    Year Ended December 31,
                                                        ----------------------------------------------------------------------------
                                                             2002            2001             2000           1999           1998
                                                        -------------- ---------------  --------------- ------------- --------------
                                                                        (In thousands, except per share amounts)
<S>                                                      <C>            <C>              <C>            <C>            <C>
Revenues ..............................................  $ 1,816,938    $  1,784,923     $ 2,737,667    $2,089,444     $ 1,516,891
                                                         -----------    ------------     -----------    ----------     -----------
Costs and expenses:
 Cost of revenues .....................................    1,122,696       1,160,432       1,557,232     1,286,844         884,598
 Additional excess inventory and related
   charges ............................................       45,526         210,564          11,100            --              --
                                                         -----------    ------------     -----------    ----------     -----------
    Total cost of revenues ............................    1,168,222       1,370,996       1,568,332     1,286,844         884,598
 Research and development .............................      457,351         503,108         378,936       297,554         291,125
 Selling, general and administrative ..................      230,202         307,310         306,962       257,712         226,258
 Acquired in-process research and
   development ........................................        2,920          96,600          77,438         4,600         145,500
 Restructuring of operations and other items,
   net ................................................       67,136         219,639           2,781        (2,063)         75,400
 Amortization of non-cash deferred stock
   compensation .......................................       77,303         104,627          41,113            --              --
 Amortization of intangibles ..........................       78,617         188,251          72,648        46,625          22,369
                                                         -----------    ------------     -----------    ----------     -----------
  Total costs and expenses ............................    2,081,751       2,790,531       2,448,210     1,891,272       1,645,250
                                                         -----------    ------------     -----------    ----------     -----------
(Loss)/ income from operations ........................     (264,813)     (1,005,608)        289,457       198,172        (128,359)
Interest expense ......................................      (51,977)        (44,578)        (41,573)      (39,988)         (8,865)
Interest income and other, net ........................       26,386          14,529          51,766        17,640          (8,952)
Gain on sale of equity securities .....................           --           5,302          80,100        48,393          16,671
                                                         -----------    ------------     -----------    ----------     -----------
(Loss)/ income before income taxes,
 minority interest and cumulative effect
 of change in accounting principle ....................     (290,404)     (1,030,355)        379,750       224,217        (129,505)
Provision/ (benefit) for income taxes .................        1,750         (39,198)        142,959        65,030           9,905
                                                         -----------    ------------     -----------    ----------     -----------
(Loss)/ income before minority interest and
 cumulative effect of change in accounting
 principle ............................................     (292,154)       (991,157)        236,791       159,187        (139,410)
Minority interest in net income of subsidiary .........          286             798             191           239              68
                                                         -----------    ------------     -----------    ----------     -----------
(Loss)/ income before cumulative effect of
 change in accounting principle .......................     (292,440)       (991,955)        236,600       158,948        (139,478)
Cumulative effect of change in accounting
 principle ............................................           --              --              --       (91,774)             --
                                                         -----------    ------------     -----------    ----------     -----------
Net (loss)/ income ....................................  $  (292,440)   $   (991,955)    $   236,600    $   67,174     $  (139,478)
                                                         ===========    ============     ===========    ==========     ===========
Basic earnings per share:
 (Loss)/ income before cumulative effect of
   change in accounting principle .....................  $     (0.79)   $      (2.84)    $      0.76    $     0.54     $     (0.49)
 Cumulative effect of change in accounting
   principle ..........................................           --              --              --        ( 0.31)             --
                                                         -----------    ------------     -----------    ----------     -----------
 Net (loss)/ income ...................................  $     (0.79)   $      (2.84)    $      0.76    $     0.23     $     (0.49)
                                                         ===========    ============     ===========    ==========     ===========
Diluted earnings per share:
 (Loss)/ income before cumulative effect of
   change in accounting principle .....................  $     (0.79)   $      (2.84)    $      0.70    $     0.51     $     (0.49)
 Cumulative effect of change in accounting
   principle ..........................................           --              --              --        ( 0.28)             --
                                                         -----------    ------------     -----------    ----------     -----------
 Net (loss)/ income ...................................  $     (0.79)   $      (2.84)    $      0.70    $     0.23     $     (0.49)
                                                         ===========    ============     ===========    ==========     ===========
Year-end status:
 Total assets .........................................  $ 4,142,737    $  4,625,772     $ 4,197,487    $3,206,605     $ 2,823,805
 Long-term obligations ................................  $ 1,438,426    $  1,630,367     $ 1,067,704    $  926,228     $   883,649
 Stockholders' equity .................................  $ 2,300,355    $  2,479,885     $ 2,498,137    $1,855,832     $ 1,524,473
</TABLE>

                                       22
<PAGE>

     The Company's fiscal years ended on December 31 for each of the years
presented above. During 2002, the Company recorded $46 million in additional
excess inventory and related charges and $67 million in charges for
restructuring of operations and other items, net. (See Notes 4 and 8 of the
Notes to the Consolidated Financial Statements.) The Company adopted SFAS No.
142 "Goodwill and Other Intangible Assets" on January 1, 2002, as a result of
which goodwill is no longer amortized. (See Note 3 of the Notes to the
Consolidated Financial Statements.) During 2001, the Company recorded $211
million in additional excess inventory and related charges, a $97 million
in-process research and development ("IPR&D") charge associated with the
acquisitions of C-Cube and AMI, which were effective on May 11, 2001 and August
31, 2001, respectively. In addition, the Company recorded charges of $220
million for restructuring of operations and other items, net. (See Notes 2, 4
and 8 of the Notes to the Consolidated Financial Statements.) During 2000, the
Company recorded a $77 million IPR&D charge associated with the acquisitions of
ParaVoice, DataPath, IntraServer and the purchases of divisions of NeoMagic and
Cacheware. The Company began recording amortization of non-cash deferred stock
compensation as a result of the adoption of FASB interpretation ("FIN") No. 44,
"Accounting for Certain Transactions Involving Stock Compensation," which was
effective for acquisitions after July 1, 2000. (See Note 2 of the Notes to the
Consolidated Financial Statements.) During 1999, the Company expensed an
unamortized preproduction balance of $92 million, net of taxes, associated with
the manufacturing facility in Gresham, Oregon and has presented it as a
cumulative effect of a change in accounting principle in accordance with SOP
No. 98-5, "Reporting on the Costs of Start-up Activities." During 1998, the
Company reported a charge for restructuring of operations and other items, net,
of $75 million and a $146 million IPR&D charge related to the acquisition of
Symbios on August 6, 1998.

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

OVERVIEW
     During 2002, our operating results continued to be impacted by the
downturn within the semiconductor industry and in the general economy. In early
2001, the most severe cyclical downturn in the semiconductor industry began,
resulting from a buildup of inventory in the supply chain and weak end-demand.
Since that time, we have started to see a gradual, but uneven recovery within
the industry and LSI. The economic outlook remains uncertain as any
geopolitical factors, such as additional terrorist activities or armed
conflict, may adversely affect the global economy, which may affect our
recovery in 2003 and adversely impact our operating results and financial
condition.

     Total consolidated revenues for the year ended December 31, 2002,
increased $32.0 million or 2% to $1.82 billion in 2002 from $1.78 billion in
2001. Revenues from the Semiconductor segment decreased by $92.2 million while
revenue from the Storage Systems segment increased by $124.2 million. The
decrease in semiconductor revenues was primarily attributable to continuing
weak economic conditions. This decline was offset in part by a full year of
revenues from C-Cube Microsystems, Inc. ("C-Cube") and from RAID products,
which became a part of the Semiconductor segment with the acquisitions of
C-Cube and the RAID division of American Megatrends, Inc. ("AMI") in May 2001
and August 2001, respectively. Revenues from our Storage Systems segment
increased due to overall increased demand for modular storage products, sales
to a new master distributor and revenues from the Mylex business unit, which
was acquired from IBM and primarily became a part of the Storage Systems
segment from August 29, 2002.

     The consolidated gross profit margin percentage increased to 36% in 2002
from 23% in 2001. This increase was mainly due to higher total revenues
accompanied by lower manufacturing variances for the Semiconductor segment,
lower compensation-related expenses due to a decrease in average headcount and
lower additional excess inventory and related charges in 2002 as compared to
2001.

     Operating expenses decreased 36% to $913.5 million in 2002 from $1.4
billion in 2001. The decrease is primarily the result of lower charges for
restructuring of operations and other items, net in 2002 compared to 2001. A
charge of $67.1 million for restructuring of operations and other items, net,
was incurred in 2002, consisting of a charge of $75.2 million as the result of
a set of actions announced by us to reduce costs and streamline operations, and
a gain of $8.1 million for other items, including a gain on sale of CDMA
handset product technology. A charge of $219.6 million was recorded in 2001.
See Note 4 of the Notes to the Consolidated Financial Statements (referred to
hereafter as "Notes"). In addition, amortization of intangibles decreased by
$109.6 million in 2002 primarily as a result of the adoption of Statement of
Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets" on January 1, 2002 (See Note 3 of the Notes), offset by additional
amortization of intangible

                                       23
<PAGE>

assets acquired during 2002. Charges for acquired in-process research and
development ("IPR&D") and amortization of non-cash deferred stock compensation
also decreased by $121.0 million in 2002. Finally, Research and Development
("R&D") expenses decreased 9% while Selling, General and Administrative
("SG&A") expenses decreased 25% during 2002 as compared to 2001 as a result of
the restructuring actions taken in 2001 and 2002. These cost reductions were
partially offset by continued R&D and SG&A expenses incurred for the former
C-Cube, AMI RAID and Mylex businesses, which are included in our consolidated
financial statements from May 11, 2001, August 31, 2001 and August 29, 2002,
respectively. (See Note 2 of the Notes.)

     Interest expense increased by $7.4 million to $52.0 million in 2002 from
$44.6 million in 2001. The increase is due to increased debt outstanding in
2002 due to the issuance of $490 million of 4% Convertible Subordinated Notes
in October 2001, offset by a reduction in the effective interest rate payable
on the Convertible Subordinated Notes as a result of the interest rate swap
transactions entered into in the second quarter of 2002, which have effectively
converted the fixed rate payments on a portion of the Convertible Subordinated
Notes to floating rates. (See Note 7 of the Notes.)

     Interest income and other, net, was $26.4 million in 2002 and was
comprised of interest income of $31.6 million and a net gain of $14.3 million
on the repurchase of a portion of the Convertible Subordinated Notes (See Note
9 of the Notes), offset in part by a net-write-down of certain equity
investments by $19.4 million due to impairment considered by our management to
be other than temporary. (See Note 6 of the Notes.)

     For the year ended December 31, 2002, we recorded a net loss of $292.4
million, or $0.79 loss per diluted share, compared to a net loss of $992.0
million, or $2.84 loss per diluted share, for the same period in 2001.

     Stock option exchange program. On August 20, 2002, we filed, with the
Securities and Exchange Commission, an offer to exchange stock options
outstanding under the 1991 Equity Incentive Plan and the 1999 Non-statutory
Stock Option Plan for new options. Under the exchange offer, eligible employees
had the opportunity to exchange eligible stock options for the promise to grant
new options in the future under the 1999 Non-statutory Stock Option Plan.
Directors and executive officers of LSI were not eligible to participate in
this program. The exchange offer expired September 18, 2002, and we accepted an
aggregate of 16,546,370 options for exchange. On March 20, 2003, we granted a
new option that covered 2 shares of our Company's common stock for every 3
shares covered by an option an employee elected to exchange. The exercise price
per share of the new options was equal to the fair market value of our
Company's common stock on the new grant date. (See Note 14 of the Notes.) The
exchange program did not result in the recording of any compensation expense in
our statement of operations.

     Significant acquisitions and other major transactions. We are continually
exploring strategic acquisitions that build upon our existing library of
intellectual property, human capital and engineering talent, and increase our
leadership position in the markets where we operate. All of our acquisitions in
2002, 2001 and 2000 were accounted for as purchases and accordingly, the
estimated fair value of assets acquired and liabilities assumed and the results
of operations were included in our Consolidated Financial Statements as of the
effective date of each acquisition through the end of the period. The
transactions are summarized below. There were no significant differences
between the accounting policies of LSI and those of the companies acquired.
(See Note 2 of the Notes.)

2002
     On August 29, 2002, we finalized an Asset Purchase Agreement with
International Business Machines Corporation ("IBM"). Under the agreement, we
acquired certain tangible and intangible assets associated with IBM's Mylex
business unit. This acquisition is expected to enhance product offerings in the
expanding entry-level storage systems space within the Storage Systems segment
and the PCI-RAID offering in the Semiconductor segment. The details of this
acquisition are summarized below.

<TABLE>
<CAPTION>
                  Acquisition   Purchase                                                  Identified     Deferred
Company               Date        Price         Consideration        IPR&D    Goodwill   Intangibles   Compensation
---------------- ------------- ---------- ------------------------ --------- ---------- ------------- -------------
                                                       (amounts in millions)
<S>              <C>             <C>      <C>                        <C>       <C>        <C>              <C>
Mylex business   August 2002     $ 50.5   Cash, including direct     $ 1.9     $ 20.3      $ 14.0          $ --
unit of IBM                               acquisition costs of
                                          $0.5 million
</TABLE>

                                       24
<PAGE>

2001

     During 2001, we acquired C-Cube Microsystems Inc. and certain tangible and
intangible assets associated with the redundant array of independent disks, or
RAID, business of American Megatrends, Inc. Both these acquisitions became a
part of our Semiconductor segment.

<TABLE>
<CAPTION>
                    Acquisition   Purchase                                                  Identified     Deferred
Company                 Date        Price        Consideration         IPR&D    Goodwill   Intangibles   Compensation
------------------ ------------- ---------- ----------------------- ---------- ---------- ------------- -------------
                                                         (amounts in millions)
<S>                <C>           <C>        <C>                     <C>        <C>           <C>           <C>
C-Cube             May 2001       $  893.7  40.2 million shares,     $  77.5    $  608.1     $  94.5       $  49.3
                                            10.6 million options,
                                            0.8 million warrants

RAID Division of   August 2001       240.5  Cash,                       19.1       128.9        77.5          16.4
AMI                                         0.8 million restricted
                                            shares
</TABLE>

     In April 2001, we announced a co-development and foundry supply agreement
with Taiwan Semiconductor Manufacturing Company Ltd. ("TSMC"). This agreement
is part of our strategy to outsource, that is to procure a larger portion of
our wafer requirements from external sources. As a result of our joint
development efforts with TSMC we anticipate purchasing, consistent with our
outsourcing strategy, such portion of our wafer volume requirements based on
the Gflx process technology that we do not manufacture ourselves. In addition,
we anticipate being able to defer the need to expand our manufacturing capacity
for the Gflx technology beyond the time when products designed for that
technology would begin volume production. We have also completed the definition
of a 90-nanometer system on a chip process platform with TSMC and its other
leading edge technology customers. This platform is designed to enable an
advanced capability for the deployment of our RapidChip products and high
volume standard cell ASICs. These advanced process technologies allow for
greater circuit density and increased functionality on a single chip. This
technology is in the final stages of development with prototype deployment
expected in 2004.

2000
     During 2000, we acquired a division of NeoMagic Corporation ("NeoMagic"),
a division of Cacheware, Inc. ("Cacheware"), Intraserver Technology, Inc.
("Intraserver"), DataPath Systems, Inc. ("DataPath"), ParaVoice Technologies,
Inc. ("ParaVoice") and Syntax Systems, Inc. ("Syntax"). Syntax and the division
of Cacheware became a part of the Storage Systems segment while all the other
acquisitions in 2000 became a part of the Semiconductor segment.

<TABLE>
<CAPTION>
                Acquisition    Purchase                                               Identified     Deferred
Company             Date         Price       Consideration       IPR&D    Goodwill   Intangibles   Compensation
------------- --------------- ---------- --------------------- --------- ---------- ------------- -------------
                                                    (amounts in millions)
<S>           <C>             <C>        <C>                   <C>         <C>        <C>            <C>
Division of   April 2000       $  15.4   Cash                   $  6.4     $  3.9      $  3.8        $    --
NeoMagic

Division of   April 2000          22.2   Cash                      8.3        9.6         4.1             --
Cacheware

Intraserver   May 2000            62.9   1.2 million shares,       1.6       53.0        15.3             --
                                         0.2 million options

DataPath      July 2000          420.8   7.5 million shares,      54.2      154.0        17.4           201.6
                                         1.6 million options

ParaVoice     October 2000        38.6   Cash                      6.9       13.6        18.0             --

Syntax        November 2000       58.8   1.4 million shares,        --       49.4        18.0             2.5
                                         0.6 million options
</TABLE>

     During 2001, the NeoMagic research project was abandoned and the remaining
intangibles and goodwill recorded in connection with the project were written
off. See the discussion under restructuring of operations and other items for
details.

                                       25
<PAGE>

     Where more than one significant factor contributed to changes in results
from year to year, we have quantified such factors throughout the Management's
Discussion & Analysis where practicable.

RESULTS OF OPERATIONS

Revenues:

<TABLE>
<CAPTION>
                                                  Year ended December 31,
                                       ---------------------------------------------
                                            2002            2001            2000
                                       -------------   -------------   -------------
                                                       (in millions)
<S>                                    <C>             <C>             <C>
   Semiconductor segment ...........    $  1,481.4      $  1,573.6      $  2,338.6
   Storage Systems segment .........         335.5           211.3           399.1
                                        ----------      ----------      ----------
   Consolidated ....................    $  1,816.9      $  1,784.9      $  2,737.7
                                        ==========      ==========      ==========
</TABLE>

     There were no significant intersegment revenues during the periods
presented.

2002 compared to 2001
     Total consolidated revenues for 2002 increased $32.0 million or 2% as
compared to 2001. Revenues for the Semiconductor segment decreased $92.2
million or 6% in 2002 as compared to the previous year. Communications revenues
dropped significantly in 2002 due to weak demand from our telecommunications
customers resulting from overcapacity in end markets. Revenues decreased
slightly in the consumer product group as revenue from set top box
semiconductors weakened substantially, primarily due to competitive factors,
and revenue from videogame semiconductors decreased slightly compared to the
prior year. The decline in the consumer group was offset in part by increased
revenues from DVD and cable modem products due to growth in those markets and
the benefit of a full year of revenue from C-Cube, which became a part of our
consolidated financial statements with its acquisition in May 2001. Revenues
for the storage components group increased year-on-year mainly because of a
full year of revenues from RAID products, which became a part of our
consolidated financial statements with the acquisition of AMI's RAID business
in August 2001.

     Revenues for the Storage Systems segment increased $124.2 million or 59%
in 2002 from 2001. The increase was due to overall increased demand for modular
storage products, sales to a new master distributor and greater demand from key
market segments such as energy and government. Revenues in 2002 also increased
due to additional revenues from the Mylex business unit, which was acquired in
August 2002 and became primarily a part of the Storage Systems segment.

     We expect revenues to decline to between $370 million and $390 million in
the first quarter of 2003, primarily due to a greater than normal seasonal
weakness in consumer products, particularly in video games. Revenue in our
communications business is also expected to decline in the first quarter, as
telecommunications' end markets remain weak and inventory levels of some
customers are adequate to meet their production requirements in the first
quarter. The first quarter is seasonally the weakest period for our consumer
business, and we expect that the first quarter of 2003 will represent the
Company's low point of revenues for the fiscal year. We expect revenue to
increase in the second quarter of 2003 as demand is expected to be up in that
quarter for our video game semiconductors, combined with moderate growth
expected for our communications and storage products in that period.

2001 compared to 2000
     Total revenues decreased 35% to $1.78 billion in 2001 from $2.74 billion
in 2000. Revenues for the Semiconductor segment decreased 33% to $1.57 billion
in 2001 from $2.34 billion in 2000. The decrease was primarily attributable to
decreased demand, most notably for semiconductor products used in broadband
access, networking infrastructure and storage infrastructure applications,
reflecting the economic downturn in the semiconductor industry. The decline in
revenues was offset partially by additional revenues from C-Cube and the RAID
division of AMI purchased in 2001. (See Note 2 of the Notes.) Revenues for the
Storage Systems segment decreased 47% to $211.3 million in 2001 from $399.1
million in 2000 due to decreased demand reflecting industry declines for all
products sold in the Storage Systems segment.

     Significant Customers. The following table summarizes the number of our
significant customers, each of whom accounted for 10% or more of our revenues,
along with the percentage of revenues they individually represent

                                       26
<PAGE>

                    on a consolidated basis and by segment:

<TABLE>
<CAPTION>
                                                                      Year ended December 31,
                                                 -----------------------------------------------------------------
                                                        2002                2001                    2000
                                                 -----------------   -----------------   -------------------------
<S>                                              <C>                 <C>                 <C>
Semiconductor segment:
 Number of significant customers .............                 1                   1       None greater than 10%
 Percentage of segment revenues ..............                22%                 21%               N/A
Storage Systems segment:
 Number of significant customers .............                 3                   3                           3
 Percentage of segment revenues ..............      36%, 15%, 13%       21%, 21%, 13%               31%, 17%, 13%
Consolidated:
 Number of significant customers .............                 1                   1                           1
 Percentage of consolidated revenues .........                18%                 18%                         12%
</TABLE>

     Revenues by geography. The following table summarizes our revenues by
geography:

<TABLE>
<CAPTION>
                                        Year ended December 31,
                              --------------------------------------------
                                  2002           2001            2000
                              ------------   ------------   --------------
                                             (in millions)
<S>                           <C>            <C>            <C>
   Revenues:
    North America .........   $    905.3     $    880.8      $   1,678.7
    Japan .................        382.1          372.8            289.2
    Pan Asia ..............        366.8          257.9            395.9
    Europe ................        162.7          273.4            373.9
                              ----------     ----------      -----------
     Total ................   $  1,816.9     $  1,784.9      $   2,737.7
                              ==========     ==========      ===========
</TABLE>

     In 2002, revenues increased in North America, Japan and Asia while they
declined in Europe as compared to 2001. Revenues were lower in Europe in 2002
as compared to 2001 mainly due to the weakness in demand for semiconductors
used in communications products in that region. Revenues in Pan Asia increased
in 2002 as compared to 2001 as a result of the acquisition of C-Cube in the
second quarter of 2001. (See Note 2 of the Notes.)

     The decline in domestic revenues in 2001 as compared to 2000 is mainly
because of the economic downturn in the United States.

     Operating costs and expenses. Key elements of the consolidated statements
of operations for the respective segments are as follows:

Gross profit margin:

<TABLE>
<CAPTION>
                                                        Year ended December 31,
                                               -----------------------------------------
                                                   2002          2001           2000
                                               -----------   -----------   -------------
                                                             (in millions)
<S>                                            <C>           <C>           <C>
   Semiconductor segment ...................     $ 523.4       $ 351.2       $ 1,018.9
    Percentage of segment revenues .........          35%           22%             44%
   Storage Systems segment .................     $ 125.3       $  62.7       $   150.4
    Percentage of segment revenues .........          37%           30%             38%
                                                 -------       -------       ---------
   Consolidated ............................     $ 648.7       $ 413.9       $ 1,169.3
                                                 -------       -------       ---------
    Percentage of revenues .................          36%           23%             43%
</TABLE>

     We have advanced wafer-manufacturing operations in Oregon, which is our
primary manufacturing site, and Japan. We also acquire wafers from foundries in
other locations. Utilizing a diversity of manufacturing locations allows us to
better manage potential disruption in the manufacturing process due to economic
and geographic risks associated with each location.

                                       27
<PAGE>

2002 compared to 2001
     The consolidated gross profit margin as a percentage of revenues increased
to 36% in 2002 from 23% in 2001. The gross profit margin as a percentage of
revenues for the Semiconductor segment increased to 35% from 22%, while for the
Storage Systems segment, it increased to 37% in 2002 from 30% in 2001.

     The following factors were primarily responsible for the improvement in
gross profit margins in 2002 as compared to 2001:

     o    Lower additional excess inventory and related charges of $45.5 million
          in 2002 as compared to $210.6 million in 2001. The charges in 2002
          impacted the Semiconductor segment and were primarily associated with
          underutilization charges related to a partial idling of our
          fabrication facilities due to decreased demand. The additional excess
          inventory and related charges of $210.6 million in 2001, including a
          charge of $6.0 million for the Storage Systems segment, as discussed
          in the 2001 compared to 2000 section below;

     o    Lower manufacturing variances, due to improved capacity utilization
          and improved product yields, for the Semiconductor segment during
          2002;

     o    Lower compensation-related expenses due to a decrease in average
          headcount in 2002 as compared to 2001; and

     o    Increased revenues in the Storage Systems segment.

     Even though gross profit margins improved in 2002 as compared to 2001,
Semiconductor segment revenues were lower in 2002 as compared to 2001.

     We expect our consolidated gross margin to be in the range of 30% to 32%
in the first quarter of 2003, as a result of expected lower revenues compared
to the prior quarter.

2001 compared to 2000
     The gross profit margin percentage for 2001 decreased to 23% from 43% in
2000 on a consolidated basis, reflecting lower gross profit margins in both of
our segments. The gross profit margin percentage for the Semiconductor segment
was 22% in 2001 compared to 44% in 2000. The decrease in the Semiconductor
segment primarily reflects the economic downturn as evidenced by:

     o    Decreased revenue for higher margin products;

     o    Higher manufacturing variances and period costs as a percentage of
          revenues; and

     o    Additional excess inventory and related charges of $204.6 million in
          2001.

     The additional excess inventory and related charges were primarily
associated with underutilization charges related to a temporary idling of our
fabrication facilities, coupled with inventory production in anticipation of
the closing of our Colorado Springs fabrication facility (see Note 4 of the
Notes) and a sudden and significant decrease in forecasted revenue, and was
calculated in accordance with our policy, which is primarily based on inventory
levels in excess of 12 months and use of management judgment for each specific
product.

     The gross profit margin percentage for the Storage Systems segment was 30%
in 2001 compared to 38% in 2000. The decrease is primarily attributable to
decreased revenue for higher margin products and additional excess inventory
and related charges of approximately $6 million recorded during 2001.

     Our operating environment, combined with the resources required to operate
in the Semiconductor and Storage Systems industries, require that we manage a
variety of factors. These factors include, among other things:

     o    Competitive pricing pressures;

     o    Product mix;

     o    Factory capacity and utilization;

     o    Manufacturing yields;

     o    Availability of certain raw materials;

                                       28
<PAGE>

     o    Terms negotiated with third-party subcontractors; and

     o    Foreign currency fluctuations.

     These and other factors could have a significant effect on our gross
profit margin in future periods.

Research and development:

<TABLE>
<CAPTION>
                                                       Year ended December 31,
                                               ---------------------------------------
                                                   2002          2001          2000
                                               -----------   -----------   -----------
                                                            (in millions)
<S>                                            <C>           <C>           <C>
   Semiconductor segment ...................     $ 421.3       $ 473.1       $ 351.7
    Percentage of segment revenues .........          28%           30%           15%
   Storage Systems segment .................     $  36.1       $  30.0       $  27.2
    Percentage of segment revenues .........          11%           14%            7%
                                                 -------       -------       -------
   Consolidated ............................     $ 457.4       $ 503.1       $ 378.9
                                                 -------       -------       -------
    Percentage of revenues .................          25%           28%           14%
</TABLE>

2002 compared to 2001
     Consolidated R&D expenses decreased $45.7 million or 9% in 2002 as
compared to 2001. During the same period, R&D expenses for the Semiconductor
segment decreased $51.8 million or 11%. The decrease was primarily attributable
to the cost-cutting measures implemented as part of the restructuring actions
in 2001 and 2002. (See Note 4 of the Notes.) The decrease was offset in part by
the following:

     o    A lower benefit of $8 million was recorded to R&D in 2002 as compared
          to $20 million recorded in 2001. This benefit is associated with the
          technology transfer agreement entered into with Silterra in Malaysia
          during 1999 (See Note 5 of the Notes);

     o    Continued R&D expenses for the former C-Cube and AMI RAID businesses,
          which are a part of the Semiconductor segment and included in our
          consolidated financial statements from May 11, 2001 and August 31,
          2001, respectively; and

     o    Expenditures related to continued development of advanced sub-micron
          products and process technologies, which includes the development of
          RapidChipTM.

     RapidChip was one of the technologies under development in the current
year. RapidChip products combine the high-density, high-performance and proven
intellectual property benefits of cell-based ASICs with the advantages of Field
Programmable Gate Arrays ("FPGAs"), such as customization and faster time to
market. RapidChip has performance comparable to cell-based ASICs at a cost
significantly lower than FPGAs. We believe that this will be one of the most
competitive products in the high-density chip market segment for many years. We
expect to begin shipping RapidChip products in the second half of 2003,
although we do not expect it to contribute significantly to our consolidated
revenues until 2004.

     R&D expenses for the Storage Systems segment increased $6.1 million or 20%
in 2002 as compared to 2001. This increase is mainly due to continuing R&D
expenses for the former Mylex business unit of IBM, which was acquired in 2002
and is included in our consolidated financial statements from August 29, 2002.

     As a percentage of revenues, consolidated R&D expenses decreased to 25% in
2002 from 28% in 2001. R&D expenses for the Semiconductor segment decreased to
28% of revenues in 2002 from 30% in 2001. This decline is a result of lower R&D
spending as discussed above offset in part by lower segment revenues in 2002 as
compared to 2001. R&D expenses as a percentage of revenues for the Storage
Systems segment decreased to 11% in 2002 from 14% in 2001 as a result of an
increase in revenues offset in part by an increase in R&D expenses in 2002.

2001 compared to 2000
     R&D expenses increased 33% to $503.1 million during 2001 as compared to
$378.9 million in 2000 on a consolidated basis. R&D expenses for the
Semiconductor segment increased 35% to $473.1 million in 2001 from $351.7
million in 2000. The increase was attributable to the following factors:

                                       29
<PAGE>

     o    Increased R&D activities based on new R&D projects, including those
          acquired in business combinations in 2001 (see Note 2 of the Notes);
          and

     o    Expenditures related to the continued development of advanced
          sub-micron products and process technologies.

     The increase was offset in part by $20.0 million and $24.0 million of
research and development benefits associated with a technology transfer
agreement entered into with Silterra in Malaysia during 2001 and 2000,
respectively. (See Note 5 of the Notes.)

     R&D expenses for the Storage Systems segment increased 10% to $30.0
million in 2001 from $27.2 million in 2000. The increase is primarily
attributable to higher compensation-related expenses due to an increase in
average headcount during the periods presented.

Selling, general and administrative:

<TABLE>
<CAPTION>
                                                       Year ended December 31,
                                               ---------------------------------------
                                                   2002          2001          2000
                                               -----------   -----------   -----------
                                                            (in millions)
<S>                                            <C>           <C>           <C>
   Semiconductor segment ...................     $ 181.2       $ 241.5       $ 255.2
    Percentage of segment revenues .........          12%           15%           11%
   Storage Systems segment .................     $  49.0       $  65.8       $  51.8
    Percentage of segment revenues .........          15%           31%           13%
                                                 -------       -------       -------
   Consolidated ............................     $ 230.2       $ 307.3       $ 307.0
                                                 -------       -------       -------
    Percentage of revenues .................          13%           17%           11%
</TABLE>

2002 compared to 2001

     Consolidated SG&A expenses decreased $77.1 million or 25% in 2002 as
compared to 2001. SG&A expenses for the Semiconductor segment decreased $60.3
million or 25% as compared to 2001. The decreases on a consolidated basis and
for the Semiconductor segment were primarily attributable to the various
cost-cutting measures implemented in 2001 and 2002 (See Note 4 of the Notes).
The decrease was offset in part by continued SG&A expenses for the former
C-Cube and AMI RAID businesses, which were added as part of the Semiconductor
segment and included in our consolidated financial statements in the second and
third quarters of 2001. SG&A expenses for the Storage Systems segment decreased
$16.8 million or 26% in 2002 as compared to the prior year. This is a result of
cost-cutting measures implemented in 2002 and 2001 and discussed further in
Note 4 of the Notes, offset in part by continuing expenses for the Mylex
business unit added to the Storage Systems segment and our consolidated
financial statements as of August 29, 2002. (See Note 2 of the Notes.)

     As a percentage of revenues, SG&A expenses decreased to 13% in 2002 from
17% in 2001 on a consolidated basis, while for the Semiconductor segment, SG&A
expenses decreased to 12% from 15% over the same period. The decrease is a
result of savings from SG&A cost-cutting measures as discussed above, offset in
part by lower segment revenues in 2002 as compared to 2001.

     For the Storage Systems segment, SG&A expenses as a percentage of revenues
decreased to 15% in 2002 from 31% in 2001. The decrease is a result of savings
in SG&A expenses from the cost-cutting measures discussed above, the impact of
a master distributor arrangement started in 2002 and higher revenues in 2002 as
compared to 2001.

2001 compared to 2000

     SG&A expenses in 2001 of $307.3 million were relatively flat as compared
to $307.0 million in 2000 on a consolidated basis. SG&A expenses for the
Semiconductor segment decreased by 5% to $241.5 million in 2001 from $255.2
million in 2000. SG&A expenses for the Storage Systems segment increased by 27%
to $65.8 million in 2001 from $51.8 million in 2000. SG&A expenses were
impacted primarily by the following factors in 2001:

     o    Continued SG&A expenses for the former C-Cube and AMI RAID business
          added to the Semiconductor segment and our consolidated financial
          statements as of May 11, 2001 and August 31, 2001, respectively; and

     o    An increase in compensation-related expenses for the Storage Systems
          segment due to an increase in average headcount during 2001.

                                       30
<PAGE>

     The above increases were offset in part by the savings from various cost
reduction programs in both our operating segments in 2001. These include, among
other things, a reduction in workforce, temporary cessation of annual merit
increases and bonuses, and shutdowns of operations during the year. (See Note 4
of the Notes.)

Acquired in-process research and development:
     We recorded a charge of $2.9 million, $96.6 million and $77.4 million for
the years ended December 31, 2002, 2001 and 2000, respectively associated with
IPR&D in connection with various acquisitions. The details at the acquisition
date are summarized in the table below:

<TABLE>
<CAPTION>
                                    Acquisition                                   Revenue projections
Company                                Date          IPR&D      Discount rate       extend through       Royalty rate
-------------------------------   --------------   ---------   ---------------   --------------------   -------------
                                                             (dollar amounts in millions)
<S>                               <C>              <C>         <C>               <C>                    <C>
Mylex unit of IBM .............   August 2002       $  1.9             25%       2006                   --
RAID Division of AMI ..........   August 2001         19.1             20%       2006                   --
C-Cube ........................   May 2001            77.5           27.5%       2006                   --
ParaVoice .....................   October 2000         6.9             50%       2005                   --
Intraserver ...................   May 2000             1.6             30%       2005                   30%
DataPath ......................   July 2000           54.2             20%       2007                   20%
Division of NeoMagic ..........   April 2000           6.4             30%       2004                   30%
Division of Cacheware .........   April 2000           8.3             30%       2003                   30%
</TABLE>

     The amounts of IPR&D were determined by identifying research projects for
which technological feasibility had not been established and no alternative
future uses existed as of the respective acquisition dates. The value of the
projects identified to be in progress was generally determined by estimating
the future cash flows from the projects once commercially feasible, discounting
the net cash flows back to their present value and then applying a percentage
of completion to the calculated value. The net cash flows from the identified
projects were based on estimates of revenues, cost of revenues, research and
development costs, selling general and administrative costs and applicable
income taxes for the projects. Total revenues for the projects are expected to
extend through the dates noted in the above table by acquisition. These
projections were based on estimates of market size and growth, expected trends
in technology and the expected timing of new product introductions by our
competitors and us. These estimates do not account for any potential synergies
that may be realized as a result of the acquisition and are in line with
industry averages and growth estimates.

     Percentage of completion. The percentage of completion for the projects
for the purchases of the Mylex unit of IBM, the RAID business from AMI, C-Cube,
ParaVoice, Cacheware and a division of Neomagic were determined based on
research and development expenses incurred as of the acquisition dates for the
projects as a percentage of total research and development expenses to bring
the projects to technological feasibility.

     The percentage of completion for the projects for the purchases of
Intraserver and DataPath were determined using milestones representing
management's estimate of effort, value added and degree of difficulty of the
portion of the projects completed as of the acquisition dates, as compared to
the remaining research and development to be completed to bring the projects to
technological feasibility. The development process is grouped into three
phases, with each phase containing between one and five milestones. The three
phases are:

     o    Researching the market requirements and the engineering architecture
          and feasibility studies;

     o    Design and verification milestones; and

     o    Prototyping and testing the product (both internal and customer
          testing).

     Discount and royalty rates. The 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
described above. We applied a royalty rate by project by acquisition to
operating income to attribute value for dependency on predecessor core
technologies. See details in table above.

                                       31
<PAGE>

Project descriptions and estimates of completion by acquisition.

     Mylex unit of IBM. On August 29, 2002, we finalized an Asset Purchase
Agreement with IBM. Under the agreement, we acquired certain tangible and
intangible assets associated with IBM's Mylex business unit. The acquisition is
expected to enhance product offerings in the expanding entry-level storage
systems space within the Storage Systems segment and the PCI-RAID offering in
the Semiconductor segment. As of the acquisition date, there were several
projects in-process. Development of storage systems hardware technology was
started in 2000, while development of firmware and subsystems components
technology was started in 2002. As of August 29, 2002, we estimated that the
projects were from 10% to 50% complete. As of the acquisition date, the cost to
complete these projects was estimated at $4.6 million in 2002 and $2.6 million
in 2003. As of December 31, 2002, the actual development timeline and costs
were in line with estimates.

     RAID business. On August 31, 2001, we entered into an Asset Purchase
Agreement with AMI. Under the agreement, we acquired certain tangible and
intangible assets associated with AMI's RAID business. The acquisition enhanced
product offerings and is included in the Semiconductor segment. As of the
acquisition date, there were several projects in process. The projects were for
development of RAID technology applications. Development of these projects
started in early 2000 and 2001. As of August 31, 2001, we estimated the
projects were approximately 12% to 62% complete for the RAID projects and the
cost to complete these projects was estimated at $4.6 million for 2001 and $2.4
million for 2002. As of December 31, 2002, the actual development timeline and
costs were in line with estimates.

     C-Cube. On May 11, 2001, we acquired C-Cube Microsystems Inc., pursuant to
a definitive merger agreement. The acquisition enhanced our consumer product
offerings in the Semiconductor segment. As of the acquisition date, there were
various projects that were in process. The development of these projects
started in early 1999. As of May 11, 2001, we estimated the projects were
approximately 61% to 84% complete. As of the acquisition date, the cost to
complete these projects was estimated at $22.7 million in 2001 and $9.1 million
in 2002. As of December 31, 2002, the actual development timeline and costs
were in line with estimates.

     ParaVoice. On October 23, 2000, we entered into an Asset Acquisition
Agreement with ParaVoice. Under the agreement, we acquired certain tangible and
intangible assets associated with ParaVoice's Voice over Internet Protocol
("VoIP") and Voice over DSL ("VoDSL") technologies. The acquisition enhanced
product offerings in the Semiconductor segment. As of the acquisition date,
there was one project in process for the development of ParaVoice's VoIP
products, which was started in late 1999. As of October 23, 2000, we estimated
that the project was 23% complete. As of the acquisition date, the cost to
complete the project was estimated at $6.3 million in 2001 and $7.3 million for
2002. As of December 31, 2002, the actual development timeline and costs were
in line with estimates.

     DataPath. On July 14, 2000, we acquired DataPath, a privately held
supplier of communications chips for broadband, data networking and wireless
applications, pursuant to the terms of the Agreement and Plan of Reorganization
and Merger. The acquisition of DataPath enhanced our product offerings in the
communications market in the Semiconductor segment. As of the acquisition date,
there were various projects in process. As of July 14, 2000, we estimated the
projects were approximately 50% to 75% complete in aggregate. As of the
acquisition date, the cost to complete the projects was estimated at $11.1
million through early 2002 and $32.8 million through 2004. As of December 31,
2002, the actual development timeline and costs were in line with estimates for
continuing projects.

     Intraserver. On May 26, 2000, we acquired Intraserver pursuant to the
terms of the Agreement and Plan of Reorganization and Merger. The acquisition
of Intraserver enhanced our host adapter board and other product offerings in
the storage infrastructure and communications markets in the Semiconductor
segment. As of the acquisition date, there were various projects in-process.
The majority of the projects identified are targeted to high-end data storage
and communication devices, where input/output functionality and speed is
critical. As of May 26, 2000, we estimated the projects were 58% complete in
aggregate (ranging from 20% to 95%). As of the acquisition date, the costs to
complete the project were $0.5 million in 2000 and early 2001. As of December
31, 2001, the project was complete.

     Division of Cacheware. On April 27, 2000, we entered into an Asset
Purchase Agreement with Cacheware. Under the agreement, we acquired certain
tangible and intangible assets associated with Cacheware's storage area

                                       32
<PAGE>

network business. ("SAN Business"). The acquisition was intended to provide a
key technology to enhance our SAN solutions. The SAN Business is included in
our Storage Systems segment. The project in-process as of the acquisition date
was for development of a SAN appliance. Development of the SAN appliance was
started in January 1999. As of April 27, 2000, we estimated that the project
was 90% complete and that remaining costs to complete the project would be $0.4
million in 2000 and early 2001. As of December 31, 2002, the project was
complete.

     Division of NeoMagic. On April 13, 2000, we entered into an Asset Purchase
Agreement with NeoMagic. Under the agreement, we acquired certain tangible and
intangible assets from NeoMagic, which includes NeoMagic's optical read-channel
mixed-signal design team and RF intellectual property. The acquisition was
intended to enhance and accelerate our set-top decoder product offerings in the
Semiconductor segment. As of the acquisition date, one project was identified
to be in process. The project was for the development of a two-chip controller
chipset. As of April 13, 2000, we estimated that the project was 68% complete.
As of the acquisition date, the project costs were estimated at $3.0 million
for the remainder of 2000 and $4.0 million in 2001. In the second quarter of
2001, the project was abandoned and remaining intangibles and goodwill were
written off. See the discussion under restructuring of operations and other
items for details.

     Development of the above-noted technologies that have not yet been
completed remains a significant risk to us due to the remaining effort to
achieve technological feasibility, rapidly changing customer markets and
significant competitive threats from numerous companies. Failure to bring the
product to market in a timely manner could adversely affect our sales and
profitability in the future. Additionally, the value of other intangible assets
acquired may become impaired.

Restructuring of operations and other items:

2002
     We recorded approximately $67.1 million in restructuring of operations and
other items for the year ended December 31, 2002, consisting of $75.2 million
for restructuring of operations, and a gain of $8.1 million for other items
including the gain on sale of CDMA handset product technology. Restructuring of
operations and other items were primarily included in the Semiconductor
segment; the restructuring expense included in the Storage Systems segment was
not significant.

Restructuring and impairment of long-lived assets:

     In the first quarter of 2002, we announced a set of actions to reduce
costs and streamline operations. These actions included a worldwide reduction
in workforce, downsizing our manufacturing operations in Tsukuba, Japan, and
the decision to exit CDMA handset product technology. During the three months
ended March 31, 2002, we recorded a restructuring charge for severance for
approximately 1,150 employees worldwide and exit costs primarily associated
with cancelled contracts and operating leases. As a result of the restructuring
actions, we recorded fixed asset write-downs due to impairment in the U.S. and
Japan for assets that will be disposed of by sale. In the second quarter of
2002, we completed the sale of CDMA handset product technology to a third
party, recognizing a net gain of $6.4 million.

     During the fourth quarter of 2002, we reversed approximately $5 million of
previously accrued restructuring expenses. As a result of our decision to
terminate fewer employees than the original plan contemplated in Tsukuba,
Japan, we reversed previously accrued restructuring expenses for termination
benefits including outplacement costs and certain contract termination fees of
$7 million. This was offset by additional expense accruals of $2 million for
costs related to the previously announced closure of the Colorado Springs
fabrication facility. Certain other reclassifications were made between lease
and contract terminations and facility closure and other exit costs to reflect
changes in management estimates for the remaining costs for these activities.

     On January 1, 2002, we adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial
accounting and reporting for the impairment of long-lived assets and for
long-lived assets to be disposed. The adoption did not have a significant
effect on our financial position and results of operations.

     Assets held for sale of $74 million and $89 million were included as a
component of prepaid expenses and other current assets as of December 31, 2002
and 2001, respectively. In September 2002, we recorded $13 million

                                       33
<PAGE>

of additional fixed asset write-downs to reflect the decrease in the fair
market value of the assets during the period. Assets classified as held for
sale are not depreciated. The fair value of assets determined to be impaired
was the result of independent appraisals and the use of management estimates.
Given that current market conditions for the sale of older fabrication
facilities and related equipment may fluctuate, there can be no assurance that
we will realize the current net carrying value for the assets. We reassess 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 additional adjustments
may be necessary. We are making appropriate efforts to sell assets held for
sale within the next twelve months.

     The following table sets forth our restructuring reserves as of December
31, 2002, which are included in other accrued liabilities on the balance sheet:

<TABLE>
<CAPTION>
                                             Balance at                        Release of        Utilized      Balance at
                                            December 31,   Restructuring      reserve and         during      December 31,
                                                2001        Expense 2002   reclassifications       2002           2002
                                           -------------- --------------- ------------------- -------------- -------------
                                                                           (In thousands)
<S>                                        <C>            <C>             <C>                 <C>            <C>
Write-down of excess assets (a) ..........    $  3,762        $ 38,918         $   5,147        $  (41,819)     $  6,008
Lease terminations and maintenance
 contracts (c) ...........................      10,695          12,871           (10,559)           (6,250)        6,757
Facility closure and other exit costs (c)       14,153             415             4,058           (10,497)        8,129
Payments to employees for severance (b) ..         724          27,490            (3,150)          (23,673)        1,391
                                              --------        --------         ---------        ----------      --------
   Total .................................    $ 29,334        $ 79,694         $  (4,504)       $  (82,239)     $ 22,285
                                              ========        ========         =========        ==========      ========
</TABLE>

------------
(a)  Amounts utilized in 2002 reflect a non-cash write-down of fixed assets in
     the U.S. and Japan due to impairment of $38.3 million and cash payments for
     machinery and equipment decommissioning costs of $3.5 million. The fixed
     asset write-downs were accounted for as a reduction of the assets and did
     not result in a liability. The $6.0 million balance as of December 31, 2002
     relates to machinery and equipment decommissioning costs in the U.S and
     selling costs for assets held for sale.

(b)  Amounts utilized represent cash severance payments to approximately 1,290
     employees during the year ended December 31, 2002. The $1.4 million balance
     as of December 31, 2002 will be paid during 2003.

(c)  Amounts utilized represent cash payments.

Other items:

     We recorded a net gain of $1.7 million in other items during the first
quarter of 2002, which consisted of a nonrefundable deposit paid to us in the
first quarter of 2002 related to the termination of the agreement to sell the
Colorado Springs fabrication facility during 2001, offset in part by certain
costs associated with maintaining CDMA handset product technology held for
sale.

2001
     We recorded approximately $219.6 million in restructuring of operations
and other items for the year ended December 31, 2001, consisting of $207.2
million for restructuring of operations and $12.4 million for other items.
Restructuring of operations and other items were primarily included in the
Semiconductor segment; the restructuring expense included in the Storage
Systems segment was not significant.

Restructuring and impairment of long-lived assets:

     In September 2001, we announced the consolidation of U.S. manufacturing
operations to Gresham, Oregon, including the transfer of process research and
development from Santa Clara, California to Gresham, Oregon. We also announced
the closure of certain assembly activities in Fremont, California, which would
be transferred offshore. As a result of these actions, we recorded a
restructuring charge of $95.0 million, including fixed asset write-downs due to
impairment as a result of the restructuring actions in the U.S., losses on
operating leases for equipment and facilities, severance for approximately 600
employees across multiple company activities and functions in the U.S., Europe,
Japan and Asia Pacific, as well as other exit costs.

     In April 2001, we announced the closure of our Colorado Springs
fabrication facility. This facility was closed in the fourth quarter of 2001.
We recorded an impairment charge of $130.5 million relating to the facility, of
which

                                       34
<PAGE>

approximately $35.0 million was recorded in cost of sales and $95.5 million was
recorded in restructuring charges. The restructuring charges consisted of fixed
asset write-downs due to impairment as a result of the restructuring actions,
losses on operating leases for equipment, severance for approximately 413
manufacturing employees and other exit costs.

     During the second quarter of 2001, we recorded an additional $16.8 million
in restructuring charges primarily associated with the write-down of fixed
assets due to impairment as a result of the restructuring actions in the U.S.,
Japan and Hong Kong that will be disposed of and severance charges for
approximately 240 employees across multiple company activities and functions in
the U.S., Europe and Asia Pacific.

     The following table sets forth our restructuring reserves as of December
31, 2001, which are included in other accrued liabilities on the balance sheet:

<TABLE>
<CAPTION>
                                                              Restructuring        Utilized          Balance at
                                                                 Expense         during 2001      December 31, 2001
                                                             ---------------   ---------------   ------------------
                                                                                 (In thousands)
<S>                                                          <C>               <C>               <C>
Write-down of excess assets (a) ..........................      $ 139,724        $  (135,962)          $ 3,762
Lease terminations and maintenance contracts (c) .........         26,912            (16,217)           10,695
Facility closure and other exit costs (c) ................         24,242            (10,089)           14,153
Payments to employees for severance (b) ..................         16,346            (15,622)              724
                                                                ---------        -----------           -------
   Total .................................................      $ 207,224        $  (177,890)          $29,334
                                                                =========        ===========           =======
</TABLE>

------------
(a)  Amounts utilized in 2001 reflect a non-cash write-down of fixed assets in
     the U.S., Japan and Hong Kong due to impairment of $133.8 million and cash
     payments for machinery and equipment decommissioning costs of $2.2 million.
     The fixed asset write-downs were accounted for as a reduction of the assets
     and did not result in a liability. The $3.8 million balance as of December
     31, 2001 relates to machinery and equipment decommissioning costs in the
     U.S.

(b)  Amounts utilized represent cash payments related to the severance of
     approximately 1,180 employees during the year ended December 31, 2001.

(c)  Amounts utilized represent cash payments.

Other items:

     We recorded approximately $12.4 million in other items during 2001 as
follows:

   o $8.1 million in charges associated with the write-down of intangible
     assets due to impairment. The majority of the intangible assets were
     originally acquired in the purchase of a division of NeoMagic in the
     second quarter of 2000.

   o $4.3 million in charges primarily consisting of the write-down of an
     investment in a marketable equity security and related purchased
     intellectual property.

2000
     We recorded restructuring of operations and other items, only in the
Semiconductor segment, of $2.8 million in 2000. This was primarily related to
the loss on an agreement entered into with a third party to outsource certain
testing services previously performed by us at our Fremont, California
facility.

Amortization of intangibles:
     We adopted SFAS No. 142, "Goodwill and Other Intangible Assets" on January
1, 2002. As a result, goodwill is no longer amortized, but is instead tested
for impairment annually or sooner if circumstances indicate that it may no
longer be recoverable. In addition, intangible assets acquired prior to July 1,
2001 that do not meet the criteria for recognition under SFAS No. 141,
"Business Combinations" have been reclassified to goodwill. (See Note 3 of the
Notes.) Upon adoption, we completed the transitional goodwill impairment
assessment required by SFAS No. 142 and concluded that goodwill was not
impaired as of January 1, 2002. The annual impairment test was performed at
December 31, 2002 and it indicated that goodwill was not impaired. Factors that
could trigger an

                                       35
<PAGE>

impairment review sooner than annually are discussed in the critical accounting
policies section later in this Annual Report on Form 10-K. Among those factors,
a significant decline in our market capitalization for an extended period of
time, relative to net book value could trigger the need for an impairment
review and goodwill may potentially become impaired at a future date.

     Goodwill is tested for impairment by reporting unit as defined by SFAS No.
142. Our reporting units are Semiconductor and Storage Systems. The impairment
testing is performed in a two-step process. The first step requires comparing
the fair value of each reporting unit to its net book value. An impairment
exists if the fair value of the reporting unit is lower than its net book
value. The second step of the process is only performed if an impairment
exists, as it involves measuring the actual impairment to goodwill. We use
independent appraisals and use of management estimates to perform the first
step of the goodwill impairment test. Two methodologies were used to obtain the
fair value for each reporting unit as of December 31, 2002: Discounted Cash
Flow and Market Multiple.

     The Discounted Cash Flow and Market Multiple methodologies include
assumptions about future conditions within our reporting units and related
industries. These assumptions include estimates of future market size and
growth, expected trends in technology, timing of new product introductions by
our competitors and us, and the nature of the industry in which comparable
companies and we operate. If significant changes to these assumptions occur,
goodwill could become impaired in the future. The valuation of long-lived and
intangible assets and goodwill is considered to be a critical accounting policy
to us and is discussed further later in this Annual Report on Form 10-K.

     Amortization of goodwill and other intangibles decreased to $78.6 million
in 2002 from $188.3 million in 2001. The decrease is primarily attributable to
the adoption of SFAS Nos. 141 and 142 as discussed above, offset by the
additional intangible assets and related amortization recorded in connection
with two acquisitions during the second half of 2002. We had approximately
$282.6 million of intangible assets, net of accumulated amortization, which
will continue to amortize as of December 31, 2002.

     Amortization of goodwill and other intangibles increased to $188.3 million
in 2001 from $72.6 million in 2000. The increase was primarily related to
additional goodwill and other intangibles and related amortization recorded in
connection with the acquisitions of C-Cube and the RAID business from AMI in
2001. (See Note 2 of the Notes.)

Amortization of non-cash deferred stock compensation:
     Amortization of non-cash deferred stock compensation is due to non-cash
deferred stock compensation recorded in connection with acquisitions completed
after July 1, 2000. The acquisitions for which deferred stock compensation and
related amortization were recorded consisted of an acquisition in the fourth
quarter of 2002, C-Cube and the RAID business from AMI in 2001, and DataPath
and Syntax in 2000. No deferred stock compensation was recorded in connection
with the acquisition of the Mylex business unit in 2002. We amortize deferred
stock compensation ratably over the vesting period.

     Amortization of non-cash deferred stock compensation of $77.3 million,
$104.6 million and $41.1 million was recorded in 2002, 2001 and 2000,
respectively. At December 31, 2002, the deferred stock compensation that
remained was $51.2 million, which is expected to be amortized over the next
three years. The balance of deferred stock compensation that remained to be
amortized at December 31, 2001, was $124.1 million. (See Note 2 to the Notes.)

Interest expense:
     Interest expense increased by $7.4 million to $52.0 million in 2002 from
$44.6 million in 2001. The increase is due to additional interest expense
incurred on the increased debt outstanding in 2002 due to the issuance of the
$490.0 million of 4% Convertible Subordinated Notes issued in October 2001.
(See Note 9 of the Notes.) The increase was offset in part by a reduction in
the effective interest rate payable on the Convertible Subordinated Notes as a
result of the interest rate swap transactions (the "Swaps") entered into in the
second quarter of 2002.

     We entered into the Swaps with various investment banks in June 2002. The
Swaps effectively convert fixed interest payments on a portion of our
Convertible Subordinated Notes to LIBOR-based floating rates. The Swaps are
intended to better manage interest rate risk on our investment portfolio (See
Note 6 of the Notes), which reprices more frequently than our debt portfolio,
and to better manage asset and liability mismatches. The Swaps qualify for
hedge accounting treatment. (See Note 7 of the Notes.) At December 31, 2002, a
notional amount of $740 million of our Convertible Subordinated Notes was
covered by the Swaps.

                                       36
<PAGE>

     Interest expense increased to $44.6 million in 2001 from $41.6 million in
2000. The increase was primarily attributable to increased debt outstanding in
2001 due to the issuance of the $490 million of 4% Convertible Subordinated
Notes issued in October 2001. (See Note 9 of the Notes.)

Interest income and other:
     Interest income and other, net, was $26.4 million in 2002 as compared to
$14.5 million in 2001. Interest income decreased to $31.6 million in 2002 from
$42.7 million in 2001. The decrease in interest income is attributable to lower
returns due to the declining interest rate environment and lower invested cash
balances in 2002 as compared to 2001. Other expense of $5.2 million in 2002
included the following:

     o    A gain of $14.3 million on the repurchase of a portion of the
          Convertible Subordinated Notes, net of the write-off of debt issuance
          costs associated with the issuance of the Notes. During the third and
          fourth quarters of 2002, we repurchased and retired $115.0 million of
          the $500 million 4% Convertible Subordinated Notes issued in 2000 and
          $20.0 million of the $345 million 4 1/4% Convertible Subordinated
          Notes issued in 1999. Effective January 1, 2002, we early adopted the
          provisions of Statement of Financial Accounting Standards No. 145,
          "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
          Statement No. 13, and Technical Corrections" related to extinguishment
          of debt. As a result, the gain on the repurchase of debt is included
          in interest income and other, net, in the statement of operations (See
          Note 9 of the Notes);

     o    A net write-down of certain equity investments for $19.4 million due
          to impairment considered by our management to be other than temporary.
          (See Note 6 of the Notes.); and

     o    A gain on miscellaneous asset sales, the cost of purchased option
          contracts, bank fees and other miscellaneous expenses.

     Interest income and other, net, decreased to $14.5 million in 2001 from
$51.8 million in 2000. The decrease was primarily attributable to the following
events in 2001, which were absent in 2000:

     o    $15.2 million write-down of equity investments due to impairment
          considered to be other than temporary, net of a $3.8 million pre-tax
          gain associated with equity securities of a certain technology company
          that was acquired by another technology company (See Note 6 of the
          Notes);

     o    $8.9 million of lower interest income due to lower average balances of
          interest-generating cash, cash equivalents and short-term investments
          and lower interest rates in 2001;

     o    The write-off of debt issuance costs of approximately $3.5 million
          associated with the repayment of bank debt and the restructuring of a
          master lease and security agreement (See Notes 9 and 13 of the Notes);
          and

     o    The cost of purchased option contracts, bank fees and other
          miscellaneous expenses.

     In 2000, we recorded a pre-tax gain of $5.7 million on the sale of a U.S.
facility in Fremont, California. This gain was absent in 2001.

Gain on sale of equity securities:
     During 2001, we sold investments in certain marketable equity securities
for $7.9 million in the open market, realizing a pre-tax gain of approximately
$5.3 million. During 2000, we sold investments in certain marketable equity
securities for $78.8 million in the open market, realizing a pre-tax gain of
approximately $73.3 million. In 2000, we also recognized a $6.8 million pre-tax
gain associated with equity securities of a certain technology company that was
acquired by another technology company.

Provision for income taxes:
     In 2002, we recorded an income tax expense of $1.8 million, which
represents an effective tax rate of approximately (1%). This rate differs from
the U.S. statutory rate primarily due to losses of our foreign subsidiaries,
which are not benefited or are benefited at lower rates, foreign tax expense in
certain jurisdictions, and reductions in the value of our deferred tax assets
with the corresponding charge to income tax expense of approximately $62
million. The effect of these charges was partially offset by the expanded net
operating loss carryback provided by a law change in 2002, as well as the
reversal of taxes previously accrued and the conclusion of a federal income

                                       37
<PAGE>

tax audit with the Internal Revenue Service for the income tax years 1995
through 2000. In 2001, we recorded an income tax benefit of $39.2 million,
which represents an effective tax rate of approximately 4%. This rate differs
from the U.S. statutory rate primarily due to losses of our foreign
subsidiaries, which are not benefited or are benefited at lower rates, foreign
tax expense in certain jurisdictions, net operating losses not currently
benefited, and items related to acquisitions, which are non-deductible for tax
purposes. The rate for 2000 was approximately 38%. The rate for 2000 was higher
than the U.S. statutory rate primarily due to non-deductible transaction costs
related to acquisitions.

Minority interest in net income of subsidiary:

     Minority interest in net income of subsidiary was not significant for the
periods presented. The changes in minority interest were attributable to the
composition of earnings and losses in one of our international affiliates for
each of the respective years.

FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY

     Cash, cash equivalents and short-term investments decreased to $990.0
million at December 31, 2002 from $1.0 billion at December 31, 2001. The
decrease is mainly due to higher net cash used in investing activities and cash
paid for the repurchase of the Convertible Subordinated Notes (See Note 9 of
the Notes), partially offset by higher net cash provided by operating
activities in 2002 as compared to 2001.

     Working capital. Working capital decreased by $77.5 million to $1.23
billion at December 31, 2002 from $1.31 billion as of December 31, 2001.
Working capital in 2002 was impacted by the following activities:

     o    We completed two acquisitions during the second half of 2002 for a
          total of $55.9 million in cash, including $0.6 million incurred for
          direct acquisition costs;

     o    During the third and fourth quarters, we repurchased and retired
          $115.0 million of the $500 million 4% Convertible Subordinated Notes
          issued in 2000 and $20.0 million of the $345 million 4 1/4%
          Convertible Subordinated Notes issued in 1999, recognizing a net
          pre-tax gain of $14.3 million. The net cash outflow as a result of
          these repurchases was $118.9 million. (See Note 9 of the Notes);

     o    Inventories decreased by $62.2 million due to increased sales in the
          fourth quarter of 2002 as compared to the same period of 2001;

     o    Prepaid expenses and other current assets declined by $12.1 million
          primarily due to a further write-down of assets held for sale to
          current fair market values, miscellaneous asset sales, offset by other
          non-cash transfers from non-current assets and deposits to prepaid
          expenses and other current assets in association with two operating
          leases (See Notes 4 and 13 of the Notes); and

     o    Current deferred tax assets, net of current deferred tax liabilities
          decreased by $141.7 million due to changes in the underlying temporary
          differences and increases in the valuation allowance (See Note 11 of
          the Notes).

     The decrease in working capital was offset, in part, by the following:

     o    Accounts receivable increased by $56.9 million to $248.6 million at
          December 31, 2002, from $191.7 million at December 31, 2001. This
          increase is mainly attributable to increased revenues in the fourth
          quarter of 2002 as compared to the fourth quarter of 2001;

     o    Accounts payable was lower by $35.9 million at December 31, 2002, as
          compared to December 31, 2001 due to lower purchases in the fourth
          quarter of 2002 as compared to the same period of 2001;

     o    Other accrued liabilities were lower by $25.1 million at December 31,
          2002, as compared to December 31, 2001, due to changes in
          merger-related accruals and restructuring reserves that decreased due
          to cash payments and reserve reversals (See Note 4 of the Notes) and
          lower expense accruals in 2002; and

     o    Lower income taxes payable due to lower tax expense recorded in 2002
          and a net income tax benefit recorded in 2001.

     Cash and cash equivalents provided by operating activities. During 2002,
we generated $153.6 million of net cash and cash equivalents from operating
activities compared to $117.4 million generated in 2001. The increase

                                       38
<PAGE>

in cash and cash equivalents provided by operating activities was the result of
income (before non-cash adjustments to our net loss) in 2002 as compared to a
loss (before non-cash adjustments to our net loss) in 2001, offset by changes
in working capital for the periods presented. Cash decreased by $87.8 million
in 2002 as compared to an increase of $228.1 million in the prior year due to
changes in working capital.

     Cash and cash equivalents used in investing activities. Cash and cash
equivalents used in investing activities was $391.1 million in 2002 as compared
to $144.7 million used in 2001. The primary investing activities during 2002 as
compared to the prior year were as follows:

     o    Purchases of debt and equity securities available for sale, net of
          maturities and sales in 2002 as compared to net sales in 2001;

     o    Lower purchases of property and equipment, net of retirements;

     o    Lower additional investments in non-current assets and deposits in
          2002; and

     o    Lower cash paid in 2002 towards acquisition of companies.

     Net capital additions were $38.6 million in 2002 as compared to $224.3
million in 2001. We believe that maintaining technological leadership in the
highly competitive worldwide semiconductor manufacturing industry requires
access to advanced manufacturing capacity. We expect total capital expenditures
to be under $100 million in 2003. Our focus is on establishing strategic
supplier alliances with foundry semiconductor manufacturers, which enables us
to have access to advanced manufacturing capacity, and reduces our capital
spending requirements.

     Cash and cash equivalents used in/provided by financing activities. Cash
and cash equivalents used in financing activities during 2002 were $75.3
million as compared to $554.3 million provided in 2001. The decrease is
primarily attributable to the lack of new borrowings in 2002 (as compared to
$472.6 million borrowed in 2001, net of debt issuance costs) and payment of
$118.9 million towards the repurchase of the Convertible Subordinated Notes in
2002 (See Note 9 of the Notes), accompanied by lower net cash proceeds from our
employee stock option and purchase plans in 2002 as compared to 2001.

     During the third and fourth quarters of 2002, we repurchased and retired
$115.0 million of the $500 million 4% Convertible Subordinated Notes issued in
2000 and $20.0 million of the $345 million 4 1/4% Convertible Subordinated
Notes issued in 1999, recognizing a net pre-tax gain of $14.3 million. The gain
on the repurchase of debt is included in interest income and other, net, in the
statement of operations. From time to time, we may buy back additional
Convertible Subordinated Notes.

     On October 30, 2001, we issued $490 million of 4% Convertible Subordinated
Notes (the "2001 Convertible Notes") due in 2006. The 2001 Convertible Notes
are subordinated to all existing and future senior debt, are convertible at the
holder's option, at any time after 60 days following issuance, into shares of
our company's common stock at a conversion price of $26.339 per share. The 2001
Convertible Notes are redeemable at our option, in whole or in part, on at
least 30 days notice at any time on or after November 6, 2004. Each holder of
the 2001 Convertible Notes has the right to cause us to repurchase all of such
holder's convertible notes at 100% of their principal amount plus accrued
interest upon the occurrence of any fundamental change, which includes a
transaction or event such as an exchange offer, liquidation, tender offer,
consolidation, merger or combination.

     On February 18, 2000, we issued $500 million of 4% Convertible
Subordinated Notes (the "2000 Convertible Notes") due in 2005. The 2000
Convertible Notes are subordinated to all existing and future senior debt, are
convertible at the holder's option, at any time after 60 days following
issuance, into shares of our company's common stock at a conversion price of
$70.2845 per share. The 2000 Convertible Notes are redeemable at our option, in
whole or in part, on at least 30 days notice at any time on or after February
20, 2003. Each holder of the 2000 Convertible Notes has the right to cause us
to repurchase all of such holder's convertible notes at 100% of their principal
amount plus accrued interest upon the occurrence of any fundamental change,
which includes a transaction or event such as an exchange offer, liquidation,
tender offer, consolidation, merger or combination.

     During March 1999, we issued $345 million of 41/4% Convertible
Subordinated Notes (the "1999 Convertible Notes") due in 2004. The 1999
Convertible Notes are subordinated to all existing and future senior debt, are
convertible at the option of the holder, at any time after 60 days following
issuance, into shares of our company's

                                       39
<PAGE>

common stock at a conversion price of $15.6765 per share. The 1999 Convertible
Notes are redeemable at our option, in whole or in part, on at least 30 days
notice at any time on or after March 20, 2002. Each holder of the 1999
Convertible Notes has the right to cause us to repurchase all of such holder's
convertible notes at 100% of their principal amount plus accrued interest upon
the occurrence of any fundamental change, which includes a transaction or event
such as an exchange offer, liquidation, tender offer, consolidation, merger or
combination.

     Fluctuations in our stock price impact the prices of our outstanding
convertible securities and the likelihood of the convertible securities being
converted into cash or equity. If our stock price is below the conversion price
of our convertible bonds on the date of maturity, they may not convert into
equity and we may be required to redeem the convertible securities for cash. In
the event they do not convert to equity, we believe that our current cash
position and expected future operating cash flows will be adequate to meet
these obligations as they mature.

     It is our policy to reinvest our earnings and we do not anticipate paying
any cash dividends to stockholders in the foreseeable future.

     In order to remain competitive in the manufacture of semiconductors, we
continue to make significant investments in new facilities and capital
equipment. We may seek additional equity or debt financing from time to time.
We believe that our existing liquid resources and funds generated from
operations, combined with funds from such financing and our ability to borrow
funds, will be adequate to meet our operating and capital requirements and
obligations for the foreseeable future. However, we cannot be certain that
additional financing will be available on favorable terms. Moreover, any future
equity or convertible debt financing will decrease the percentage of equity
ownership of existing stockholders and may result in dilution, depending on the
price at which the equity is sold or the debt is converted.

     As of December 31, 2002, we had operating leases financing certain wafer
fabrication equipment (See Note 13 of the Notes). The debt related to these
operating leases is not reflected on the balance sheet. Per the terms of the
leases, we are required to maintain a minimum balance in cash, cash equivalents
and short-term investments of $350 million. We were in compliance with this
requirement as of December 31, 2002. We guarantee residual values of equipment
on these leases. As of December 31, 2002, we do not expect to realize a loss on
the guarantee at the end of the lease term, and accordingly, no additional rent
expense has been recognized.

     The following table summarizes our contractual obligations at December 31,
2002 and the effect these obligations are expected to have on our liquidity and
cash flow in future periods.

<TABLE>
<CAPTION>
                                                                           Payments due by period
                                            ------------------------------------------------------------------------------------
Contractual Obligations                      Less than 1 year     1 - 3 years     4 - 5 years     After 5 years        Total
-----------------------------------------   ------------------   -------------   -------------   ---------------   -------------
                                                                               (in millions)
<S>                                         <C>                  <C>             <C>             <C>               <C>
Convertible Subordinated Notes* .........         $  --            $  709.9        $  490.0           $  --         $  1,199.9
Operating lease obligations .............          75.3               113.2            50.0            22.3              260.8
Capital lease obligations ...............           0.4                 0.5              --              --                0.9
                                                  -----            --------        --------           -----         ----------
   Total ................................        $ 75.7            $  823.6        $  540.0          $ 22.3         $  1,461.6
                                                 ======            ========        ========          ======         ==========
</TABLE>

------------
*  Excludes the change in fair value of the interest rate risk on the
   Convertible Subordinated Notes of $37.0 million at December 31, 2002. See
   Note 7 of the Notes.

CRITICAL ACCOUNTING POLICIES
     The discussion and analysis of our financial condition and results of
operations are based on the consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. Note 1 of the Notes describes the significant accounting
policies essential to the consolidated financial statements. The preparation of
these financial statements requires estimates and assumptions that affect the
reported amounts and disclosures.

     We believe the following to be critical accounting policies. That is, they
are both important to the portrayal of our Company's financial condition and
results, and they require significant management judgments and estimates about

                                       40
<PAGE>

matters that are inherently uncertain. As a result of the inherent uncertainty,
there is a likelihood that materially different amounts would be reported under
different conditions or using different assumptions. Although we believe that
our judgments and estimates are appropriate and correct, actual future results
may differ materially from our estimates.

     Inventory reserves. We establish reserves for estimated excess or obsolete
inventory based upon assumptions about demand and market conditions generally
over the following 12 months. We operate in a volatile industry sector
characterized by rapid changes in technology and market conditions.

     Valuation of long-lived and intangible assets and goodwill. We operate our
own wafer fabrication facilities and make significant capital expenditures to
ensure that we are technologically competitive. In addition, we have actively
pursued the acquisition of businesses, which has resulted in significant
goodwill and intangible assets. We assess the impairment of long-lived assets,
identifiable intangibles and related goodwill annually or sooner if events or
changes in circumstances indicate that the carrying value may not be
recoverable. Factors which could trigger an impairment review include the
following: (i) significant negative industry or economic trends; (ii) exiting
an activity in conjunction with a restructuring of operations; (iii) current,
historical or projected losses that demonstrate continuing losses associated
with an asset; or (iv) a significant decline in our market capitalization, for
an extended period of time, relative to net book value. When we determine that
there is an indicator that the carrying value of long-lived assets,
identifiable intangibles and related goodwill may not be recoverable, we
measure impairment based on estimates of future cash flows. These estimates
include assumptions about future conditions such as future revenues, gross
margins, operating expenses within our Company, the fair values of certain
assets based on appraisals, and industry trends.

     Valuation of residual value guarantees. We guarantee the residual values
of equipment associated with two of our operating leases. (See Note 13 of the
Notes.) If it becomes probable that a loss on the guarantees will occur, we
would immediately recognize the deficiency as additional rent expense on a
straight-line basis over the remaining term of the lease. In order to assess
whether or not a loss has occurred, we use independent appraisals and use of
management estimates to estimate the residual value of the equipment. These
estimates include assumptions about future conditions within our Company and
industry. We test for potential loss annually or sooner if events or changes in
circumstances indicate that the residual value of the equipment may be lower
than the guaranteed residual value. As of December 31, 2002, our maximum
potential exposure to residual value guarantees is $110 million.

     Restructuring reserves. We have recorded reserves for restructuring costs
related to the restructuring of operations. The restructuring costs include
payments to employees for severance, lease and contract termination fees,
decommissioning costs for fabrication equipment, and other costs to close
facilities. The reserves are recorded at the time we announce a plan to exit
certain activities and are based on estimates of the costs and length of time
to exit those activities.

     Income taxes. We have recorded a valuation allowance to reduce the
deferred tax assets to the amount that is more likely than not to be realized.
We have considered future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for the valuation allowance.

Recent Accounting Pronouncements
     In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 143 ("SFAS No. 143"), "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. The Statement applies to all entities.
It applies to legal obligations associated with the retirement of long-lived
assets that result from the acquisition, construction, development and/ or the
normal operation of a long-lived asset, except for certain obligations of
lessees. This statement applies to certain contractual obligations we have
under operating leases for facilities and equipment. We adopted SFAS No. 143 on
January 1, 2003, and it did not have a significant effect on our consolidated
balance sheet or statement of operations.

     In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities" ("SFAS No. 146"). SFAS No. 146 addresses significant
issues regarding the recognition, measurement and reporting of costs that are
associated with exit and disposal activities, including restructuring
activities that are currently accounted for under EITF No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring)." The scope
of SFAS No. 146 also includes costs

                                       41
<PAGE>

related to terminating a contract that is not a capital lease and termination
benefits that employees who are involuntarily terminated receive under the
terms of a one-time benefit arrangement that is not an ongoing benefit
arrangement or an individual deferred-compensation contract. We are required to
adopt the provisions of SFAS No. 146 effective for exit or disposal activities
initiated after December 31, 2002. The provisions of EITF No. 94-3 shall
continue to apply for an exit activity initiated under an exit plan that met
the criteria of EITF No. 94-3 prior to the adoption of SFAS No. 146. The
adoption of SFAS No. 146 will change on a prospective basis the timing of when
restructuring charges are recorded from a commitment date approach to when the
liability is incurred. We do not anticipate that the adoption of this statement
will have a material impact on our consolidated balance sheet or statement of
operations.

     In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 requires that a
liability be recorded in the guarantor's balance sheet upon issuance of a
guarantee. In addition, FIN 45 requires disclosures about the guarantees that
an entity has issued, including a reconciliation of changes in the entity's
product warranty liabilities. The initial recognition and initial measurement
provisions of FIN 45 are applicable on a prospective basis to guarantees issued
or modified after December 31, 2002, irrespective of the guarantor's fiscal
year-end. The disclosure requirements of FIN 45 are effective for financial
statements of interim or annual periods ending after December 15, 2002. We are
in the process of evaluating the impact FIN 45 will have to us, but currently
believe that only our consolidated balance sheet will be affected. The
guaranteed residual values for the equipment under two of our operating leases
are subject to FIN 45 and will require us to gross up our balance sheet in
2003, by creating an asset and equal liability for the fair value of the
guaranteed residual value of the equipment. We do not believe that this
pronouncement will have a material net impact to our consolidated statement of
operations. See Note 13 of the Notes to the Consolidated Financial Statements
for a discussion of our operating leases.

     In November 2002, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 00-21, "Revenue Arrangements with Multiple
Deliverables." EITF Issue No. 00-21 provides guidance on how to account for
arrangements that involve the delivery or performance of multiple products,
services and/or rights to use assets. The provisions of EITF Issue No. 00-21
will apply to revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. We believe that the adoption of this standard will not
have a material impact on our consolidated balance sheet or statement of
operations.

     In December 2002, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 148, "Accounting for Stock-Based Compensation,
Transition and Disclosure." SFAS No. 148 provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. SFAS No. 148 also requires that
disclosures of the pro forma effect of using the fair value method of
accounting for stock-based employee compensation be displayed more prominently
and in a tabular format. Additionally, SFAS No. 148 requires disclosure of the
pro forma effect in interim financial statements. The transition and annual
disclosure requirements of SFAS No. 148 are effective for fiscal years ended
after December 15, 2002. The interim disclosure requirements are effective for
interim periods ending after December 15, 2002. We have adopted the disclosure
requirements of SFAS No. 148 as of December 31, 2002.

     In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective immediately for all new variable interest entities created or
acquired after January 31, 2003. For variable interest entities created or
acquired prior to February 1, 2003, the provisions of FIN 46 must be applied
for the first interim or annual period beginning after June 15, 2003. We
currently have two operating leases for equipment, as discussed in Note 13 of
the Notes. The assets currently held under these operating leases had an
original cost of approximately $332 million and are held in entities generally
set up to own and lease such assets to the Company. Based on our interpretation
of FIN 46, we currently believe that we will be required to consolidate the
variable interest entities associated with these operating leases on July 1,
2003, the effective date of the statement for us, barring financial
restructuring. We are currently seeking to refinance these leases in a manner
that best meets our capital financing strategy and our cost of capital
objectives. We believe that these leases once refinanced, would not require
consolidation.

                                       42
<PAGE>

FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS

     Statements in this discussion and analysis include forward-looking
information within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities and Exchange Act of 1934, as
amended. All forward-looking statements included in this discussion and
analysis are based on information available to us on the date of filing of this
Annual Report on Form 10-K, and we assume no obligation to update any such
forward-looking statements. These statements involve known and unknown risks
and uncertainties. Our actual results in future periods may be significantly
different from any future performance suggested in this report. In some cases,
you can identify forward-looking statements by terminology such as "may,"
"will," "expects," "plans," "anticipates," "believes," "estimates," "intends,"
"projects," "predicts," or similar expressions. For such statements, we claim
the protection under the safe harbor for forward-looking statements contained
in the Private Securities Litigation Reform Act of 1995. Although we believe
that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. Risks and uncertainties that may affect our results may
include, among others:

     o    The long-term down turn of the economy and the cyclical nature of the
          Semiconductor industry and the markets addressed by our products;

     o    Availability and extent of utilization of manufacturing capacity;

     o    Use of foundries to outsource production of a substantial portion of
          our wafer requirements;

     o    Disruptions in general economic activity due to worsening global
          business conditions or caused by the effects of terrorist activities
          or armed conflict;

     o    Adverse changes in general economic conditions in any of the countries
          in which we do business;

     o    Dependence on a limited number of customers for a substantial portion
          of our revenues;

     o    Price erosion;

     o    Competitive factors;

     o    Timing and success of new product introductions;

     o    Changes in product mix;

     o    Fluctuations in manufacturing yields;

     o    Product obsolescence;

     o    Business and product market cycles;

     o    Economic and technological risks associated with our acquisitions,
          investments and alliance activities; and

     o    The ability to develop and implement new technologies.

     Our operating results could also be impacted by sudden fluctuations in
customer requirements, foreign currency exchange rate fluctuations and other
economic conditions affecting customer demand and the cost of operations in one
or more of the global markets in which we do business. We operate in a
technologically advanced, rapidly changing and highly competitive environment.
While we cannot predict what effect these various factors may have on our
financial results, the aggregate effect of these and other factors could result
in significant volatility in our future performance. To the extent our
performance may not meet expectations published by external sources, public
reaction could result in a sudden and significantly adverse impact on the
market price of our securities, particularly on a short-term basis.

     We have international subsidiaries and distributors that operate and sell
our products globally. Further, we purchase a substantial portion of our raw
materials and manufacturing equipment from foreign suppliers and incur labor
and other operating costs in foreign currencies, particularly in our Japanese
manufacturing facilities. As a result, we are exposed to the risk of changes in
foreign currency exchange rates or declining economic conditions in these
countries. We utilize forward exchange contracts and purchased currency option
contracts to manage our exposure associated with net asset and liability
positions and cash flows denominated in non-functional currencies. (See Note 6
of the Notes.) There is no assurance that these hedging transactions will
eliminate exposure to currency rate fluctuations and this could affect our
operating results.

                                       43
<PAGE>

     Our corporate headquarters and some of our manufacturing facilities are
located near major earthquake faults. As a result, in the event of a major
earthquake, we could suffer damages that could significantly and adversely
affect our operating results and financial condition.

     We operate in an industry sector where the value of securities is highly
volatile and may be influenced by economic and other factors beyond our
control. We believe that our future operating results will continue to be
subject to quarterly variations based upon a wide variety of factors.

     See additional discussion contained in "Risk Factors" set forth in Part I,
Item 1 of this Annual Report on Form 10-K, which is incorporated by reference
into this Part II, Item 7.

     While management believes that the discussion and analysis in this report
is adequate for a fair presentation of the information, we recommend that you
read this discussion and analysis in conjunction with the remainder of this
Annual Report on Form 10-K.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk
     Interest rate sensitivity. We are subject to interest rate risk on our
investment portfolio and outstanding debt. In order to better manage interest
rate risk on our investment portfolio (See Note 6 of the Notes), which reprices
more frequently than the debt portfolio, and to better manage asset and
liability mismatches, we entered into interest rate swap transactions (the
"Swaps") with several investment banks in June 2002. The Swaps effectively
convert fixed interest payments on a portion of our $1.2 billion Convertible
Subordinated Notes to LIBOR-based floating rates. The Swaps are accounted for
as hedges. (See Note 7 of the Notes.) The difference between the changes in the
fair values of the derivative and the hedged risk resulted in a $4.0 million
charge that we included in interest expense on our statement of operations for
the year ended December 31, 2002.

     An interest rate move of 30 basis-points (10% of our weighted-average
worldwide interest rate in 2002) affecting our floating-rate financial
instruments as of December 31, 2002, including both debt obligations and
investments, would not have a significant effect on our financial position,
results of operations and cash flows over the next fiscal year, assuming that
the investment balance remains consistent. In 2001, an interest rate move of 41
basis points (10% of our weighted-average worldwide interest rate in 2001)
affecting our interest sensitive investments would also not have had a
significant effect on our financial position, results of operations and cash
flows.

     Foreign currency exchange risk. We have foreign subsidiaries that operate
and sell our products in various global markets. We purchase a substantial
portion of our raw materials and equipment from foreign suppliers and incur
labor and other operating costs in foreign currencies, particularly at our
Japanese manufacturing facilities. As a result, our cash flow and earnings are
exposed to fluctuations in foreign currency exchange rates. We attempt to limit
these exposures through operational strategies and financial market
instruments. We use various hedge instruments, primarily forward contracts with
maturities of six months or less and currency option contracts, to manage our
exposure associated with net asset and liability positions and cash flows
denominated in non-functional currencies. We did not enter into derivative
financial instruments for trading purposes during 2002 and 2001.

     Based on our overall currency rate exposures at December 31, 2002,
including derivative financial instruments and nonfunctional
currency-denominated receivables and payables, a near-term 10% appreciation or
depreciation of the U.S. dollar would not have a significant effect on our
financial position, results of operations and cash flows over the next fiscal
year. In 2001, a near-term 10% appreciation or depreciation of the U.S. dollar
would also not have had a significant effect.

     Equity price risk. We have investments in marketable equity securities
included in long-term assets. The fair values of these investments are
sensitive to equity price changes. Any change in the value of marketable
investments is ordinarily recorded through accumulated comprehensive income.
The increase or decrease in fair value of the investments would affect our
results of operations to the extent the investments were sold or that declines
in value were deemed by management to be other than temporary.

     If prices of the equity investments increase or decrease 10% from their
fair value as of December 31, 2002, it would increase or decrease the
investment values by $3.8 million. As of December 31, 2001, a 10% increase or
decrease in fair value would have increased or decreased the investment values
by $7.8 million. We do not use any derivatives to hedge the fair value of our
marketable equity securities.

                                       44
<PAGE>

Item 8. Financial Statements and Supplementary Data

                             LSI LOGIC CORPORATION
                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                December 31,
                                                                       -------------------------------
                                                                            2002             2001
                                                                       --------------   --------------
                                                                            (In thousands, except
                                                                             per-share amounts)
<S>                                                                    <C>              <C>
                                                      ASSETS
Cash and cash equivalents ..........................................    $   448,847      $   757,138
Short-term investments .............................................        541,129          256,169
Accounts receivable, less allowances of $7,033 and $20,151 .........        248,621          191,731
Inventories ........................................................        194,466          256,629
Deferred tax assets ................................................         11,380          160,371
Prepaid expenses and other current assets ..........................        181,610          193,710
                                                                        -----------      -----------
    Total current assets ...........................................      1,626,053        1,815,748
Property and equipment, net ........................................        746,964          944,374
Goodwill and other intangibles, net ................................      1,251,043        1,297,542
Deferred tax assets ................................................        137,152          107,957
Non-current assets and deposits ....................................        211,248          249,485
Investment in equity securities ....................................         37,655           78,433
Other assets .......................................................        132,622          132,233
                                                                        -----------      -----------
    Total assets ...................................................    $ 4,142,737      $ 4,625,772
                                                                        ===========      ===========
                                   LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable ...................................................    $   100,856      $   136,739
Accrued salaries, wages and benefits ...............................         71,499           72,260
Other accrued liabilities ..........................................        184,837          209,941
Income taxes payable ...............................................         30,066           73,187
Deferred tax liabilities ...........................................         10,192           17,526
Current portion of long-term obligations ...........................            361              332
                                                                        -----------      -----------
Total current liabilities ..........................................        397,811          509,985
                                                                        -----------      -----------
Deferred tax liabilities ...........................................        123,365          173,759
Long-term debt and capital lease obligations .......................      1,241,217        1,335,806
Other non-current liabilities ......................................         73,483          120,470
                                                                        -----------      -----------
Total long-term obligations and deferred tax liabilities ...........      1,438,065        1,630,035
                                                                        -----------      -----------
Commitments and contingencies (Note 13)
Minority interest in subsidiary ....................................          6,506            5,867
                                                                        -----------      -----------
Stockholders' equity:
 Preferred shares; $.01 par value; 2,000 shares authorized; none
   outstanding .....................................................             --               --
 Common stock; $.01 par value; 1,300,000 shares authorized;
   375,096 and 368,446 shares outstanding ..........................          3,751            3,684
 Additional paid-in capital ........................................      2,954,282        2,905,638
 Deferred stock compensation .......................................        (51,161)        (124,091)
 Accumulated deficit ...............................................       (612,243)        (319,803)
 Accumulated other comprehensive income ............................          5,726           14,457
                                                                        -----------      -----------
    Total stockholders' equity .....................................      2,300,355        2,479,885
                                                                        -----------      -----------
    Total liabilities and stockholders' equity .....................    $ 4,142,737      $ 4,625,772
                                                                        ===========      ===========
</TABLE>

                See Notes to Consolidated Financial Statements.
                                       45
<PAGE>

                             LSI LOGIC CORPORATION
                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                  Year Ended December 31,
                                                                      -----------------------------------------------
                                                                           2002             2001             2000
                                                                      --------------   --------------   -------------
                                                                         (In thousands, except per share amounts)
<S>                                                                   <C>              <C>              <C>
Revenues ..........................................................    $ 1,816,938      $  1,784,923     $2,737,667
                                                                       -----------      ------------     ----------
Costs and expenses:
 Cost of revenues .................................................      1,122,696         1,160,432      1,557,232
 Additional excess inventory and related charges ..................         45,526           210,564         11,100
                                                                       -----------      ------------     ----------
    Total cost of revenues ........................................      1,168,222         1,370,996      1,568,332
 Research and development .........................................        457,351           503,108        378,936
 Selling, general and administrative ..............................        230,202           307,310        306,962
 Acquired in-process research and development .....................          2,920            96,600         77,438
 Restructuring of operations and other items, net .................         67,136           219,639          2,781
 Amortization of non-cash deferred stock compensation (*) .........         77,303           104,627         41,113
 Amortization of intangibles ......................................         78,617           188,251         72,648
                                                                       -----------      ------------     ----------
    Total costs and expenses ......................................      2,081,751         2,790,531      2,448,210
                                                                       -----------      ------------     ----------
(Loss)/income from operations .....................................       (264,813)       (1,005,608)       289,457
Interest expense ..................................................        (51,977)          (44,578)       (41,573)
Interest income and other, net ....................................         26,386            14,529         51,766
Gain on sale of equity securities .................................             --             5,302         80,100
                                                                       -----------      ------------     ----------
(Loss)/income before income taxes and minority interest ...........       (290,404)       (1,030,355)       379,750
Provision/(benefit) for income taxes ..............................          1,750           (39,198)       142,959
                                                                       -----------      ------------     ----------
(Loss)/income before minority interest ............................       (292,154)         (991,157)       236,791
Minority interest in net income of subsidiary .....................            286               798            191
                                                                       -----------      ------------     ----------
    Net (loss)/income .............................................    $  (292,440)     $   (991,955)    $  236,600
                                                                       ===========      ============     ==========
(Loss)/earnings per share:
 Basic ............................................................    $     (0.79)     $      (2.84)    $     0.76
                                                                       ===========      ============     ==========
 Diluted ..........................................................    $     (0.79)     $      (2.84)    $     0.70
                                                                       ===========      ============     ==========
Shares used in computing per share amounts:
 Basic ............................................................        370,529           349,280        310,813
                                                                       ===========      ============     ==========
 Diluted ..........................................................        370,529           349,280        354,337
                                                                       ===========      ============     ==========
</TABLE>

------------
(*) Amortization of non-cash deferred stock compensation, if not shown
   separately, would have been included in cost of revenues, research and
   development, and selling, general and administrative expenses, as shown
   below:

<TABLE>
<CAPTION>
                                                   Year ended December 31,
                                                   -----------------------
                                                    2002     2001     2000
                                                   ------   ------   -----
                                                        (In millions)
<S>                                                <C>      <C>      <C>
   Cost of revenues ............................    $ 2      $ 2      $--
   Research and development ....................     58       78       29
   Selling, general and administrative .........     17       25       12
</TABLE>

                See Notes to Consolidated Financial Statements.
                                       46
<PAGE>

                             LSI LOGIC CORPORATION
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>

                                            Common Stock        Additional
                                       ----------------------     Paid-in
                                          Shares     Amount       Capital
                                       ----------- ---------- --------------
                                                  (In thousands)
<S>                                    <C>         <C>        <C>
Balances at December 31, 1999 ........   299,572     $2,996     $1,271,093
Net income ...........................
Foreign currency translation
 adjustments .........................
Unrealized loss on available-for-sale
 securities ..........................
Total comprehensive income ...........
Purchase of common stock under
 stock repurchase program ............    (1,500)       (15)       (49,281)
Issuance to employees under
 stock option and purchase plans .....    13,352        134        125,945
Tax benefit of employee stock
 transactions ........................                              51,450
Issuance of common stock in
 conjunction with acquisitions .......    10,099        100        532,357
Deferred stock compensation ..........
Amortization of deferred stock
 compensation ........................
                                         -------     ------     ----------
Balances at December 31, 2000 ........   321,523      3,215      1,931,564
Net loss .............................
Foreign currency translation
 adjustments .........................
Unrealized loss on available-for-sale
 securities ..........................
Total comprehensive loss .............
Issuance to employees under stock
 option and purchase plans ...........     6,249         62         81,588
Issuance of common stock for
 conversion of convertible debt ......         4         --             65
Issuance of common stock in
 conjunction with acquisitions
 (Note 2) ............................    40,670        407        892,421
Deferred stock compensation (Note 2) .
Amortization of deferred stock
 compensation ........................
                                         -------     ------     ----------
Balances at December 31, 2001 ........   368,446      3,684      2,905,638
Net loss .............................
Foreign currency translation
 adjustments .........................
Unrealized loss on available-for-sale
 securities ..........................
Total comprehensive loss .............
Issuance to employees under
 stock option and purchase plans .....     6,292         63         45,102
Issuance of common stock in
 conjunction with acquisitions
 (Note 2) ............................       358          4          3,542
Deferred stock compensation (Note 2) .
Amortization of deferred stock
 compensation ........................
                                         -------     ------     ----------
Balances at December 31, 2002 ........   375,096     $3,751     $2,954,282
                                         =======     ======     ==========

<CAPTION>
                                                       (Accumulated    Accumulated
                                          Deferred       Deficit)/        Other
                                            Stock        Retained     Comprehensive
                                        Compensation     Earnings     Income/(Loss)       Total
                                       -------------- -------------- --------------- ---------------
                                                              (In thousands)
<S>                                    <C>            <C>            <C>             <C>
Balances at December 31, 1999 ........   $       --     $  435,552      $ 146,191     $   1,855,832
Net income ...........................                     236,600
Foreign currency translation
 adjustments .........................                                    (33,650)
Unrealized loss on available-for-sale
 securities ..........................                                    (58,290)
                                                                                      -------------
Total comprehensive income ...........                                                      144,660
                                                                                      -------------
Purchase of common stock under
 stock repurchase program ............                                                      (49,296)
Issuance to employees under
 stock option and purchase plans .....                                                      126,079
Tax benefit of employee stock
 transactions ........................                                                       51,450
Issuance of common stock in
 conjunction with acquisitions .......                                                      532,457
Deferred stock compensation ..........     (204,158)                                       (204,158)
Amortization of deferred stock
 compensation ........................       41,113                                          41,113
                                         ----------                                   -------------
Balances at December 31, 2000 ........     (163,045)       672,152         54,251         2,498,137
Net loss .............................                    (991,955)
Foreign currency translation
 adjustments .........................                                    (31,069)
Unrealized loss on available-for-sale
 securities ..........................                                     (8,725)
                                                                                      -------------
Total comprehensive loss .............                                                   (1,031,749)
                                                                                      -------------
Issuance to employees under stock
 option and purchase plans ...........                                                       81,650
Issuance of common stock for
 conversion of convertible debt ......                                                           65
Issuance of common stock in
 conjunction with acquisitions
 (Note 2) ............................                                                      892,828
Deferred stock compensation (Note 2) .      (65,673)                                        (65,673)
Amortization of deferred stock
 compensation ........................      104,627                                         104,627
                                         ----------     ------------    ---------     -------------
Balances at December 31, 2001 ........     (124,091)      (319,803)        14,457         2,479,885
Net loss .............................                    (292,440)
Foreign currency translation
 adjustments .........................                                     11,358
Unrealized loss on available-for-sale
 securities ..........................                                    (20,089)
Total comprehensive loss .............                                                     (301,171)
                                                                                      -------------
Issuance to employees under
 stock option and purchase plans .....                                                       45,165
Issuance of common stock in
 conjunction with acquisitions
 (Note 2) ............................                                                        3,546
Deferred stock compensation (Note 2) .       (4,373)                                         (4,373)
Amortization of deferred stock
 compensation ........................       77,303                                          77,303
                                         ----------     ------------    ---------     -------------
Balances at December 31, 2002 ........   $  (51,161)    $ (612,243)     $   5,726     $   2,300,355
                                         ==========     ==========      =========     =============
</TABLE>

                See Notes to Consolidated Financial Statements.
                                       47
<PAGE>

                             LSI LOGIC CORPORATION
                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                      Year Ended December 31,
                                                                         --------------------------------------------------
                                                                               2002             2001              2000
                                                                         ---------------   --------------   ---------------
                                                                                           (In thousands)
<S>                                                                      <C>               <C>              <C>
Operating activities:
 Net (loss)/ income ..................................................    $   (292,440)     $   (991,955)    $    236,600
 Adjustments:
   Depreciation and amortization .....................................         349,326           532,562          403,961
   Amortization of non-cash deferred stock compensation ..............          77,303           104,627           41,113
   Acquired in-process research and development ......................           2,920            96,600           77,438
   Non-cash restructuring and other items, net .......................          46,050           184,876            2,781
   Loss on write-down of equity securities, net of gain
    on sales .........................................................          19,423             9,906          (80,100)
   Gain on sale of short-term investments ............................          (8,220)           (2,098)              --
   Gain on repurchase of Convertible Subordinated Notes ..............         (14,260)               --               --
   Changes in deferred tax assets and liabilities ....................          61,385           (45,271)         (13,057)
   Tax benefit of employee stock transactions ........................              --                --           51,450
   Changes in assets and liabilities, net of assets acquired
    assets and liabilities assumed in business combinations:
    Accounts receivable, net .........................................         (54,619)          345,439         (246,755)
    Inventories, net .................................................          75,579            43,182          (47,136)
    Prepaid expenses and other assets ................................          18,648            18,030         (117,898)
    Accounts payable .................................................         (35,828)         (138,100)          80,498
    Accrued and other liabilities ....................................         (91,619)          (40,445)         176,522
                                                                          ------------      ------------     ------------
      Net cash provided by operating activities ......................         153,648           117,353          565,417
                                                                          ------------      ------------     ------------
Investing activities:
 Purchase of debt and equity securities available-for-sale ...........      (1,771,809)       (1,272,897)      (1,432,515)
 Maturities and sales of debt and equity securities
   available-for-sale ................................................       1,486,816         1,860,402          989,129
 Purchase of equity securities .......................................              --           (12,269)         (26,664)
 Proceeds from sale of stock investments .............................              --             7,926           78,770
 Acquisitions of companies, net of cash acquired .....................         (55,916)         (177,677)         (85,402)
 Purchases of property and equipment, net of retirements .............         (38,572)         (224,252)        (276,633)
 Increase in non-current assets and deposits, net ....................         (11,658)         (325,894)              --
                                                                          ------------      ------------     ------------
      Net cash used in investing activities ..........................        (391,139)         (144,661)        (753,315)
                                                                          ------------      ------------     ------------
Financing activities:
 Proceeds from borrowings ............................................              --           690,088          500,000
 Repayment of debt obligations .......................................            (332)         (201,226)        (376,658)
 Repurchase of Convertible Subordinated Notes ........................        (118,938)               --               --
 Debt issuance costs .................................................              --           (16,249)         (15,300)
 Purchase of common stock under repurchase program ...................              --                --          (49,296)
 Issuance of common stock, net .......................................          43,992            81,650          124,975
                                                                          ------------      ------------     ------------
      Net cash (used in)/provided by financing activities ............         (75,278)          554,263          183,721
                                                                          ------------      ------------     ------------
Effect of exchange rate changes on cash and cash equivalents .........           4,478            (5,712)         (10,531)
                                                                          ------------      ------------     ------------
(Decrease)/increase in cash and cash equivalents .....................        (308,291)          521,243          (14,708)
Cash and cash equivalents at beginning of period .....................         757,138           235,895          250,603
                                                                          ------------      ------------     ------------
Cash and cash equivalents at end of period ...........................    $    448,847      $    757,138     $    235,895
                                                                          ============      ============     ============
</TABLE>

                See Notes to Consolidated Financial Statements.
                                       48
<PAGE>

                             LSI Logic Corporation

                   Notes to Consolidated Financial Statements

Note 1 -- Significant Accounting policies

     Nature of business. LSI Logic Corporation ("the Company" or "LSI") is a
leading supplier of high-performance integrated circuits and highly scalable
enterprise storage systems. The Company is focused on the four markets of
consumer products, communications, storage components and storage systems.

     The semiconductor industry is characterized by rapid technological change,
competitive pricing pressures and cyclical market patterns. The Company's
financial results are affected by a wide variety of factors, including general
economic conditions worldwide, economic conditions specific to the
semiconductor industry, the timely implementation of new manufacturing
technologies and the ability to safeguard patents and intellectual property in
a rapidly evolving market. In addition, the semiconductor market has
historically been cyclical and subject to significant economic downturns at
various times. As a result, the Company may experience significant
period-to-period fluctuations in future operating results due to the factors
mentioned above or other factors.

     Basis of presentation. The consolidated financial statements include the
accounts of the Company and all of its subsidiaries. Intercompany transactions
and balances have been eliminated in consolidation. Where the functional
currency of the Company's foreign subsidiaries is the local currency, all
assets and liabilities are translated into U.S. dollars at the current rates of
exchange as of the balance sheet date and revenues and expenses are translated
using weighted average rates prevailing during the period. Accounts denominated
in foreign currencies have been remeasured into functional currencies before
translation into U.S. dollars. Foreign currency transaction gains and losses
are included as a component of interest income and other. Gains and losses from
foreign currency translation are included as a separate component of
comprehensive income.

     Minority interest in subsidiary represents the minority stockholders'
proportionate share of the net assets and the results of operations of the
Company's majority-owned subsidiary. Sales of common stock of the Company's
subsidiary and purchases of such shares may result in changes in the Company's
proportionate share of the subsidiary's net assets.

     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 consolidated financial statements and the reported amounts
of revenues and expenses during the reporting periods. Actual results could
differ materially from these estimates.

     Certain items previously reported in specific financial statement captions
have been reclassified to conform to the 2002 presentation.

     Acquisitions accounted for as purchases. The estimated fair value of
acquired assets and assumed liabilities and the results of operations for
acquisitions accounted for under the purchase method of accounting are included
in the Company's consolidated financial statements as of the effective date of
the purchase, through the end of the period. The total purchase price is
allocated to the estimated fair value of assets acquired and liabilities
assumed based on independent appraisals and management estimates. The fair
value of common shares issued for acquisitions was determined using the average
closing stock price for the period of two days before and after the date the
number of LSI common shares to be issued was fixed. The purchase price includes
direct acquisition costs consisting of investment banking, legal and accounting
fees. There were no significant differences between the accounting policies of
the Company and the acquired entities.

     Cash equivalents. All highly liquid investments purchased with an original
maturity of 90 days or less are considered to be cash equivalents. Cash
equivalents are reported at amortized cost plus accrued interest.

     Accounts receivable and allowance for doubtful accounts. Trade receivables
are reported in the balance sheet reduced by an allowance for doubtful accounts
for estimated losses resulting from receivables not considered to

                                       49
<PAGE>

                             LSI Logic Corporation

             Notes to Consolidated Financial Statements (Continued)

Note 1 -- Significant Accounting policies (Continued)

be collectible. The allowance for doubtful accounts is estimated by evaluating
customer's history and credit worthiness as well as current economic and market
trends.

     Investments. Available-for-sale investments include marketable short-term
investments and long-term investments in marketable and restricted shares of
technology companies. Short-term investments in marketable debt securities are
reported at fair value and include all debt securities regardless of their
maturity dates. Long-term investments in marketable equity securities are
reported at fair value with unrealized gains and losses, net of related tax,
recorded as a separate component of comprehensive income in stockholders'
equity until realized. The investments in long-term restricted and
non-marketable equity securities are recorded at cost. Gains and losses on
securities sold are determined based on the specific identification method and
are included in interest income and other. For all investment securities,
unrealized losses that are considered to be other than temporary are recognized
as a component of interest income and other. Circumstances that indicate an
other than temporary decline may include subsequent "down" financing rounds,
decreases in quoted market price and declines in results of operations of the
issuer. The Company does not hold any of these securities for speculative or
trading purposes.

     Inventories. Inventories are stated at the lower of cost or market. Cost
is computed on a currently adjusted standard basis (which approximates
first-in, first-out) for raw materials, work-in-process and finished goods.
Inventory reserves are established when conditions indicate that the selling
price could be less than cost due to physical deterioration, obsolescence,
changes in price levels, or other causes. Reserves are established for excess
inventory generally based on inventory levels in excess of 12 months of demand,
as judged by management, for each specific product.

     Property and equipment. Property and equipment are recorded at cost and
include interest on funds borrowed during the construction period. Depreciation
and amortization are calculated based on the straight-line method over the
estimated useful lives of the assets as presented below:

<TABLE>
<S>                                        <C>
      Buildings and improvements ......... 20-40 years
      Equipment .......................... 3-5 years
      Furniture and fixtures ............. 5 years
</TABLE>

     Amortization of leasehold improvements is computed using the shorter of
the remaining term of the Company's facility leases or the estimated useful
lives of the improvements.

     Software. The Company capitalizes external costs related to the purchase
and implementation of software projects used for business operations and
engineering design activities. Capitalized software costs primarily include
purchased software and external consulting fees. Capitalized software projects
are amortized over the estimated useful lives of the projects, typically a
two-to-five year period. The Company had $163 million and $178 million of
capitalized software costs and $144 million and $131 million of accumulated
amortization included in other assets at December 31, 2002 and 2001,
respectively. Software amortization totaling $43 million, $56 million and $41
million was included in the Company's results of operations during 2002, 2001
and 2000, respectively.

     Impairment of long-lived assets and lease guarantees. The Company
evaluates the carrying value of long-lived assets whenever events or changes in
circumstances indicate the carrying value of an asset may not be recoverable.
The determination of recoverability is based on an estimate of undiscounted
cash flows expected to result from the use and eventual disposition of the
asset. In the event such cash flows are not expected to be sufficient to
recover the recorded value of the assets, the assets are written down to their
estimated fair values. When assets are removed from operations and held for
sale, the impairment loss is estimated as the excess of the carrying value of
the assets over their fair value. The Company guarantees the residual values of
equipment associated with two operating leases (See Note 13). If it becomes
probable that a loss on the guarantees will occur, the Company would
immediately recognize the deficiency as additional rent expense on a
straight-line basis over the remaining term

                                       50
<PAGE>

                             LSI Logic Corporation

             Notes to Consolidated Financial Statements (Continued)

Note 1 -- Significant Accounting policies (Continued)

of the lease. In order to assess whether or not a loss has occurred, the
Company uses independent appraisals and use of management estimates to estimate
the residual value of the equipment. These estimates include assumptions about
future conditions within the Company and industry. The Company tests for
potential loss annually or sooner if events or changes in circumstances
indicate that the residual value of the equipment may be lower than the
guaranteed residual value.

     Self-insurance. The Company retains certain exposures in its insurance
plan under self-insurance programs. Reserves for claims made and reserves for
estimated claims incurred but not yet reported are recorded as current
liabilities.

     Product warranties. The Company warrants finished goods against defects in
material and workmanship under normal use and service for periods of one to
five years for Semiconductor products and Storage Systems' hardware and 90 days
for Storage Systems' software. A liability for estimated future costs under
product warranties is recorded when products are shipped.

     Fair value disclosures of financial instruments. The estimated fair value
of financial instruments is determined by the Company, using available market
information and valuation methodologies considered to be appropriate. However,
considerable judgment is required in interpreting market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts that the Company could realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies could have a significant effect on the estimated fair
value amounts. The fair value of investments, derivative instruments and
convertible debt are based on market data. Carrying amounts of accounts
receivable and accounts payable approximate fair value due to the short
maturity of these financial instruments.

     Derivative instruments. All of the Company's derivative instruments are
recognized as assets or liabilities in the statement of financial position and
measured at fair value (see Note 7). The Company does not enter into derivative
financial instruments for speculative or trading purposes. On the date a
derivative contract is entered into, the Company designates its derivative as
either a hedge of the fair value of a recognized asset or liability
("fair-value" hedge), as a hedge of the variability of cash flows to be
received ("cash-flow" hedge), or as a foreign-currency hedge. Changes in the
fair value of a derivative that is highly effective and is designated and
qualifies as a fair-value hedge, along with the loss or gain on the hedged
asset or liability that is attributable to the hedged risk (including losses or
gains on firm commitments), are recorded in current period earnings. Effective
changes in the fair value of a derivative that is highly effective and is
designated and qualifies as a cash-flow hedge, are recorded in other
comprehensive income, until earnings are affected by the variability of the
cash flows. Changes in the fair value of derivatives that are highly effective,
and are designated and qualify as a foreign-currency hedge, are recorded in
either current period earnings or other comprehensive income, depending on
whether the hedge transaction is a fair-value hedge (e.g., a hedge of a firm
commitment that is to be settled in a foreign currency) or a cash-flow hedge
(e.g., a foreign-currency-denominated forecasted transaction).

     The Company formally documents all relationships between hedging
instruments and hedged items, as well as its risk management objective and
strategy for undertaking various hedge transactions. This process includes
linking all derivatives that are designated as fair-value, cash flow or
foreign-currency hedges to specific assets and liabilities on the balance sheet
or to specific firm commitments or forecasted transactions. The Company also
assesses, both at the hedge's inception and on an ongoing basis, whether the
derivatives that are used in hedging transactions are highly effective in
offsetting changes in fair values or cash flows of the hedged items. If it were
determined that a derivative was not highly effective as a hedge or that it had
ceased to be a highly effective hedge, the Company would discontinue hedge
accounting prospectively, as discussed below.

     The Company would discontinue hedge accounting prospectively when (1) it
was determined that the derivative was no longer highly effective in offsetting
changes in the fair value or cash flows of a hedged item (including firm
commitments or forecasted transactions); (2) the derivative expired or was
sold, terminated or exercised; (3) the

                                       51
<PAGE>

                             LSI Logic Corporation

             Notes to Consolidated Financial Statements (Continued)

Note 1 -- Significant Accounting policies (Continued)

derivative was no longer designated as a hedge instrument, because it was
unlikely that a forecasted transaction would occur; (4) the hedged firm
commitment no longer met the definition of a firm commitment; or (5) management
determined that designation of the derivative as a hedge instrument was no
longer appropriate.

     When hedge accounting is discontinued because it is determined that the
derivative no longer qualifies as a highly effective fair-value hedge, the
derivative will continue to be carried on the balance sheet at its fair value,
and the hedged asset or liability will no longer be adjusted for changes in
fair value. When hedge accounting is discontinued because the hedged item no
longer meets the definition of a firm commitment, the derivative will continue
to be carried on the balance sheet at its fair value, and any asset or
liability that was previously recorded pursuant to recognition of the firm
commitment will be removed from the balance sheet and recognized as a gain or
loss in current period earnings. When hedge accounting is discontinued because
it is probable that a forecasted transaction will not occur, the derivative
will continue to be carried on the balance sheet at its fair value, and gains
and losses that were accumulated in other comprehensive income will be
recognized immediately in earnings. When a hedge on an interest bearing
financial instrument (such as an interest rate swap) is cancelled and hedge
accounting is discontinued, the hedged item is no longer adjusted for changes
in its fair value, and the remaining asset or liability will be amortized to
earnings over the remaining life of the hedged item. In all other situations in
which hedge accounting is discontinued, the derivative will be carried at its
fair value on the balance sheet, with changes in its fair value recognized in
current period earnings.

     Concentration of credit risk of financial instruments. Financial
instruments that potentially subject the Company to credit risk consist of cash
equivalents, short-term investments, interest rate swaps and accounts
receivable. Cash equivalents, short-term investments and interest rate swaps
are maintained with high quality institutions, the composition and maturities
of which are regularly monitored by management. A majority of the Company's
trade receivables are derived from sales to large multinational computer,
communication, networking, storage and consumer electronics manufacturers, with
the remainder distributed across other industries. No customers accounted for
greater than 10% of trade receivables as of December 31, 2002. As of December
31, 2001, two customers each accounted for 12% of consolidated trade
receivables. Concentrations of credit risk with respect to all other trade
receivables are considered to be limited due to the quantity of customers
comprising the Company's customer base and their dispersion across industries
and geographies. The Company performs ongoing credit evaluations of its
customers' financial condition and requires collateral as considered necessary.
Write-offs of uncollectable amounts have not been significant.

     Revenue recognition. Product revenue is primarily recognized upon
shipment, when persuasive evidence of a sales arrangement exists, the price is
fixed or determinable, title has transferred and collection of resulting
receivables is reasonably assured. Standard products sold to distributors are
subject to specific rights to return products; therefore, revenue recognition
is deferred until the distributor sells the product to a third party. Revenue
from the licensing of the Company's design and manufacturing technology is
recognized when the significant contractual obligations have been fulfilled.
Royalty revenue is recognized upon the sale of products subject to royalties.
The Company uses the percentage-of-completion method for recognizing revenues
on fixed-fee design arrangements. All amounts billed to a customer related to
shipping and handling are classified as revenue while all costs incurred by the
Company for shipping and handling are classified as costs of goods sold.

     The provisions of Statement of Position ("SOP") 97-2, "Software Revenue
Recognition," as amended by SOP 98-9, "Modification of SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions" are applied to all
transactions involving the sale of software products and hardware transactions
where the software is not incidental. For hardware transactions where software
is incidental, the fee is not bifurcated and separate accounting guidance is
not applied to the hardware and software elements.

     Stock-based compensation. The Company accounts for stock-based
compensation, including stock options granted and shares issued under the
Employee Stock Purchase Plan, using the intrinsic value method as prescribed

                                       52
<PAGE>

                             LSI Logic Corporation

             Notes to Consolidated Financial Statements (Continued)

Note 1 -- Significant Accounting policies (Continued)

in APB No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Compensation cost for stock options, if any, is measured as
the excess of the quoted market price at grant date over the exercise price and
recognized ratably over the vesting period. The Company's policy is to grant
options with an exercise price equal to the quoted market price of the
Company's stock on the grant date.

     For all acquisitions that closed after July 2000, the intrinsic value of
the unvested options, restricted awards and warrants assumed as part of the
acquisitions as of the closing date of the acquisitions was recorded as
deferred stock compensation as a component of the purchase price to be
amortized over the respective vesting periods of the options and awards. The
Company calculated the value of restricted shares issued using the closing
price of its common stock on the date of consummation of the purchase. The fair
value of the options and warrants assumed was determined using the Black
Scholes model. Deferred stock compensation is included as a component of
stockholders' equity and is amortized over the vesting period of one to four
years.

     The following table provides pro forma disclosures as if the Company had
recorded compensation costs based on the estimated grant date fair value, as
defined by SFAS No. 123, for awards granted under its stock option and stock
purchase plans, the Company's net income and earnings per share would have been
adjusted to the pro forma amounts below.

<TABLE>
<CAPTION>
                                                                 Year ended December 31,
                                                     -----------------------------------------------
                                                          2002              2001             2000
                                                     --------------   ----------------   -----------
                                                        (In thousands, except per share amounts)
<S>                                                  <C>              <C>                <C>
Net (loss)/income, as reported ...................     $ (292,440)      $   (991,955)     $ 236,600
Add: Amortization of non-cash deferred stock
 compensation expense determined under the
 intrinsic value method as reported in net income,
 net of related tax effects * ....................         30,583             44,772          9,146
Deduct: Total stock-based employee compensation
 expense determined under fair value method for
 all awards, net of related tax effects ..........       (243,871)          (242,900)       (96,615)
                                                       ----------       ------------      ---------
Pro forma net (loss)/income ** ...................     $ (505,728)      $ (1,190,083)     $ 149,131
                                                       ==========       ============      =========
(Loss)/income per share:
 Basic-as reported ...............................     $    (0.79)      $      (2.84)     $    0.76
 Basic-pro forma .................................     $    (1.36)      $      (3.41)     $    0.48
 Diluted-as reported .............................     $    (0.79)      $      (2.84)     $    0.70
 Diluted-pro forma ...............................     $    (1.36)      $      (3.41)     $    0.46
</TABLE>

------------
*  This amount excludes amortization of non-cash deferred stock compensation on
restricted stock awards.
** These amounts have been adjusted to reflect a correction to volatility,
   which resulted in a 2% reduction in the pro forma net loss in 2001 and a 5%
   increase in pro forma net income in 2000.

     For the years ended December 31, 2002 and 2001, common stock equivalents
of approximately 70.3 million and 95.8 million shares, respectively, were
excluded from the computation of pro forma diluted earnings per share as a
result of their antidilutive effect on pro forma loss per share. For the year
ended December 31, 2000, common stock equivalents of approximately 6.2 million
shares and interest expense of $11 million, net of taxes, associated with the
2000 Convertible Subordinated Notes were excluded from the computation of pro
forma diluted earnings per share as a result of their antidilutive effect on
pro forma earnings per share.

                                       53
<PAGE>

                             LSI Logic Corporation

             Notes to Consolidated Financial Statements (Continued)

Note 1 -- Significant Accounting policies (Continued)

     The stock-based compensation expense determined under the fair value
method, included in the table above, was calculated using the Black-Scholes
model. The assumptions used in this model are discussed further in Note 10.

     Earnings per share. Basic earnings per share ("EPS") is computed by
dividing net income available to common stockholders (numerator) by the
weighted average number of common shares outstanding (denominator) during the
period. Diluted EPS is computed using the weighted-average number of common and
dilutive potential common shares outstanding during the period. In computing
diluted EPS, the average stock price for the period is used in determining the
number of shares assumed to be repurchased upon the exercise of stock options.
A reconciliation of the numerators and denominators of the basic and diluted
per share amount computations is as follows:

<TABLE>
<CAPTION>
                                                    Year Ended December 31,
                                           2002                                 2001
                           ------------------------------------ ------------------------------------
                                                     Per-Share                            Per-Share
                               (Loss)*     Shares+     Amount       (Loss)*     Shares+     Amount
                           -------------- --------- ----------- -------------- --------- -----------
                                            (In thousands except per share amounts)
<S>                        <C>            <C>       <C>         <C>            <C>       <C>
Basic EPS:
 Net (loss)/ income
   available
   to common
   stockholders ..........  $  (292,440)  370,529   $   (0.79)   $  (991,955)  349,280   $   (2.84)
                                                    ---------                            ---------
 Effect of dilutive
   securities:
 Stock options and
   restricted
   stock awards ..........
 4 1/4% Convertible
   Subordinated Notes.....
Diluted EPS:
 Net (loss)/ income
   available
   to common
   stockholders ..........  $  (292,440)  370,529   $   (0.79)   $  (991,955)  349,280   $   (2.84)
                                                    ---------                            ---------

<CAPTION>
                                Year Ended December 31,
                                         2000
                           ---------------------------------
                                                   Per-Share
                              Income*    Shares+    Amount
                           ------------ --------- ----------
                            (In thousands except per share
                                        amounts)
<S>                        <C>          <C>       <C>
Basic EPS:
 Net (loss)/ income
   available
   to common
   stockholders ..........  $ 236,600    310,813    $ 0.76
                                                    ------
 Effect of dilutive
   securities:
 Stock options and
   restricted
   stock awards ..........                21,517
 4 1/4% Convertible
   Subordinated Notes.....     10,997     22,007
Diluted EPS:
 Net (loss)/ income
   available
   to common
   stockholders ..........  $ 247,597    354,337    $ 0.70
                                                    ------
</TABLE>

------------
*  Numerator
+  Denominator

     Options to purchase approximately 57,064,593 and 73,996,916 shares were
outstanding at December 31, 2002 and 2001, respectively, and were excluded from
the computation of diluted shares because of their antidilutive effect on
earnings per share as the Company incurred a net loss for these years. The
exercise price of these options ranged from $0.06 to $72.25 at December 31,
2002 and from $0.01 to $72.25 at December 31, 2001. Options to purchase
approximately 6,573,340 shares were outstanding at December 31, 2000, but were
not included in the computation of diluted shares for the year, because the
exercise prices of these options were greater than the average market price of
common shares. The exercise price of these options ranged from $26.38 to $72.25
at December 31, 2000.

     Common equivalent shares associated with the 2001, 2000 and 1999
Convertible Notes of 47,059,516 and 32,277,323 were excluded from the
calculation of diluted shares because of their antidilutive effect on loss per
share for the years ended December 31, 2002 and 2001, respectively. For the
year ended December 31, 2000, common equivalent shares of 6,197,902 associated
with the 2000 Convertible Notes were excluded from the calculation of diluted
shares because of their antidilutive effect on earnings per share.

     Related party transactions. There were no significant related party
transactions during the years ended December 31, 2002, 2001 and 2000, other
than as listed in Notes 5 and 13.

                                       54
<PAGE>

                             LSI Logic Corporation

             Notes to Consolidated Financial Statements (Continued)

Note 1 -- Significant Accounting policies (Continued)

     Recent accounting pronouncements. In August 2001, the Financial Accounting
Standards Board ("FASB") issued Statement No. 143 ("SFAS No. 143"), "Accounting
for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting
and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. The Statement
applies to all entities. It applies to legal obligations associated with the
retirement of long-lived assets that result from the acquisition, construction,
development and/ or the normal operation of a long-lived asset, except for
certain obligations of lessees. This statement applies to certain contractual
obligations of the Company under operating leases for facilities and equipment.
The Company adopted SFAS No. 143 on January 1, 2003, and it did not have a
significant effect on the consolidated balance sheet or statement of
operations.

     In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities" ("SFAS No. 146"). SFAS No. 146 addresses significant
issues regarding the recognition, measurement and reporting of costs that are
associated with exit and disposal activities, including restructuring
activities that are currently accounted for under EITF No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring)." The scope
of SFAS No. 146 also includes costs related to terminating a contract that is
not a capital lease and termination benefits that employees who are
involuntarily terminated receive under the terms of a one-time benefit
arrangement that is not an ongoing benefit arrangement or an individual
deferred-compensation contract. The Company is required to adopt the provisions
of SFAS No. 146 effective for exit or disposal activities initiated after
December 31, 2002. The provisions of EITF No. 94-3 shall continue to apply for
an exit activity initiated under an exit plan that met the criteria of EITF No.
94-3 prior to the adoption of SFAS No. 146. The adoption of SFAS No. 146 will
change on a prospective basis the timing of when restructuring charges are
recorded from a commitment date approach to when the liability is incurred. The
Company does not anticipate that the adoption of this statement will have a
material impact on the consolidated balance sheet or statement of operations.

     In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 requires that a
liability be recorded in the guarantor's balance sheet upon issuance of a
guarantee. In addition, FIN 45 requires disclosures about the guarantees that
an entity has issued, including a reconciliation of changes in the entity's
product warranty liabilities. The initial recognition and initial measurement
provisions of FIN 45 are applicable on a prospective basis to guarantees issued
or modified after December 31, 2002, irrespective of the guarantor's fiscal
year-end. The disclosure requirements of FIN 45 are effective for financial
statements of interim or annual periods ending after December 15, 2002. The
Company is in the process of evaluating the impact FIN 45 will have, but
currently believes that only the consolidated balance sheet will be affected.
The guaranteed residual values for the equipment under two operating leases are
subject to FIN 45 and will require a gross up to the balance sheet in 2003, by
creating an asset and equal liability for the fair value of the guaranteed
residual value of the equipment. The Company does not believe that this
pronouncement will have a material net impact to the consolidated statement of
operations. See Note 13 of the Notes to the Consolidated Financial Statements
for a discussion of our operating leases.

     In November 2002, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 00-21, "Revenue Arrangements with Multiple
Deliverables." EITF Issue No. 00-21 provides guidance on how to account for
arrangements that involve the delivery or performance of multiple products,
services and/or rights to use assets. The provisions of EITF Issue No. 00-21
will apply to revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. The Company believes that the adoption of this standard
will not have a material impact on the consolidated balance sheet or statement
of operations.

     In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation, Transition and Disclosure." SFAS No. 148 provides
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. SFAS No. 148
also requires that disclosures

                                       55
<PAGE>

                             LSI Logic Corporation

             Notes to Consolidated Financial Statements (Continued)

Note 1 -- Significant Accounting policies (Continued)

of the pro forma effect of using the fair value method of accounting for
stock-based employee compensation be displayed more prominently and in a
tabular format. Additionally, SFAS No. 148 requires disclosure of the pro forma
effect in interim financial statements. The transition and annual disclosure
requirements of SFAS No. 148 are effective for fiscal years ended after
December 15, 2002. The interim disclosure requirements are effective for
interim periods ending after December 15, 2002. The Company has adopted the
disclosure requirements of SFAS No. 148 as of December 31, 2002.

     In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective immediately for all new variable interest entities created or
acquired after January 31, 2003. For variable interest entities created or
acquired prior to February 1, 2003, the provisions of FIN 46 must be applied
for the first interim or annual period beginning after June 15, 2003. We
currently have two operating leases for equipment, as discussed in Note 13 of
the Notes. The assets currently held under these operating leases had an
original cost of approximately $332 million and are held in entities generally
set up to own and lease such assets to the Company. Based on our interpretation
of FIN 46, we currently believe that we will be required to consolidate the
variable interest entities associated with these operating leases on July 1,
2003, the effective date of the statement for us, barring financial
restructuring. We are currently seeking to refinance these leases in a manner
that best meets our capital financing strategy and our cost of capital
objectives. We believe that these leases once refinanced, would not require
consolidation.

Note 2 -- Business Combinations

     We are continually exploring strategic acquisitions that build upon our
existing library of intellectual property, human capital and engineering
talent, and increase our leadership position in the markets where we operate.
Below is a discussion of recent acquisitions and acquired in-process research
and development.

2002
     Acquisition of Mylex Business Unit. On August 29, 2002, the Company
finalized an Asset Purchase Agreement with International Business Machines
Corporation ("IBM"). Under the agreement with IBM, the Company acquired certain
tangible and intangible assets associated with IBM's Mylex business unit. The
acquisition is expected to enhance product offerings in the expanding
entry-level storage systems space within the Storage Systems segment and the
PCI-RAID offering in the Semiconductor segment. The acquisition was accounted
for as a purchase.

     The Company paid approximately $50.5 million in cash, which included
direct acquisition costs of $0.5 million for legal and accounting fees. The
total purchase price was allocated to the estimated fair value of assets
acquired based on independent appraisals and management estimates as follows
(in thousands):

<TABLE>
<S>                                                                 <C>
      Fair value of net assets acquired .........................    $14,008
      In-process research and development .......................      1,922
      Current technology ........................................      6,539
      Trademarks ................................................        250
      Supply agreement ..........................................      7,247
      Excess of purchase price over net assets acquired .........     20,506
                                                                     -------
      Total purchase price ......................................    $50,472
                                                                     =======
</TABLE>

                                       56
<PAGE>

                             LSI Logic Corporation

             Notes to Consolidated Financial Statements (Continued)
Note 2 -- Business Combinations (Continued)

     In-process research and development. In connection with the purchase of
the Mylex business unit, the Company recorded a $1.9 million charge to IPR&D
during the third quarter of 2002. As of the acquisition date, there were
several projects that were in process for development of storage systems
hardware, firmware and subsystem components technology.

     The value of the projects identified to be in progress were determined by
estimating the future cash flows from the projects once commercially feasible,
discounting the net cash flows back to their present value and then applying a
percentage of completion to the calculated value. The percentage of completion
for the projects were determined based on research and development expenses
incurred as of August 29, 2002, as a percentage of total research and
development expenses to bring the projects to technological feasibility. The
discount rate used was 25% for the projects. Development of storage systems
hardware technology was started in 2000. Development of firmware and subsystems
components technology was started in 2002. As of August 29, 2002, the Company
estimated that the projects were from 10% to 50% complete.

     Development of the technology remains a substantial risk to the Company
due to a number of factors, including the remaining effort to achieve
technological feasibility, rapidly changing customer markets and competitive
threats from other companies. Additionally, the value of other intangible
assets acquired may become impaired.

     Useful life of intangible assets. The amounts allocated to current
technology, trademarks and the supply agreement are being amortized over their
estimated useful lives of 2 to 4.3 years using the straight-line method.

     Other acquisition. In the fourth quarter of 2002, the Company completed
the acquisition of a company focused on the development of digital video
product technologies in a transaction valued at approximately $7 million. There
were no material effects on the financial statements from this acquisition.

     Pro forma statement of earnings information has not been presented because
the effect of these 2002 acquisitions was not material either on an individual
or an aggregate basis.

   2001

     During 2001, the Company completed two acquisitions accounted for under
the purchase method of accounting. Unaudited pro forma statement of earnings
information has not been presented for the RAID business because the effects of
this acquisition were not material. See summary table below (in millions,
except per share amounts):

<TABLE>
<CAPTION>
Entity name,
Segment included in,
Description of acquired      Acquisition   Purchase
business                         date        price         Consideration
--------------------------- ------------- ---------- -------------------------
<S>                         <C>           <C>        <C>
RAID Division of AMI,       August 2001    $  240.5  $224 cash
Semiconductor segment,                               0.8 million restricted
Redundant Array of                                   common shares
Independent Disks ("RAID")
C-Cube,                       May 2001        893.7  40.2 million shares
Semiconductor segment,                               issued at $18.73 per
Digital video products                               share, 10.6 million
                                                     options assumed, 0.8
                                                     million warrants
                                                     assumed

<CAPTION>
                               Fair Value
Entity name,                  of tangible
Segment included in,          net assets/                  Current
Description of acquired      (liabilities)              technology &                Deferred
business                        acquired     Goodwill    trademarks      IPR&D    compensation
--------------------------- --------------- ---------- -------------- ---------- -------------
<S>                         <C>             <C>        <C>            <C>        <C>
RAID Division of AMI,           $ (1.4)      $  128.9     $  77.5      $  19.1      $  16.4
Semiconductor segment,
Redundant Array of
Independent Disks ("RAID")
C-Cube,                           64.3          608.1        94.5         77.5         49.3
Semiconductor segment,
Digital video products
</TABLE>

     Pro forma results for C-Cube acquisition. The following unaudited pro
forma summary is provided for illustrative purposes only and is not necessarily
indicative of the consolidated results of operations for future periods or that
actually would have been realized had the Company and C-Cube been a
consolidated entity during the periods presented. The summary combines the
results of operations as if C-Cube had been acquired as of the beginning of the
periods presented.

                                       57
<PAGE>

                             LSI Logic Corporation

             Notes to Consolidated Financial Statements (Continued)

Note 2 -- Business Combinations (Continued)

     The summary includes the impact of certain adjustments such as
amortization of intangibles and non-cash deferred stock compensation.
Additionally, the in-process research and development charge of $78 million
discussed above has been excluded from the periods presented as it arose from
the acquisition of C-Cube. The restructuring of operations and other items of
$220 million were included in the pro forma calculation as the charges did not
relate to the acquisition of C-Cube (see Note 4).

<TABLE>
<CAPTION>
                                                  Year ended December 31,
                                                    2001           2000
                                               ------------- ---------------
                                                        (Unaudited)
                                                   (In thousands, except
                                                    per-share amounts)
<S>                                            <C>           <C>
   Revenues ..................................  $1,851,659     $ 3,002,716
   Net (loss)/income .........................  $ (962,488)    $   109,112
   Basic (loss)/earnings per share ...........  $    (2.65)    $      0.31
   Diluted (loss)/earnings per share .........  $    (2.65)    $      0.29
</TABLE>

2000
     During 2000, the Company completed six acquisitions each accounted for
under the purchase method of accounting. Unaudited pro forma statement of
earnings information has not been presented because the effects of these
acquisitions were not material on either an individual or an aggregate basis.
See summary table below (in millions, except per share amounts):

<TABLE>
<CAPTION>
Entity name,
Segment included in,
Description of acquired           Acquisition    Purchase
business                              date         price        Consideration
------------------------------- --------------- ---------- ----------------------
<S>                             <C>             <C>        <C>
Syntax,                         November 2000    $  58.8   1.4 million shares
Storage Systems segment,                                   issued at $30.71 per
Software solutions for                                     share, including 0.04
centralized storage                                        million restricted
management                                                 common shares,
                                                           0.6 million options
                                                           assumed
ParaVoice,                       October 2000       38.6   Cash
Semiconductor segment,
Voice over Internet Protocol
(VoIP) and Voice over DSL
(VoDSL)
DataPath,                         July 2000        420.8   7.5 million shares
Semiconductor segment,                                     issued at $46.11 per
Semiconductor standard                                     share, including 2.3
products                                                   million restricted
                                                           common shares, 1.6
                                                           million options
                                                           assumed
Intraserver,                       May 2000         62.9   1.2 million shares
Semiconductor segment,                                     issued at $45.83 per
Host adapter boards, storage                               share, 0.2 million
infrastructure and                                         options assumed
communication products

<CAPTION>
                                   Fair Value                 Current
Entity name,                      of tangible               technology,
Segment included in,              net assets/               trademarks &
Description of acquired          (liabilities)                customer               Deferred
business                            acquired     Goodwill       base       IPR&D   compensation
------------------------------- --------------- ---------- ------------- -------- -------------
<S>                             <C>             <C>        <C>           <C>      <C>
Syntax,                             $ (11.1)     $  49.4      $  18.0     $   --     $   2.5
Storage Systems segment,
Software solutions for
centralized storage
management

ParaVoice,                              0.1         13.6         18.0         6.9         --
Semiconductor segment,
Voice over Internet Protocol
(VoIP) and Voice over DSL
(VoDSL)

DataPath,                             ( 6.4)       154.0         17.4        54.2      201.6
Semiconductor segment,
Semiconductor standard
products

Intraserver,                          ( 7.0)        53.0         15.3         1.6         --
Semiconductor segment,
Host adapter boards, storage
infrastructure and
communication products
</TABLE>

                                       58
<PAGE>

                             LSI Logic Corporation

             Notes to Consolidated Financial Statements (Continued)

Note 2 -- Business Combinations (Continued)

<TABLE>
<CAPTION>
Entity name,
Segment included in,
Description of acquired      Acquisition   Purchase
business                         date        price    Consideration
--------------------------- ------------- ---------- ---------------
<S>                         <C>           <C>        <C>
Division of Cacheware,       April 2000    $  22.2   Cash
Storage Systems segment,
SAN Business
Division of NeoMagic,        April 2000       15.4   Cash
Semiconductor segment,
Optical read-channel mixed
signal design team and RF
intellectual property

<CAPTION>
                               Fair Value                 Current
Entity name,                  of tangible               technology,
Segment included in,          net assets/               trademarks &
Description of acquired      (liabilities)                customer                Deferred
business                        acquired     Goodwill       base       IPR&D    compensation
--------------------------- --------------- ---------- ------------- --------- -------------
<S>                         <C>             <C>        <C>           <C>       <C>
Division of Cacheware,          $  0.2        $  9.7      $  4.0      $  8.3   --
Storage Systems segment,
SAN Business
Division of NeoMagic,              1.3           3.9         3.8         6.4   --
Semiconductor segment,
Optical read-channel mixed
signal design team and RF
intellectual property
</TABLE>

     During 2001, the NeoMagic research project was abandoned and the remaining
intangibles and goodwill recorded in connection with the project were written
off to restructuring of operations and other items.

     In-process research and development. The Company recorded in-process
research and development ("IPR&D") charges of $3 million, $97 million and $77
million for the years ended December 31, 2002, 2001 and 2000, respectively. The
details at the acquisition date are summarized in the table below.

<TABLE>
<CAPTION>
                                                                                                          Revenue
                                                                                  Percentage of         projections
                                    Acquisition                 Discount           Completion             extend       Royalty
Company                                Date          IPR&D        rate             and Method             through       rate
-------------------------------   --------------   ---------   ----------   ------------------------   ------------   --------
                                                                  (dollar amounts in millions)
<S>                               <C>              <C>         <C>          <C>                        <C>            <C>
Mylex Division of IBM .........    August 2002      $  1.9          25%      10% to 50%, percent of    2006           --
                                                                                  R&D expenses
RAID Division of AMI ..........    August 2001        19.1          20%           12% to 62%,          2006           --
                                                                            percent of R&D expenses
C-Cube ........................     May 2001          77.5        27.5%      61% to 84%, percent of    2006           --
                                                                                  R&D expenses
ParaVoice .....................   October 2000         6.9          50%       23%, percent of R&D      2005           --
                                                                                    expenses
DataPath ......................     July 2000         54.2          20%       50% to 75%, project      2007           20%
                                                                                   milestones
Intraserver ...................     May 2000           1.6          30%       20% to 95%, project      2005           30%
                                                                                   milestones
Division of NeoMagic ..........    April 2000          6.4          30%       68%, percent of R&D      2004           30%
                                                                                    expenses
Division of Cacheware .........    April 2000          8.3          30%       90%, percent of R&D      2003           30%
                                                                                    expenses
</TABLE>

     The amounts of IPR&D were determined by identifying research projects for
which technological feasibility had not been established and no alternative
future uses existed as of the respective acquisition dates. The value of the
projects identified to be in progress was determined by estimating the future
cash flows from the projects once commercially feasible, discounting the net
cash flows back to their present value and then applying a percentage of
completion to the calculated value. The net cash flows from the identified
projects were based on estimates of revenues, cost of revenues, research and
development costs, selling, general and administrative costs and applicable
income taxes for the projects. Total revenues for the projects are expected to
extend through the dates noted in the table above by acquisition. These
projections were based on estimates of market size and growth, expected trends
in technology and the expected timing of new product introductions by our
competitors and the Company. These estimates do not account for any potential
synergies that may be realized as a result of the acquisition and are in line
with industry averages and growth estimates.

                                       59
<PAGE>

                             LSI Logic Corporation

             Notes to Consolidated Financial Statements (Continued)

Note 2 -- Business Combinations (Continued)

     The percentage of completion for the projects was determined using one of
the following two methods:

     o    Percentage of research and development expenses. Research and
          development expenses incurred as of the acquisition dates for the
          projects as a percentage of total research and development expenses to
          bring the projects to technological feasibility.

     o    Project milestones. Milestones representing management's estimate of
          effort, value added and degree of difficulty of the portion of the
          projects completed as of the acquisition dates, as compared to the
          remaining research and development to be completed to bring the
          projects to technological feasibility. The development process is
          grouped into three phases, with each phase containing between one and
          five milestones. The three phases are: (i) researching the market
          requirements and the engineering architecture and feasibility studies;
          (ii) design and verification milestones; and (iii) prototyping and
          testing the product (both internal and customer testing).

     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
described above. The Company applied a royalty rate by project by acquisition
to operating income to attribute value for dependency on predecessor core
technologies.

     Development of technologies that have not yet been completed remains a
substantial risk to the Company due to various factors, including the remaining
effort to achieve technological feasibility, rapidly changing customer markets
and competitive threats from other companies. Failure to bring the product 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.

Note 3 -- Goodwill and Intangible Assets

     The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets,"
on January 1, 2002. As a result, goodwill is no longer amortized, but is
instead tested for impairment annually or sooner if circumstances indicate that
it may no longer be recoverable. In addition, intangible assets acquired prior
to July 1, 2001 that do not meet the criteria for recognition under SFAS No.
141, "Business Combinations" have been reclassified to goodwill. Assembled
workforce, net of accumulated amortization of $56 million was reclassified to
goodwill.

     Upon adoption, the Company completed the transitional goodwill impairment
assessment required by SFAS No. 142 and concluded that goodwill was not
impaired as of January 1, 2002. The annual impairment test was performed as of
December 31, 2002 and indicated that goodwill was not impaired. For the purpose
of measuring the impairment, goodwill was assigned to reporting units as
defined by SFAS No. 142. The reporting units identified by the Company are
Semiconductor and Storage Systems.

                                       60
<PAGE>

                             LSI Logic Corporation

             Notes to Consolidated Financial Statements (Continued)

Note 3 -- Goodwill and Intangible Assets (Continued)

     Goodwill and intangible assets by reportable segment are comprised of the
following (in thousands):

<TABLE>
<CAPTION>
                                        December 31, 2002                December 31, 2001
                                  ------------------------------   -----------------------------
                                      Gross                            Gross
                                     Carrying       Accumulated       Carrying      Accumulated
                                      Amount       Amortization        Amount       Amortization
                                  -------------   --------------   -------------   -------------
<S>                               <C>             <C>              <C>             <C>
Unamortized intangible assets:
 Semiconductor ................    $  887,990       $       --      $  892,212      $       --
 Storage Systems ..............        80,474               --          59,968              --
                                   ----------       ----------      ----------      ----------
   Total goodwill (a) .........       968,464               --         952,180              --
Amortized intangible assets:
 Semiconductor:
  Current technology ..........       372,260         (159,295)        370,462         (97,545)
  Trademarks ..................        37,347          (13,589)         37,347          (7,797)
                                   ----------       ----------      ----------      ----------
   Subtotal ...................       409,607         (172,884)        407,809        (105,342)
Storage Systems:
 Current technology ...........        67,080          (32,773)         60,541         (23,810)
 Trademarks ...................         3,750           (1,954)          3,500          (1,498)
 Customer base ................         5,010           (1,684)          5,010            (848)
 Supply agreement .............         7,247             (820)             --              --
                                   ----------       ----------      ----------      ----------
   Subtotal ...................        83,087          (37,231)         69,051         (26,156)
                                   ----------       ----------      ----------      ----------
Total .........................    $1,461,158       $ (210,115)     $1,429,040      $ (131,498)
                                   ==========       ==========      ==========      ==========
</TABLE>

------------
(a)  Goodwill is net of accumulated amortization immediately prior to the
     adoption of SFAS No. 142.

     The changes in the carrying amount of goodwill for the year ended December
31, 2002 are as follows (in thousands):

<TABLE>
<CAPTION>
                                               Semiconductor     Storage Systems
                                                  segment            segment          Total
                                              ---------------   ----------------   -----------
<S>                                           <C>               <C>                <C>
Balance as of January 1, 2002 .............      $ 892,212           $59,968        $952,180
Goodwill acquired during the year .........          2,915            20,506          23,421
Adjustment to goodwill acquired in a
 prior year for a tax refund ..............         (7,137)               --          (7,137)
                                                 ---------           -------        --------
Balance as of December 31, 2002 ...........      $ 887,990           $80,474        $968,464
                                                 =========           =======        ========
</TABLE>

     Amortization expense is comprised of the following (in thousands):

<TABLE>
<CAPTION>
                                     Year Ended December 31,
                               ------------------------------------
                                  2002         2001         2000
                               ---------   -----------   ----------
<S>                            <C>         <C>           <C>
Goodwill ...................    $    --     $130,339      $38,660
Current technology .........     70,713       52,456       31,995
Trademarks .................      6,248        4,621        1,980
Customer base ..............        836          835           13
Supply agreement ...........        820           --           --
                                -------     --------      -------
Total ......................    $78,617     $188,251      $72,648
                                =======     ========      =======
</TABLE>

                                       61
<PAGE>

                             LSI Logic Corporation

             Notes to Consolidated Financial Statements (Continued)
Note 3 -- Goodwill and Intangible Assets (Continued)

     The amounts allocated to current technology, trademarks, customer base and
supply agreement are being amortized over their estimated weighted average
useful lives of two to six years.

     The estimated future amortization expense of intangible assets as of
December 31, 2002 is as follows (in millions):

<TABLE>
<CAPTION>
                                      Amount:
Fiscal year:                         --------
<S>                                  <C>
  2003 ...........................     $ 83
  2004 ...........................       82
  2005 ...........................       73
  2006 ...........................       40
  2007 and later .................        5
                                       ----
                                       $283
                                       ====
</TABLE>

     Pro forma net loss and pro forma net loss per share excluding amortization
expense for goodwill are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                     Year Ended December 31,
                                                         -----------------------------------------------
                                                              2002             2001             2000
                                                         --------------   --------------   -------------
<S>                                                      <C>              <C>              <C>
Net (loss)/income, as reported .......................     $ (292,440)      $ (991,955)      $ 236,600
Add back goodwill amortization .......................             --          130,339          38,660
                                                           ----------       ----------       ---------
Pro forma net (loss)/income ..........................       (292,440)        (861,616)        275,260
                                                           ==========       ==========       =========
Basic (loss)/income per share, as reported ...........     $    (0.79)      $    (2.84)      $    0.76
Add back goodwill amortization .......................             --             0.37            0.12
                                                           ----------       ----------       ---------
Basic pro forma (loss)/income per share ..............     $    (0.79)      $    (2.47)      $    0.88
                                                           ==========       ==========       =========
Diluted (loss)/income per share, as reported .........     $    (0.79)      $    (2.84)      $    0.70
Add back goodwill amortization .......................             --             0.37            0.11
                                                           ----------       ----------       ---------
Diluted (loss)/income per share ......................     $    (0.79)      $    (2.47)      $    0.81
                                                           ==========       ==========       =========
</TABLE>

Note 4 -- Restructuring and other items

2002
     The Company recorded approximately $67.1 million in restructuring of
operations and other items for the year ended December 31, 2002, consisting of
$75.2 million for restructuring of operations, and a gain of $8.1 million for
other items including the gain on sale of CDMA handset product technology.
Restructuring of operations and other items were primarily included in the
Semiconductor segment; the restructuring expense included in the Storage
Systems segment was not significant.

Restructuring and impairments of long-lived assets:

     In the first quarter of 2002, the Company announced a set of actions to
reduce costs and streamline operations. These actions included a worldwide
reduction in workforce, downsizing the Company's manufacturing operations in
Tsukuba, Japan and the decision to exit the CDMA handset product technology.
During the three months ended March 31, 2002, the Company recorded a
restructuring charge for severance for approximately 1,150 employees worldwide
and exit costs primarily associated with cancelled contracts and operating
leases. As a result of the restructuring actions, the Company recorded fixed
asset write-downs due to impairment in the U.S. and Japan for assets that will
be disposed of by sale. In the second quarter of 2002, the Company completed
the sale of CDMA handset product technology to a third party, recognizing a net
gain of $6.4 million.

                                       62
<PAGE>

                             LSI Logic Corporation

             Notes to Consolidated Financial Statements (Continued)
Note 4 -- Restructuring and other items (Continued)

     During the fourth quarter of 2002, the Company reversed approximately $5
million of previously accrued restructuring expenses. As a result of the
Company's decision to terminate fewer employees than the original plan
contemplated in Tsukuba, Japan, previously accrued restructuring expenses were
reversed for termination benefits including outplacement costs and certain
contract termination fees of $7 million. This was offset by additional expense
accruals of $2 million for costs related to the previously announced closure of
the Colorado Springs fabrication facility. Certain other reclassifications were
made between lease and contract terminations and facility closure and other
exit costs to reflect changes in management estimates for the remaining costs
for these activities.

     On January 1, 2002, the Company adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial
accounting and reporting for the impairment of long-lived assets and for
long-lived assets to be disposed. The adoption did not have a significant
effect on the Company's financial position and results of operations.

     Assets held for sale of $74 million and $89 million were included as a
component of prepaid expenses and other current assets as of December 31, 2002
and 2001, respectively. In September 2002, the Company recorded $13 million of
additional fixed asset write-downs to reflect the decrease in the fair market
value of the assets during the period. Assets classified as held for sale are
not depreciated. The fair value of assets determined to be impaired was the
result of independent appraisals and the use of management estimates. Given
that current market conditions for the sale of older fabrication facilities and
related equipment may fluctuate, there can be no assurance that the Company
will realize the current net carrying value for the assets. 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
additional adjustments may be necessary.

     The following table sets forth the Company's restructuring reserves as of
December 31, 2002, which are included in other accrued liabilities on the
balance sheet:

<TABLE>
<CAPTION>
                                                       Balance at    Restructuring       Release of        Utilized      Balance at
                                                      December 31,      Expense         reserve and         during      December 31,
                                                          2001            2002       reclassifications       2002           2002
                                                     -------------- --------------- ------------------- -------------- -------------
                                                             (In thousands)                          (In thousands)
<S>                                                  <C>            <C>             <C>                 <C>            <C>
Write-down of excess assets(a) .....................    $  3,762        $ 38,918         $   5,147        $  (41,819)     $  6,008
Lease terminations and maintenance contracts(c) ....      10,695          12,871           (10,559)           (6,250)        6,757
Facility closure and other exit costs (c) ..........      14,153             415             4,058           (10,497)        8,129
Payments to employees for severance(b) .............         724          27,490            (3,150)          (23,673)        1,391
                                                        --------        --------         ---------        ----------      --------
Total ..............................................    $ 29,334        $ 79,694         $  (4,504)       $  (82,239)     $ 22,285
                                                        ========        ========         =========        ==========      ========
</TABLE>

------------
(a)  Amounts utilized in 2002 reflect a non-cash write-down of fixed assets in
     the U.S. and Japan due to impairment of $38.3 million and cash payments for
     machinery and equipment decommissioning costs of $3.5 million. The fixed
     asset write-downs were accounted for as a reduction of the assets and did
     not result in a liability. The $6.0 million balance as of December 31, 2002
     relates to machinery and equipment decommissioning costs in the U.S and
     selling costs for assets held for sale.

(b)  Amounts utilized represent cash severance payments to approximately 1,290
     employees during the year ended December 31, 2002. The $1.4 million balance
     as of December 31, 2002 will be paid during 2003.

(c)  Amounts utilized represent cash payments.

Other items:

     The Company recorded a net gain of $1.7 million in other items during the
first quarter of 2002, which consisted of a nonrefundable deposit paid to the
Company in the first quarter of 2002 related to the termination of the
agreement to sell the Colorado Springs fabrication facility during 2001, offset
in part by certain costs associated with maintaining CDMA handset product
technology until sold.

                                       63
<PAGE>

                             LSI Logic Corporation

             Notes to Consolidated Financial Statements (Continued)

Note 4 -- Restructuring and other items (Continued)

2001
     The Company recorded approximately $219.6 million in restructuring of
operations and other items for the year ended December 31, 2001, consisting of
$207.2 million for restructuring of operations and $12.4 million for other
items. Restructuring of operations and other items were primarily included in
the Semiconductor segment; the restructuring expense included in the Storage
Systems segment was not significant.

Restructuring and impairments of long-lived assets:

     In September 2001, the Company announced the consolidation of U.S.
manufacturing operations to Gresham, Oregon including the transfer of process
research and development from Santa Clara, California to Gresham, Oregon. The
Company also announced the closure of certain assembly activities in Fremont,
California, which would be transferred offshore. As a result of these actions,
the Company recorded a restructuring charge of $95.0 million, including fixed
asset write-downs due to impairment as a result of the restructuring actions in
the U.S., losses on operating leases for equipment and facilities, severance
for approximately 600 employees across multiple company activities and
functions in the U.S., Europe, Japan and Asia Pacific, as well as other exit
costs.

     In April 2001, the Company announced the closure of the Company's Colorado
Springs fabrication facility. This facility was closed in the fourth quarter of
2001. The Company recorded an impairment charge of $130.5 million relating to
the facility, of which approximately $35.0 million was recorded in cost of
sales and $95.5 million was recorded in restructuring charges. The
restructuring charges consisted of fixed asset write-downs due to impairment as
a result of the restructuring actions, losses on operating leases for
equipment, severance for approximately 413 manufacturing employees and other
exit costs.

     During the second quarter of 2001, the Company recorded an additional
$16.8 million in restructuring charges primarily associated with the write-down
of fixed assets due to impairment as a result of the restructuring actions in
the U.S., Japan and Hong Kong that will be disposed of and severance charges
for approximately 240 employees across multiple company activities and
functions in the U.S., Europe and Asia Pacific.

     The following table sets forth our restructuring reserves as of December
31, 2001, which are included in other accrued liabilities on the balance sheet:

<TABLE>
<CAPTION>
                                                             Restructuring        Utilized        Balance at
                                                                Expense            during        December 31,
                                                                  2001              2001             2001
                                                            ---------------   ---------------   -------------
                                                                             (In thousands)
<S>                                                         <C>               <C>               <C>
Write-down of excess assets(a) ..........................      $ 139,724        $  (135,962)       $  3,762
Lease terminations and maintenance contracts(c) .........         26,912            (16,217)         10,695
Facility closure and other exit costs (c) ...............         24,242            (10,089)         14,153
Payments to employees for severance(b) ..................         16,346            (15,622)            724
                                                               ---------        -----------        --------
Total ...................................................      $ 207,224        $  (177,890)       $ 29,334
                                                               =========        ===========        ========
</TABLE>

------------
(a)  Amounts utilized in 2001 reflect a non-cash write-down of fixed assets in
     the U.S., Japan and Hong Kong due to impairment of $133.8 million and cash
     payments for machinery and equipment decommissioning costs of $2.2 million.
     The fixed asset write-downs were accounted for as a reduction of the assets
     and did not result in a liability. The $3.8 million balance as of December
     31, 2001 relates to machinery and equipment decommissioning costs in the
     U.S.

(b)  Amounts utilized represent cash payments related to the severance of
     approximately 1,180 employees during the year ended December 31, 2001.

(c)  Amounts utilized represent cash payments.

                                       64
<PAGE>

                             LSI Logic Corporation

             Notes to Consolidated Financial Statements (Continued)

Note 4 -- Restructuring and other items (Continued)

Other items:

     The Company recorded approximately $12.4 million in other items during
2001 as follows:

     o    $8.1 million in charges associated with the write-down of intangible
          assets due to impairment. The majority of the intangible assets were
          originally acquired in the purchase of a division of NeoMagic in the
          second quarter of 2000.

     o    $4.3 million in charges primarily consisting of the write-down of an
          investment in a marketable equity security and related purchased
          intellectual property.

2000

     The Company recorded a restructuring of operations and other items, net,
only in the Semiconductor segment, of $2.8 million in 2000. This was primarily
related to the loss on an agreement entered into with a third party to
outsource certain testing services previously performed by us at our Fremont,
California facility.

Note 5 -- License Agreement

     In the second quarter of 1999, the Company and Silterra Malaysia Sdn. Bhd.
(formerly known as Wafer Technology (Malaysia) Sdn. Bhd.) ("Silterra") entered
into a technology transfer agreement under which the Company grants licenses to
Silterra with respect to certain of the Company's wafer fabrication
technologies and provides associated manufacturing training and related
services. In exchange, the Company received cash consideration of $75 million
and equity consideration over four years for which transfers of technology and
performance of obligations of the Company were scheduled to occur. The equity
consideration was valued at zero at December 31, 2002. The obligations under
the technology transfer agreement are complete as of December 31, 2002. The
Company transferred technology to Silterra valued at $8 million, $20 million,
$24 million and $15 million for the years ended December 31, 2002, 2001, 2000
and 1999 respectively. The amount was recorded as an offset to the Company's
R&D expenses. In addition, the Company provided engineering training with a
value of $2 million, $4 million and $2 million for the years ended December 31,
2001, 2000 and 1999. The amount was recorded as an offset to cost of revenues.

                                       65
<PAGE>

                             LSI Logic Corporation

             Notes to Consolidated Financial Statements (Continued)

Note 6 -- Cash, Cash Equivalents and Investments

<TABLE>
<CAPTION>
                                                       December 31,     December 31,
                                                           2002             2001
                                                      --------------   -------------
                                                              (In thousands)
<S>                                                   <C>              <C>
Cash and cash equivalents
Overnight deposits ................................      $ 117,899       $ 295,439
Commercial paper ..................................         20,804         151,793
Corporate and municipal debt securities ...........         30,524           9,957
                                                         ---------       ---------
 Total cash equivalents ...........................        169,227         457,189
Cash ..............................................        279,620         299,949
                                                         ---------       ---------
 Total cash and cash equivalents ..................      $ 448,847       $ 757,138
                                                         =========       =========
Available-for-sale debt securities
Corporate and municipal debt securities ...........      $ 180,843       $ 191,405
Commercial paper ..................................             --          19,851
Auction rate preferred stock ......................         55,590          29,887
U.S. government and agency securities .............        202,613          15,026
Asset- and mortgage-backed securities .............        102,083              --
                                                         ---------       ---------
 Total short-term investments .....................      $ 541,129       $ 256,169
                                                         =========       =========
Long-term investment in equity securities .........      $  37,655       $  78,433
                                                         =========       =========
</TABLE>

     Net realized gains on sales of available-for-sale debt securities were $8
million and $2 million for the years ended December 31, 2002 and 2001,
respectively. Realized gains and losses for these securities were not
significant for the year ended December 31, 2000.

     Contractual maturities of available-for-sale debt securities as of
December 31, 2002 were as follows (in thousands):

<TABLE>
<S>                                    <C>
  Due within one year ................  $154,512
  Due in 1-5 years ...................   195,258
  Due in 5-10 years ..................   100,034
  Due after 10 years .................    91,325
                                        --------
  Total ..............................  $541,129
                                        ========
</TABLE>

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

     An unrealized gain on long-term investments in available-for-sale
securities of $3 million, net of the related tax effect of $1 million, and $22
million, net of the related tax effect of $12 million, was included in
accumulated comprehensive income as of December 31, 2002 and 2001,
respectively.

Long-term investment in marketable available-for-sale securities

<TABLE>
<CAPTION>
                                               Gross          Gross
                               Adjusted     unrealized     unrealized     Estimated
                                 cost          gains         losses       fair value
                              ----------   ------------   ------------   -----------
                                                  (In thousands)
<S>                           <C>          <C>            <C>            <C>
December 31, 2002 .........    $13,073        $ 6,589       $ (2,586)      $17,076
December 31, 2001 .........     19,691         34,560             --        54,251
</TABLE>

                                       66
<PAGE>

                             LSI Logic Corporation

             Notes to Consolidated Financial Statements (Continued)

Note 6 -- Cash, Cash Equivalents and Investments (Continued)

     During 2002, the Company realized a net pre-tax loss of $19 million
associated with the decline in value of equity securities. The decline in value
was considered by management to be other than temporary. Sales of equity
securities during 2002 were not significant.

     During 2001, the Company sold equity securities for $8 million in the open
market, realizing a pre-tax gain of approximately $5 million. The Company also
wrote down to estimated fair value equity investments in certain technology
companies. The write-down was for approximately $19 million. The decline in
value of the investments was considered by management to be other than
temporary. In addition, a pre-tax gain of approximately $4 million was realized
associated with equity securities of a certain technology company that was
acquired by another technology company during the year.

     During 2000, the Company sold equity securities for $79 million in the
open market, realizing a pre-tax gain of approximately $73 million. In
addition, the Company realized a pre-tax gain of approximately $7 million
associated with equity securities of a certain technology company that was
acquired by another technology company during the year.

Note 7 -- Derivative Instruments

Foreign currency risk

     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 and interest rates. The Company
utilizes various hedge instruments, primarily forward contracts and currency
option contracts, to manage its exposure associated with firm intercompany and
third-party transactions and net asset and liability positions denominated in
non-functional currencies.

     Forward contracts are used to hedge certain cash flows denominated in
non-functional currencies. As of December 31, 2002, there were no such
contracts outstanding. As of December 31, 2001, there was one forward contract
outstanding that expired within one month. These contracts were designated as
foreign currency fair value hedges. The fair values of these instruments are
recorded in other current assets or other accrued liabilities. Changes in the
fair value of forward contracts due to changes in time value are excluded from
the assessment of effectiveness and are recognized in interest income and
other, net. For the years ended December 31, 2002 and 2001, respectively, the
change in time value of the forward contracts was not significant. The Company
did not record any gains or losses due to hedge ineffectiveness during 2002 or
2001.

     The Company also enters into purchased currency option contracts that are
designated as foreign currency cash-flow hedges of third-party yen revenue
exposures. There were no option contracts outstanding as of December 31, 2002
and 2001. Changes in the fair value of currency option contracts due to changes
in time value are excluded from the assessment of effectiveness and are
recognized in interest income and other, net. For the years ended December 31,
2002 and 2001, the change in option time value was approximately $2 million and
$4 million, respectively. During the years ended December 31, 2002 and 2001,
$0.3 million and $6 million, respectively, were reclassified to revenue from
other comprehensive income as the forecasted transactions affected earnings.
The Company did not record any gains or losses due to hedge ineffectiveness for
the years ended December 31, 2002 or 2001.

     Forward exchange contracts are also used to hedge certain foreign
currency-denominated assets or liabilities. These derivatives do not qualify
for hedge accounting treatment. Accordingly, changes in the fair value of these
hedges are recorded immediately in earnings to offset the changes in fair value
of the assets or liabilities being hedged. The related gains and losses
included in interest income and other, net, were not significant.

                                       67
<PAGE>

                             LSI Logic Corporation

             Notes to Consolidated Financial Statements (Continued)

Note 7 -- Derivative Instruments (Continued)

Interest rate risk

     The Company is subject to interest rate risk on our investment portfolio
and outstanding debt. In order to better manage interest rate risk on the
investment portfolio (See Note 6), which reprices more frequently than the debt
portfolio, and to better manage asset and liability mismatches, the Company
entered into interest rate swap transactions (the "Swaps") with several
investment banks in June 2002. The Swaps were entered into to convert the fixed
rate interest expense on the Company's 4% and 4.25% Convertible Subordinated
Notes (the "Notes") to a floating rate based on LIBOR (see Note 9).

     As of December 31, 2002, interest rate Swaps with a notional amount of
$740 million effectively convert fixed interest payments to LIBOR-based
floating rates. Under the terms of the Swaps, the Company must provide
collateral to match any mark-to-market exposure on the swaps. Collateral of
approximately $7 million was included in non-current assets and deposits as of
December 31, 2002. The Swaps qualify for hedge accounting as fair value hedges,
with changes in the fair value of the interest rate risk on the Notes being
offset by changes in the fair values of the Swaps recorded as a component of
interest expense. The net mark-to-market impact of the changes in fair value of
the interest rate risk on the Notes and the Swaps on earnings for the year
ended December 31, 2002 reduced income by $4 million and was included in
interest expense. The change in fair value of the hedged interest rate risk was
$37 million at December 31, 2002 and was included in long-term debt. The fair
value of the Swaps was $33 million at December 31, 2002 and was included in
other long-term assets.

     As a result of the buyback of a portion of the Notes (see Note 9) during
the fourth quarter of 2002 and the Company's continuing monitoring of asset and
liability mismatches, the Company discontinued hedge accounting and terminated
interest rate Swaps with a notional amount of $345 million. The unrecognized
gain of $4.2 million from the termination of these Swaps was included as a
component of the Notes and is being amortized as an adjustment to interest
expense over the remaining 15 month term of the Notes.

                                       68
<PAGE>

                             LSI Logic Corporation

             Notes to Consolidated Financial Statements (Continued)

Note 8 -- Balance Sheet Detail

<TABLE>
<CAPTION>
                                                                         December 31,
                                                                     2002              2001
                                                               ---------------   ---------------
                                                                        (In thousands)
<S>                                                            <C>               <C>
Inventories:
 Raw materials .............................................    $     18,152      $     31,797
 Work-in-process ...........................................          65,052            88,354
 Finished goods ............................................         111,262           136,478
                                                                ------------      ------------
                                                                $    194,466      $    256,629
                                                                ============      ============
Property and equipment:
 Land ......................................................    $     53,013      $     52,130
 Buildings and improvements ................................         470,028           470,433
 Equipment .................................................       1,253,061         1,330,609
 Furniture and fixtures ....................................          46,783            54,778
 Leasehold improvements ....................................          37,151            54,083
 Construction in progress ..................................          18,747            58,454
                                                                ------------      ------------
                                                                   1,878,783         2,020,487
 Accumulated depreciation and amortization .................      (1,131,819)       (1,076,113)
                                                                ------------      ------------
                                                                $    746,964      $    944,374
                                                                ============      ============
Other accrued liabilities:
 Accrued expenses ..........................................    $    142,592      $    158,673
 Sales tax payable .........................................           4,687             7,044
 Interest payable ..........................................          15,273            14,890
 Restructuring reserves ....................................          22,285            29,334
                                                                ------------      ------------
                                                                $    184,837      $    209,941
                                                                ============      ============
Accumulated other comprehensive income:
 Unrealized gains on available-for-sale securities .........    $      2,599      $     22,683
 Foreign currency translation adjustments ..................           3,127            (8,226)
                                                                ------------      ------------
                                                                $      5,726      $     14,457
                                                                ============      ============
</TABLE>

     The Company recorded, as a component of cost of revenues, additional
excess inventory and related charges of $46 million and $211 million for the
years ended December 31, 2002 and 2001, respectively. The charges were due to
underutilization related to a temporary idling of the Company's fabrication
facilities due to reduced demand, inventory production in anticipation of
closing the Company's Colorado Springs manufacturing facility during 2001 (see
Note 4), and a sudden and significant decrease in forecasted revenue. The
charges were calculated in accordance with the Company's policy, which is
primarily based on inventory levels in excess of 12 months and management
judgment of demand for each specific product.

     An allocation of interest costs incurred on borrowings during a period
required to complete construction of the asset was capitalized as part of the
historical cost of acquiring certain assets. Gross capitalized interest
included in property and equipment totaled $29 million at December 31, 2002 and
2001. Accumulated amortization of capitalized interest was $20 million and $17
million at December 31, 2002 and 2001, respectively. No interest was
capitalized during 2002 and 2001.

                                       69
<PAGE>

                             LSI Logic Corporation

             Notes to Consolidated Financial Statements (Continued)

Note 9 -- Debt

<TABLE>
<CAPTION>
                                                                                                   December 31,
                                                                                           -----------------------------
                                                                   Interest    Conversion
                                                        Maturity     Rate*       Price          2002           2001
                                                       ---------- ---------- ------------- -------------- --------------
                                                                                                  (In thousands)
<S>                                                    <C>        <C>        <C>           <C>            <C>
2001 Convertible Subordinated Notes .................. 2006             4%   $ 26.3390       $  490,000     $  490,000
2000 Convertible Subordinated Notes .................. 2005             4%   $ 70.2845          385,000        500,000
1999 Convertible Subordinated Notes .................. 2004          4.25%   $ 15.6765          324,935        344,935
Change in fair value of interest rate
 risk on Convertible Subordinated
 Notes ...............................................                                           36,724             --
Unamortized gain on terminated swap ..................                                            4,025             --
Capital lease obligations ............................                                              894          1,203
                                                                                             ----------     ----------
                                                                                              1,241,578      1,336,138
Current portion of long-term debt and capital lease
 obligations .........................................                                             (361)          (332)
                                                                                             ----------     ----------
Long-term debt and capital lease obligations .........                                       $1,241,217     $1,335,806
                                                                                             ==========     ==========
</TABLE>

------------
*  The interest rate on a portion of the Convertible Subordinated Notes has
   been converted to floating rates through interest rate swaps (see Note 7).
   The weighted average interest rate on the Convertible Subordinated Notes,
   after adjusting for the impact of the interest rate swaps, for the year
   ended December 31, 2002, was 3.02%.

     The 2001, 2000 and 1999 Convertible Subordinated Notes are subordinated to
all existing and future senior debt and are convertible at the holder's option
at any time after 60 days following issuance. They are redeemable at the
Company's option, in whole or in part, on at least 30 days notice at any time
on or after the call date, which is two years before the due date. Each holder
of the Convertible Notes has the right to cause the Company to repurchase all
of such holder's Convertible Notes at 100% of their principal amount plus
accrued interest upon the occurrence of any fundamental change, which includes
a transaction or event such as an exchange offer, liquidation, tender offer,
consolidation, merger or combination. Interest is payable semiannually. The
Company paid approximately $14 million, $15 million and $10 million for debt
issuance costs related to the 2001, 2000 and 1999 Convertible Notes,
respectively. The debt issuance costs are being amortized using the interest
method. As of December 31, 2002 and 2001, total debt issuance costs, net of
accumulated amortization was $19 million and $28 million, respectively, and
included in other long-term assets. The net proceeds from the 2001 Convertible
Notes were used to repay bank debt outstanding with a balance of approximately
$200 million. The net proceeds from the 2000 Convertible Notes were used to
repay bank debt outstanding with a balance of approximately $380 million. The
net proceeds of the 1999 Convertible Notes were used to repay existing debt
obligations.

     During 2002, the Company repurchased $115 million of the 2000 Convertible
Subordinated Notes and $20 million of the 1999 Convertible Subordinated Notes,
recognizing a pre-tax gain of $14 million, net of the write-off of debt
issuance costs associated with the issuance of the Notes. The Company has
adopted the provisions of Statement of Financial Accounting Standards No. 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections" related to extinguishment of debt as of
January 1, 2002. As a result, the gain on the repurchase of debt is included in
interest income and other, net, in the statement of operations.

     At December 31, 2002, the estimated fair values of the 2001, 2000 and 1999
Convertible Subordinated Notes were $404 million, $343 million and $311
million, respectively. At December 31, 2001, the estimated fair values of the
2001, 2000 and 1999 Convertible Subordinated Notes were $445 million, $419
million and $387 million, respectively.

     Aggregate principal payments required on outstanding capital lease and
debt obligations are $0.3 million, $325 million, $385 million and $490 million
for the years ended December 31, 2003, 2004, 2005 and 2006, respectively. There
are currently no payments required after December 31, 2006.

                                       70
<PAGE>

                             LSI Logic Corporation

             Notes to Consolidated Financial Statements (Continued)

Note 9 -- Debt (Continued)

     The Company paid $47 million, $38 million and $30 million in interest
during 2002, 2001 and 2000, respectively.

Note 10 -- Common Stock

     Stock option plans. The Company has stock option plans to grant options to
officers, employees and consultants. Under these plans, the Company may grant
stock options with an exercise price that is no less than the fair market value
of the stock on the date of grant. The term of each option is determined by the
Board of Directors and is generally ten years. Options generally vest in annual
increments of 25% per year commencing one year from the date of grant. The 1999
Nonstatutory Stock Option Plan and 1991 Equity Incentive Plan have 34 million
and 30 million shares available for future grants, respectively, as of December
31, 2002.

     The 1995 Director Option Plan, as amended, provides for an initial grant
to new directors of 30,000 options to purchase shares of common stock and
subsequent automatic grants of 25,000 options to purchase shares of common
stock each year thereafter. The initial grants vest in annual increments of 25%
per year, commencing one year from the date of grant. Subsequent option grants
become exercisable in full six months after the grant date. The exercise price
of the options granted is equal to the fair market value of the stock on the
date of grant. There are 0.3 million shares available for future grants under
the 1995 Director Option Plan.

     There are a total of 121 million shares of common stock reserved for
issuance upon exercise of options, including options available for future
grants, outstanding under all stock option plans.

     Stock option exchange program. On August 20, 2002, the Company filed, with
the Securities and Exchange Commission, an offer to exchange stock options
outstanding under the 1991 Equity Incentive Plan and the 1999 Nonstatutory
Stock Option Plan for new options. Under the exchange offer, eligible employees
had the opportunity to exchange eligible stock options for the promise to grant
new options in the future under the 1999 Nonstatutory Stock Option Plan.
Directors and executive officers of the Company were not eligible to
participate in this program. The exchange offer expired September 18, 2002, and
the Company accepted an aggregate of 16,546,370 options for exchange. On March
20, 2003, the Company will grant a new option that will cover two shares of LSI
Logic common stock for every three shares covered by an option an employee
elected to exchange. The exercise price per share of the new options will be
equal to the fair market value of the Company's common stock on the new grant
date. The exchange program is not expected to result in the recording of any
compensation expense in our statement of operations. (See Note 14.)

                                       71
<PAGE>

                             LSI Logic Corporation

             Notes to Consolidated Financial Statements (Continued)

Note 10 -- Common Stock (Continued)

     The following table summarizes the Company's stock options for each of the
years ended December 31, 2002, 2001 and 2000 (share amounts in thousands):

<TABLE>
<CAPTION>
                                                       2002                    2001                    2000
                                              ----------------------- ----------------------- ----------------------
                                                            Weighted                Weighted               Weighted
                                                            Average                 Average                 Average
                                                            Exercise     Number     Exercise     Number    Exercise
                                               Number of   Price Per       of      Price Per       of      Price Per
                                                 Shares      Share       Shares      Share       Shares      Share
                                              ----------- ----------- ----------- ----------- ----------- ----------
<S>                                           <C>         <C>         <C>         <C>         <C>         <C>
Options outstanding at January 1, ...........    73,997    $   22.44     55,164    $   24.09     48,709    $  16.73
Options assumed in acquisitions .............        --           --     10,617        15.26      2,327        6.19
Options canceled ............................   (23,751)     ( 30.57)    (7,257)     ( 25.89)    (5,833)    ( 27.94)
Options granted .............................     8,425        14.21     18,911        20.79     18,069       41.47
Options exercised ...........................    (1,606)     (  8.57)    (3,438)     ( 10.22)    (8,108)    ( 10.70)
                                                -------    ---------     ------    ---------     ------    --------
Options outstanding at December 31, .........    57,065    $   18.24     73,997    $   22.44     55,164    $  24.09
                                                =======    =========     ======    =========     ======    ========
Options exercisable at December 31, .........    34,333    $   17.02     30,766    $   18.81     19,250    $  14.62
                                                =======    =========     ======    =========     ======    ========
</TABLE>

     Significant option groups outstanding as of December 31, 2002 are as
follows (share amounts in thousands):

<TABLE>
<CAPTION>
                                          Outstanding                      Exercisable
                             --------------------------------------   ---------------------
                                                          Weighted                Weighted
                                          Remaining       Average                  Average
                              Number     Contractual      Exercise     Number     Exercise
Options with exercise           of           Life        Price Per       of       Price Per
prices ranging from:          Shares       (years)         Share       Shares       Share
--------------------------   --------   -------------   -----------   --------   ----------
<S>                          <C>        <C>             <C>           <C>        <C>
$0.06 to $5.00 ...........       589          3.46       $   2.34         589     $  2.34
$5.01 to $10.00 ..........    11,819          6.21           8.37       9,565        8.49
$10.01 to $15.00 .........    12,721          5.78          12.67       9,013       12.36
$15.01 to $20.00 .........    12,313          7.55          17.27       5,254       17.28
$20.01 to $25.00 .........    10,358          7.94          22.08       3,811       21.98
$25.01 to $30.00 .........     4,080          6.68          29.07       2,932       29.09
$30.01 to $72.25 .........     5,185          7.19          42.26       3,169       41.26
                              ------          ----       --------       -----     -------
                              57,065          6.81       $  18.24      34,333     $ 17.02
                              ======          ====       ========      ======     =======
</TABLE>

     All options were granted at an exercise price equal to the market value of
the Company's common stock at the date of grant, with the exception of the
options assumed under the stock plans of companies acquired during 2001 and
2000. No further options may be granted under the assumed plans.

     Stock purchase plan. The Company has an Employee Stock Purchase Plan under
which rights are granted to all 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. Sales under the Employee Stock Purchase Plan in 2002,
2001 and 2000 were approximately 4.8 million, 2.9 million and 5.2 million
shares of common stock at an average price of $7.67, $16.39 and $6.30 per
share, respectively. There were approximately 17 million shares of common stock
reserved for issuance for the Employee Stock Purchase Plan as of December 31,
2002.

     Stock-based compensation. The Company accounts for stock-based
compensation, including stock options granted and shares issued under the
Employee Stock Purchase Plan, using the intrinsic value method as prescribed in
APB No. 25, " Accounting for Stock Issued to Employees," and related
interpretations. The Company provides pro forma disclosures to illustrate the
effects on the results of operations as if the Company had recorded
compensation costs based on the estimated grant date fair value, as defined by
SFAS No. 123, for awards granted under its stock option plans and stock
purchase plan (see Note 1). The estimated weighted average grant date fair

                                       72
<PAGE>

                             LSI Logic Corporation

             Notes to Consolidated Financial Statements (Continued)

Note 10 -- Common Stock (Continued)

value, as defined by SFAS No. 123, was calculated using the Black-Scholes
model. The Black-Scholes model was developed to estimate the fair value of
freely tradable, fully transferable options without vesting restrictions, which
significantly differ from the Company's stock option awards. These models also
require highly subjective assumptions, including future stock price volatility
and expected time until exercise, which greatly affect the calculated grant
date fair value. The following weighted average assumptions were included in
the estimated grant date fair value calculations:

<TABLE>
<CAPTION>
                                                                 2002          2001          2000
Employee stock options granted                                ----------   -----------   -----------
<S>                                                           <C>          <C>           <C>
Weighted average estimated grant date fair value ..........    $ 8.29       $ 12.06       $ 23.91
Assumptions in calculation:
Expected life (years) .....................................      3.84          3.79          3.85
Risk-free interest rate ...................................      3.97%         4.70%         6.28%
Volatility ................................................     77.00%        76.00%        72.00%
Dividend yield ............................................         --            --            --
</TABLE>

<TABLE>
<CAPTION>
                                                                 2002         2001          2000
Employee Stock Purchase Plan right to purchase stock          ----------   ----------   -----------
<S>                                                           <C>          <C>          <C>
Weighted average estimated grant date fair value ..........    $ 3.00       $ 6.90       $ 13.83
Assumptions in calculation:
Expected life (years) .....................................      0.50         0.50          0.63
Risk-free interest rate ...................................      1.26%        3.03%         6.07%
Volatility ................................................     81.56%       82.34%        98.82%
Dividend yield ............................................         --           --            --
</TABLE>

     Stock split. On January 25, 2000, the Company announced a two-for-one
stock split, which was declared by the Board of Directors as a 100% stock
dividend payable to stockholders of record on February 4, 2000 as one new share
of common stock for each share held on that date. The newly issued common stock
shares were distributed on February 16, 2000. All references to stock option
data of the Company's common stock below have been restated retroactively to
reflect the two-for-one common stock split as if it occurred for all periods
presented.

     Stock repurchase program. On July 28, 2000, the Company's Board of
Directors authorized a new stock repurchase program in which up to 5 million
shares of the Company's common stock were authorized to be repurchased in the
open market from time to time. The Company repurchased 1.5 million shares of
its common stock in the open market, under this program, for approximately
$49.3 million during the year ended December 31, 2000. The transactions were
recorded as reductions to common stock and additional paid-in capital. There
were no stock repurchases in 2002 or 2001.

     Stock purchase rights. In November 1988, the Company implemented a plan to
protect stockholders' rights in the event of a proposed takeover of the
Company. The plan was amended and restated in November 1998. Under the plan,
each share of the Company's outstanding common stock carries one Preferred
Share Purchase Right. Each Preferred Share Purchase Right entitles the holder,
under certain circumstances, to purchase one-thousandth of a share of Preferred
Stock of the Company or its acquirer at a discounted price. The Preferred Share
Purchase Rights are redeemable by the Company and will expire in 2008.

                                       73
<PAGE>

                             LSI Logic Corporation

             Notes to Consolidated Financial Statements (Continued)

Note 11 -- Income Taxes

     The (benefit)/provision for taxes consisted of the following:

<TABLE>
<CAPTION>
                                           Year ended December 31,
                                     2002            2001            2000
                                -------------   --------------   ------------
                                               (In thousands)
<S>                             <C>             <C>              <C>
Current:
 Federal ....................     $ (83,885)      $       --      $ 108,974
 State ......................            --               --          5,880
 Foreign ....................        24,250            6,073         41,162
                                  ---------       ----------      ---------
   Total ....................       (59,635)           6,073        156,016
                                  ---------       ----------      ---------
Deferred liability/(benefit):
 Federal ....................        36,775          (28,688)        (7,640)
 State ......................         8,006           (6,192)        (1,750)
 Foreign ....................        16,604          (10,391)        (3,667)
                                  ---------       ----------      ---------
   Total ....................        61,385          (45,271)       (13,057)
                                  ---------       ----------      ---------
Total .......................     $   1,750       $  (39,198)     $ 142,959
                                  =========       ==========      =========
</TABLE>

     The domestic and foreign components of (loss)/income before income taxes
and minority interest were as follows:

<TABLE>
<CAPTION>
                                                                         Year ended December 31,
                                                                  2002              2001             2000
                                                             --------------   ----------------   ------------
                                                                              (In thousands)
<S>                                                          <C>              <C>                <C>
Domestic .................................................     $  (69,078)      $   (605,797)     $ 169,449
Foreign ..................................................       (221,326)          (424,558)       210,301
                                                               ----------       ------------      ---------
Income before income taxes and minority interest .........     $ (290,404)      $ (1,030,355)     $ 379,750
                                                               ==========       ============      =========
</TABLE>

     Significant components of the Company's deferred tax assets and
liabilities as of December 31, 2002 and 2001 were as follows:

<TABLE>
<CAPTION>
                                                                       December 31,
                                                                    2002            2001
                                                               -------------   -------------
                                                                      (In thousands)
<S>                                                            <C>             <C>
Deferred tax assets:
 Net operating loss carryforwards ..........................    $   46,233      $   90,913
 Tax credit carryovers .....................................        52,598          25,037
 Future deductions for purchased intangible assets .........       100,281          90,981
 Future deductions for reserves and other ..................        12,191          40,767
 Future deductions for inventory reserves ..................        46,721          31,142
                                                                ----------      ----------
 Total deferred tax assets .................................       258,024         278,840
 Valuation allowance .......................................      (178,734)       (150,267)
                                                                ----------      ----------
 Net deferred tax assets ...................................        79,290         128,573
Deferred tax liabilities:
 Depreciation and amortization .............................       (64,315)        (51,530)
                                                                ----------      ----------
Total net deferred tax assets ..............................    $   14,975      $   77,043
                                                                ==========      ==========
</TABLE>

                                       74
<PAGE>

                             LSI Logic Corporation

             Notes to Consolidated Financial Statements (Continued)
Note 11 -- Income Taxes (Continued)

     Valuation allowances reduce the deferred tax assets to the amount that,
based upon all available evidence, is more likely than not to be realized. The
deferred tax assets' valuation allowance is attributed to U.S. federal, state
and certain foreign deferred tax assets primarily consisting of reserves, other
one-time charges, purchased intangible assets, tax credit carryovers and net
operating loss carryovers that could not be benefited under existing carryback
rules. Approximately $14 million of the valuation allowance at December 31,
2002 relates to tax benefits of stock option deductions, which will be credited
to equity if and when realized.

     At December 31, 2002, the Company had federal, state and foreign net
operating loss carryovers of approximately $72 million, $109 million and $87
million, respectively. The federal and state net operating losses will expire
beginning in 2004 through 2023. The foreign net operating losses will carry
forward indefinitely. Approximately $39 million of the federal net operating
loss carryover and $12 million of the state net operating loss carryover relate
to recent acquisitions and are subject to certain limitations under IRC 382. As
of December 31, 2002, the Company had tax credits of approximately $52 million,
which will expire beginning in 2004.

     Differences between the Company's effective tax rate and the federal
statutory rate were as follows:

<TABLE>
<CAPTION>
                                                                         Year ended December 31,
                                                         2002                       2001                      2000
                                              -------------------------- -------------------------- ------------------------
                                                                              (In thousands)
<S>                                           <C>             <C>        <C>             <C>        <C>          <C>
Federal statutory rate ......................   $  (101,642)      (35%)    $  (360,624)      (35%)   $ 132,913       35%
State taxes, net of federal benefit .........         8,006         3%          (4,025)       --         2,685        1%
Difference between U.S. and foreign
 tax rates ..................................        74,858        26%         136,366        13%      (23,542)      (6)%
Nondeductible expenses ......................        33,733        12%          65,878         6%       73,048       20%
Net operating loss and future
 deductions not currently
 benefited ..................................        46,526        16%         130,714        13%           --       --
Release of income taxes previously
 accrued ....................................       (61,386)      (21)%             --        --            --       --
Research and development tax credit .........            --        --           (8,963)       (1%)     (10,000)      (3)%
Foreign tax credits .........................            --        --               --        --       (29,542)      (8)%
Benefit of net operating losses and
 deferred tax assets not previously
 recognized .................................            --        --               --        --        (3,503)      (1)%
Other .......................................         1,655        --            1,456        --           900       --
                                                -----------       ---      -----------       ---     ---------       ----
Effective tax rate ..........................   $     1,750         1%     $   (39,198)       (4%)   $ 142,959       38%
                                                ===========       ===      ===========       ===     =========       ====
</TABLE>

     The Company paid $16 million, $22 million and $28 million for income taxes
in 2002, 2001 and 2000, respectively.

     In December 2002, the Internal Revenue Service ("IRS") concluded their
audit of the Company's federal income tax returns for the fiscal years 1995
through 1996. As part of the final closing agreement, the IRS and the Company
agreed to expand the scope of the audit for the years 1995 and 1996 to all
fiscal years up to and including 2000. All adjustments for the fiscal years up
to and including 2000 are final and have been reflected in the Company's income
tax expense during the current year. Upon conclusion of the audit, the Company
reassessed its reserve requirements and consequently reversed approximately $61
million of previously accrued income taxes.

     Undistributed earnings of the Company's foreign subsidiaries aggregate
approximately $107 million at December 31, 2002, and are indefinitely
reinvested in foreign operations or will be remitted substantially free of
additional tax. No material provision has been made for taxes that might be
payable upon remittance of such earnings, nor is it practicable to determine
the amount of this liability.

                                       75
<PAGE>

                             LSI Logic Corporation

             Notes to Consolidated Financial Statements (Continued)

Note 12 -- Segment and Geographic Information

     The Company operates in two reportable segments: the Semiconductor segment
and the Storage Systems segment. In the Semiconductor segment, the Company uses
advanced process technology and comprehensive design methodologies to design,
develop, manufacture and market highly complex integrated circuits. These
system-on-a-chip solutions include both application specific integrated
circuits, commonly referred to as ASICs, and application specific standard
products in silicon, or ASSPs. Semiconductor segment product offerings also
include RAID host bus adapters and related products, and services. In the
Storage Systems segment, the Company designs, manufactures, markets and
supports high-performance, highly scaleable open storage area network systems,
storage solutions and a complete line of RAID systems, subsystems and related
software.

     Information about profit or loss and assets. The following is a summary of
operations by segment for the years ended December 31, 2002, 2001 and 2000:

<TABLE>
<CAPTION>
                                             Year ended December 31,
                                      2002             2001              2000
                                 -------------   ----------------   -------------
                                                  (In thousands)
<S>                              <C>             <C>                <C>
Revenues:
 Semiconductor ...............    $1,481,386       $  1,573,618      $2,338,557
 Storage Systems .............       335,552            211,305         399,110
                                  ----------       ------------      ----------
   Total .....................    $1,816,938       $  1,784,923      $2,737,667
                                  ==========       ============      ==========
(Loss)/income from operations:
 Semiconductor ...............    $ (290,017)      $   (947,156)     $  238,134
 Storage Systems .............        25,204            (58,452)         51,323
                                  ----------       ------------      ----------
   Total .....................    $ (264,813)      $ (1,005,608)     $  289,457
                                  ==========       ============      ==========
</TABLE>

     Intersegment revenues for the periods presented above were not
significant. Restructuring of operations and other items were included in both
segments.

     The following is a summary of total assets by segment as of December 31,
2002, 2001 and 2000:

<TABLE>
<CAPTION>
                                              December 31,
                                  2002             2001             2000
                             --------------   --------------   -------------
                                             (In thousands)
<S>                          <C>              <C>              <C>
Total assets:
 Semiconductor ...........    $ 3,851,283      $ 4,301,326      $ 3,851,849
 Storage Systems .........        291,454          324,446          345,638
                              -----------      -----------      -----------
 Total ...................    $ 4,142,737      $ 4,625,772      $ 4,197,487
                              ===========      ===========      ===========
</TABLE>

                                       76
<PAGE>

                             LSI Logic Corporation

             Notes to Consolidated Financial Statements (Continued)
Note 12 -- Segment and Geographic Information (Continued)

     Significant Customers. The following table summarizes the number of our
significant customers, each of whom accounted for 10% or more of our revenues,
along with the percentage of revenues they individually represent on a
consolidated basis and by segment:

<TABLE>
<CAPTION>
                                                                  Year ended December 31,
                                                       2002              2001                 2000
                                                 ---------------   ---------------   ----------------------
<S>                                              <C>               <C>               <C>
Semiconductor segment:
 Number of significant customers .............         1                 1           None greater than 10%
 Percentage of segment revenues ..............        22%               21%                   n/a
Storage Systems segment:
 Number of significant customers .............         3                 3                     3
 Percentage of segment revenues ..............   36%, 15%, 13%     21%, 21%, 13%         31%, 17%, 13%
Consolidated:
 Number of significant customers .............         1                 1                     1
 Percentage of consolidated revenues .........        18%               18%                   12%
</TABLE>

     Information about geographic areas. The Company's significant operations
outside the United States include manufacturing facilities, design centers and
sales offices in Japan, Europe and Pan Asia. The following is a summary of
operations by entities located within the indicated geographic areas for 2002,
2001 and 2000.

<TABLE>
<CAPTION>
                                      Year ended December 31,
                                2002            2001            2000
                           -------------   -------------   -------------
                                          (In thousands)
<S>                        <C>             <C>             <C>
Revenues:
 North America .........    $  905,323      $  880,779      $1,678,709
 Japan .................       382,139         372,815         289,149
 Pan Asia ..............       366,767         257,893         395,864
 Europe ................       162,709         273,436         373,945
                            ----------      ----------      ----------
   Total ...............    $1,816,938      $1,784,923      $2,737,667
                            ==========      ==========      ==========
</TABLE>

<TABLE>
<CAPTION>
                                            December 31,
                                2002             2001            2000
                           --------------   -------------   --------------
                                           (In thousands)
<S>                        <C>              <C>             <C>
Long-lived assets:
 North America .........    $ 1,740,407      $2,014,950      $ 1,662,184
 Japan .................         97,033         118,968          185,758
 Pan Asia ..............        536,444         560,711          147,574
 Europe ................          5,648           7,438            8,844
                            -----------      ----------      -----------
   Total ...............    $ 2,379,532      $2,702,067      $ 2,004,360
                            ===========      ==========      ===========
</TABLE>

     North American revenues include export sales. Long-lived assets consist of
net property and equipment, goodwill, other intangible assets, capitalized
software and other long-term assets, excluding long-term deferred tax assets.

Note 13 -- Commitments and Contingencies

Operating Leases

     The Company uses operating leases to finance certain equipment used in its
wafer fabrication facilities. As of December 31, 2002 the Company had two such
operating leases.

                                       77
<PAGE>

                             LSI Logic Corporation

             Notes to Consolidated Financial Statements (Continued)

Note 13 -- Commitments and Contingencies (Continued)

     In March 2000, the Company entered into a master lease and security
agreement with ABN AMRO Bank and two other banks acting as the Lessor and
several other banks acting as Participants for up to $250 million for certain
wafer fabrication equipment. Each lease supplement pursuant to the transaction
had a lease term of three years with two consecutive one-year renewal options.
The Company may, at the end of any lease term, return or purchase, at a
pre-determined amount, all of the equipment. As of December 31, 2002, the
Company had fully drawn against this agreement.

     In April 2001, the Company entered into a master lease and security
agreement with a group of banks for up to $230 million for certain wafer
fabrication equipment. The Lessor under this lease is an unrelated trust
administered and managed by Wells Fargo Bank Northwest. Each lease supplement
pursuant to the transaction had a lease term of five years with two consecutive
one-year renewal options. The Company may, at the end of any lease term, return
or purchase, at a stated amount, all of the equipment. The agreement was
amended in the fourth quarter of 2001, to reduce the total availability to $161
million. As of December 31, 2002, the Company had fully drawn against this
agreement.

     In the third quarter of 2001, the Company amended the master lease and
security agreements entered into in April 2001 and March 2000 as described
above. As of December 31, 2002, there was $242 million of unamortized leased
equipment value outstanding under these two leases. Pursuant to the amendments,
the Company now participates in each of these leases as a debt holder,
replacing some of the existing banks. As of December 31, 2002, the Company's
debt participation was $190 million, of which $38 million was classified as
prepaid and other current assets and $152 million was classified as non-current
assets and deposits. In addition, cash collateral of $52 million was recorded
as non-current assets and deposits. The lessors have access to the cash
collateral only in the event of a default by the Company. Per the amendments,
the Company is required to maintain a minimum balance in cash, cash equivalents
and short-term investments of $350 million. The Company was in compliance with
this requirement as of December 31, 2002.

     The Company guarantees residual values related to equipment on leases. As
of December 31, 2002, our maximum potential exposure to residual value
guarantees is $110 million.

     No officer or employee of the Company has any financial interest in these
leasing arrangements or in the trust used in the April 2001 lease. The minimum
lease payments under the two lease agreements, excluding option periods, are $3
million for the year ending December 31, 2003 and $1 million each in the years
ending December 31, 2004 and 2005. These payments reflect the amendments and,
as such, exclude any payments on the Company's debt participation.

     The Company leases the majority of its facilities, certain equipment, and
software under non-cancelable operating leases, which expire through 2011. The
facilities lease agreements typically provide for base rental rates that are
increased at various times during the terms of the lease and for renewal
options at the fair market rental value. Future minimum payments under these
operating lease agreements are $72 million, $64 million, $47 million, $37
million, $13 million and $22 million for the years ending December 31, 2003,
2004, 2005, 2006, 2007 and thereafter, respectively.

     Rental expense under all operating leases was $125 million, $150 million
and $102 million for the years ended December 31, 2002, 2001 and 2000,
respectively.

                                       78
<PAGE>

                             LSI Logic Corporation

             Notes to Consolidated Financial Statements (Continued)
Note 13 -- Commitments and Contingencies (Continued)

Guarantees

Product warranties.

<TABLE>
<CAPTION>
                                                                         Year ended
                                                                      December 31, 2002
                                                                     ------------------
                                                                       (in thousands)
<S>                                                                  <C>
   Balance at the beginning of the period ..........................      $  3,756
   Accruals for warranties issued during the period ................        10,796
   Accruals related to pre-existing warranties (including
    changes in estimates) ..........................................           702
   Settlements made during the period (in cash or in kind) .........        (8,926)
                                                                          --------
   Balance at the end of the period ................................      $  6,328
                                                                          ========
</TABLE>

     Standby letters of credit. At December 31, 2002 and 2001, the Company had
outstanding standby letters of credit of $15 million and $14 million,
respectively. These instruments are off-balance sheet commitments to extend
financial guarantees for certain self-insured risks, import/export taxes and
performance under contracts, and generally have one-year terms. The fair value
of the letters of credit approximates the contract amount.

Legal Matters

     In late 1995, a lawsuit was filed by certain former shareholders of our
Canadian subsidiary ("LSI Canada") in the Court of Queen's Bench of Alberta,
Judicial District of Calgary (the "Court") in which the question of LSI
Canada's value at September 7, 1995 was to be determined. Parties representing
approximately 580,000 shares contested the value of $4.00 (Canadian) that was
paid to the other former shareholders of LSI Canada at the time all shares of
LSI Canada not then owned by the Company were acquired by the Company.
Following a hearing held in March 2001, the Court dismissed the motion of the
former shareholders that challenged the propriety of the fair value proceedings
initiated by LSI Canada and the jurisdiction of the Court to adjudicate the
matter. In addition, the Court ruled that the portions of the application of
the former shareholders to initiate a claim based upon allegations that our
actions and certain named (former) directors and a (former) officer of LSI
Canada were oppressive of the rights of minority shareholders of LSI Canada
were to be struck and the balance of the claims were stayed. The Court also
directed all of the litigants to recommence preparation for trial in the fair
value proceeding and advised the litigants of the Court's intention to schedule
a date for trial of that matter as soon as practicable. In July 2002, the
Company (including LSI Canada) entered into a negotiated settlement
("Settlement") with those parties who represent a substantial majority of the
dissenting shares and who were the complainants in the related claim seeking
relief for oppression. As a result and in accordance with the provisions of the
Settlement, the Court was asked by the parties to the Settlement to find and so
order that payment by LSI Canada of the proposed all-inclusive settlement
proceeds would fully satisfy the obligation of LSI Canada to pay value and any
related claims for interest and costs for all of the dissenting shares, that
the parties to the Settlement would bind all other dissenting shares to such
result and to order certain other actions be taken that would cause a full and
final resolution of all claims that are or may be associated with the matter,
including a complete dismissal, with prejudice, of the related claim for relief
from oppression. The Court issued an Order and Judgment consistent with the
parties' requests, which became effective on August 30, 2002. As of December
31, 2002, the period during which any appeals could have been made expired. The
matter has been fully and finally resolved and there has been no material
adverse effect on the Company.

     In February 1999, a lawsuit alleging patent infringement was filed in the
United States District Court for the District of Arizona by the Lemelson
Medical, Education & Research Foundation, Limited Partnership ("Lemelson")
against 88 electronics industry companies, including us. The case number is
CIV990377PHXRGS. The patents involved in this lawsuit are alleged to relate to
semiconductor manufacturing and computer imaging, including the

                                       79
<PAGE>

                             LSI Logic Corporation

             Notes to Consolidated Financial Statements (Continued)

Note 13 -- Commitments and Contingencies (Continued)

use of bar coding for automatic identification of articles. The plaintiff
sought an infringement judgment, an injunction, treble damages, attorneys' fees
and further relief as the court may provide. In September 1999, the Company
filed an answer denying infringement, raising affirmative defenses and
asserting a counterclaim for declaratory judgment of non-infringement,
invalidity and unenforceability of Lemelson's patents. As of December 31, 2002,
the discovery phase was continuing. Initial patent claim construction briefs
are due in March 2004. As of this time, no trial date has been set. While the
Company cannot make any assurance regarding the eventual resolution of this
matter, the Company does not believe it will have a material adverse effect on
the consolidated results of operations or financial condition.

     U.S. Philips Corporation, a subsidiary of Royal Philips Electronics of
Netherlands ("Philips"), filed suits on October 17, 2001 in the U.S. District
Court in New York against eight companies, including us, for allegedly
infringing and inducing others to infringe Philips U.S. Patent Number
4,689,740. This patent is directed to devices and methods used with the
Inter-Integrated Circuit Bus. Philips sought an infringement judgment, an
injunction, attorneys' fees, costs and further relief as the court may provide.
While the Company cannot make any assurance regarding the eventual resolution
of this matter, the Company does not believe it will have a material adverse
effect on the consolidated results of operations or financial condition.

     On June 14, 2002, Plasma Physics Corporation ("Plasma Physics") filed suit
against the Company in the Eastern District of New York, alleging that the
Company is willfully and deliberately infringing two U.S. Plasma Physics
patents. LSI was served with the lawsuit in December 2002. The case is number
CV 02-3462 (LDW) (WDW). The two Plasma Physics patent numbers are 5,470,784 and
6,245,648. No specific Company products were identified in the complaint. The
plaintiff sought an infringement judgment, an injunction, treble damages,
attorneys' fees and further relief as the court may provide. Similar lawsuits
were also filed at the same time against several other corporations. In January
2003, the Company answered the complaint denying infringement and asserting the
affirmative defenses and asserting counterclaims for judgments declaring patent
non-infringement, declaring patent invalidity, and declaring the patents
unenforceable. Trial is currently set for April 30, 2004. While the Company
cannot make any assurance regarding the eventual resolution of this matter, the
Company does not believe it will have a material adverse effect on the
consolidated results of operations or financial condition.

     The Company is a party to other litigation matters and claims that are
normal in the course of its operations, and while the results of such
litigation and claims cannot be predicted with certainty, the Company believes
that the final outcome of such matters is not expected to have a material
adverse effect on the Company's consolidated results of operations and
financial condition.

Note 14 -- Subsequent Events

     In February 2003, in an effort to further streamline operations and better
align operating expenses with projected revenues, the Company terminated
approximately 210 employees primarily involved in manufacturing operations,
research and development, marketing and sales. The Company will record a
restructuring charge of approximately $30 million to $45 million which
primarily includes non-cash charges associated with the write-down of certain
intangible assets and cash charges for severance and related termination
benefits for the former employees.

     On March 20, 2003, the Company granted approximately 10.7 million options
under the 1999 Nonstatutory Stock Option Plan at the closing market value,
pursuant to the stock option exchange program as discussed in Note 10.

                                       80
<PAGE>

                       Report of Independent Accountants

To the Stockholders and Board of Directors
of LSI Logic Corporation:

     In our opinion, the consolidated financial statements listed in the index
appearing under Item 15(a)(1) on page 85 present fairly, in all material
respects, the financial position of LSI Logic Corporation and its subsidiaries
(the "Company") at December 31, 2002 and December 31, 2001, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2002 in conformity with accounting principles generally
accepted in the United States of America. In addition, in our opinion, the
financial statement schedule listed in the index appearing under Item 15(a)(2)
on page 85 presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements. These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

     As discussed in Note 3 to the consolidated financial statements, effective
January 1, 2002, the Company changed its method of accounting for goodwill in
accordance with Statement of Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets.

/s/ Pricewaterhouse Coopers LLP

San Jose, California
January 22, 2003,
except for Note 14, as to which the date is
March 20, 2003

                                       81
<PAGE>

Supplementary Financial Data

Interim Financial Information (Unaudited)

<TABLE>
<CAPTION>
                                                         Quarter
                               ------------------------------------------------------------
                                   First           Second          Third          Fourth
                               -------------   -------------   -------------   ------------
                                         (In thousands, except per share amounts)
<S>                            <C>             <C>             <C>             <C>
Year Ended December 31, 2002
Revenues ...................    $  412,509      $  437,768      $  486,964      $  479,697
Gross profit ...............       105,846         163,364         198,531         180,975
Net loss ...................      (171,753)        (62,291)        (27,626)        (30,770)
Basic loss per share:
 Net loss ..................    $    (0.47)     $    (0.17)     $    (0.07)     $    (0.08)
Diluted loss per share:
 Net loss ..................    $    (0.47)     $    (0.17)     $    (0.07)     $    (0.08)
Year Ended December 31, 2001
Revenues ...................    $  517,199      $  465,219      $  396,675      $  405,830
Gross profit ...............       206,054          72,434          59,997          75,442
Net loss ...................       (31,248)       (312,481)       (398,082)       (250,144)
Basic loss per share:
 Net loss ..................    $    (0.10)     $    (0.91)     $    (1.09)     $    (0.68)
Diluted loss per share:
 Net loss ..................    $    (0.10)     $    (0.91)     $    (1.09)     $    (0.68)
</TABLE>

     During the first and second quarters of 2002, the Company recorded
additional excess inventory and related charges of approximately $41 million
and $5 million, respectively. During the first, second, third and fourth
quarters of 2002, the Company recorded charges for restructuring of operations
and other items of approximately $65 million, $(6) million, $13 million and
$(5) million, respectively. See Notes 4 and 8 of the Notes to the Consolidated
Financial Statements.

     During the second, third and fourth quarters of 2001, the Company recorded
additional excess inventory and related charges of approximately $108 million,
$50 million and $53 million, respectively. During the second and third quarters
of 2001, the Company recorded IPR&D charges of approximately $78 million and
$19 million, respectively, in connection with the purchases of C-Cube and a
division of AMI. During the second, third and fourth quarters of 2001, the
Company recorded charges for restructuring of operations and other items of
approximately $60 million, $133 million and $27 million, respectively. See
Notes 2, 4 and 8 of the Notes to the Consolidated Financial Statements.

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

     Not applicable.

                                       82
<PAGE>

                                   PART III

     Certain information required by Part III is omitted from this Report in
that the Company will file a definitive proxy statement within 120 days after
the end of its fiscal year pursuant to Regulation 14A (the "Proxy Statement")
for its Annual Meeting of Stockholders to be held May 1, 2003, and certain of
the information to be included therein is incorporated by reference herein.

Item 10. Directors and Executive Officers of the Registrant
     The information regarding the Company's executive officers required by
this Item is incorporated by reference from the section entitled "Executive
Officers of the Company" in Part I of this Form 10-K.

     The information regarding the Company's directors is incorporated by
reference from "Election of Directors" in the Company's Proxy Statement.

     The information concerning Section 16(a) reporting is incorporated by
reference from "Section 16(a) Beneficial Ownership Reporting Compliance" in the
Company's Proxy Statement.

Item 11. Executive Compensation
     The information required by this Item is incorporated by reference from
"Executive Compensation" in the Company's Proxy Statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management
     The information required by this Item is incorporated by reference to
"Security Ownership" in the Company's Proxy Statement.

                     Equity Compensation Plan Information
                            As of December 31, 2002

<TABLE>
<CAPTION>
                                                       (a)                       (b)                     (c)
                                                                                                Number of securities
                                                                                               remaining available for
                                                                                                future issuance under
                                              Number of securities        Weighted-average       equity compensation
                                           to be issued upon exercise     exercise price of       plans (excluding
                                             of outstanding options,    outstanding options,    securities reflected
Plan category                                  warrants and rights       warrants and rights       in column (a))
----------------------------------------- ---------------------------- ---------------------- ------------------------
<S>                                       <C>                          <C>                    <C>
Equity compensation plans approved by
 security holders(1) .................... 31,324,443                          $ 18.05         45,510,234
Equity compensation plans not approved by
 security holders(2) .................... 25,740,150                          $ 18.47         35,207,671
Total ................................... 57,064,593                          $ 18.24         80,717,905
</TABLE>

------------
(1)  Equity compensation plans approved by security holders include the
     following:

   i)  The Amended and Restated Employee Stock Purchase Plan ("US ESPP"),
       under which rights are granted to LSI Logic employees in the United
       States 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. There are 15,483,636 shares remaining available for
       future issuance under this plan. The US ESPP includes an annual
       replenishment calculated as 1.15% of the Company's common stock issued
       and outstanding at the fiscal year end less the number of shares
       available for future grants under the US ESPP.

   ii) The 1991 Equity Incentive Plan, under which the Company may grant stock
       options to employees, officers and consultants, with an exercise price
       that is no less than the fair market value of the stock on the date of
       grant. The term of each option is determined by the Board of Directors
       and is generally ten years. Options generally vest in annual increments
       of 25% per year commencing one year from the date of grant.

   iii) The 1995 Amended Director Option Plan (excluding the shares for which
       stockholder approval is being sought at this annual meeting) under which
       new directors receive an initial grant of 30,000 options to

                                       83
<PAGE>

       purchase shares of common stock and directors receive subsequent
       automatic grants of 25,000 options to purchase shares of common stock
       each year thereafter. The initial grants vest in annual increments of
       25% per year, commencing one year from the date of grant. Subsequent
       option grants become exercisable in full six months after the grant
       date. The exercise price of the options granted is equal to the fair
       market value of the stock on the date of grant.

(2)  Equity compensation plans not approved by security holders include the
     following:

   i)  An aggregate of 10,401,017 options with a weighted-average exercise
       price of $12.93 per share are outstanding that were assumed in
       acquisitions. No further options may be granted under these assumed
       plans.

   ii) A total of 316,042 shares of common stock are reserved under the 2001
       Supplemental Stock Issuance Plan, of which 152,922 shares remain
       available for future issuance. Shares of common stock may be issued
       under this plan pursuant to share right awards, which entitle the
       recipients to receive those shares upon the satisfaction of the
       following service requirements: 20% of the shares subject to an award
       will be issued upon completion of three months of continuous service
       measured from the award date, an additional 30% of the shares will be
       issued upon completion of 12 months of continuous service measured from
       the award date and the remaining 50% of the shares will be issued upon
       completion of 24 months of continuous service measured from the award
       date.

   iii) The 1999 Nonstatutory Stock Option Plan, under which the Company may
       grant stock options to its employees, excluding officers, with an
       exercise price that is no less than the fair market value of the stock
       on the date of grant. The term of each option is determined by the Board
       of Directors and is generally ten years. Options generally vest in
       annual increments of 25% per year commencing one year from the date of
       grant.

   iv) The International Employee Stock Purchase Plan, under which rights are
       granted to LSI Logic employees (excluding executive officers) outside of
       the United States 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. There are 1,412,567 shares remaining
       available for future issuance under this plan.

Item 13. Certain Relationships and Related Transactions

     The information required by this Item is incorporated by reference to
"Certain Transactions" in the Company's Proxy Statement.

                                    PART IV

Item 14. Controls and Procedures

     We maintain disclosure controls and procedures and internal accounting
controls designed to ensure that information required to be disclosed in our
filings under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms. Our principal executive and financial
officers have evaluated our disclosure controls and procedures pursuant to Rule
13a-14 promulgated under the Securities Exchange Act within 90 days prior to
the filing of this Annual Report on Form 10-K and have determined that such
disclosure controls and procedures are effective to timely alert them to
material information relating to our company required to be disclosed in our
filings with the Securities and Exchange Commission. Subsequent to our
evaluation, there were no significant changes in internal controls or other
factors that could significantly affect our internal controls, including any
corrective actions with regard to significant deficiencies and material
weaknesses. We are aware that no set of disclosure controls and procedures is
full-proof, and that maintenance of disclosure controls and procedures is an
ongoing process that may change over time.

                                       84
<PAGE>

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

     (a)  The following documents are filed as a part of this Report:

     1.   FINANCIAL STATEMENTS. The following Consolidated Financial Statements
          of LSI Logic Corporation and Report of Independent Accountants are
          contained in this Form 10-K:

<TABLE>
<CAPTION>
                                                                                         Page in the
                                                                                          Form 10-K
                                                                                        ------------
<S>                                                                                     <C>
     Consolidated Balance Sheets -- As of December 31, 2002 and 2001 ................   45
     Consolidated Statements of Operations -- For the Three Years Ended
      December 31, 2002, 2001 and 2000 ..............................................   46
     Consolidated Statements of Stockholders' Equity -- For the Three Years Ended
      December 31, 2002, 2001 and 2000 ..............................................   47
     Consolidated Statements of Cash Flows -- For the Three Years Ended
      December 31, 2002, 2001 and 2000 ..............................................   48
     Notes to Consolidated Financial Statements .....................................   49
     Report of Independent Accountants ..............................................   81
</TABLE>

   Fiscal years 2002, 2001 and 1999 were 52-week years with a December 31
                                  fiscal year end.

   2. FINANCIAL STATEMENT SCHEDULES.

                                  SCHEDULE II
                       VALUATION AND QUALIFYING ACCOUNTS
                                 (in millions)

<TABLE>
<CAPTION>
                 Column A                      Column B             Column C             Column D       Column E
                                              Balance at      Additions charged to                     Balance at
                                             beginning of        costs, expenses                         end of
               Description                      period          or other accounts      Deductions*       period
-----------------------------------------   --------------   ----------------------   -------------   -----------
<S>                                         <C>              <C>                      <C>             <C>
2002
Allowance for doubtful accounts .........        $ 20                 $  9               $ (22)           $  7
2001
Allowance for doubtful accounts .........        $  8                 $ 15               $  (3)           $ 20
2000
Allowance for doubtful accounts .........        $ 11                 $  4               $  (7)           $  8
</TABLE>

------------
*  Deductions include write-offs of uncollectible accounts and collections of
amounts previously reserved.

                                       85
<PAGE>

3. EXHIBITS:

<TABLE>
<S>        <C>
      2.1  Stock Purchase Agreement dated as of June 28, 1998, by and among the Registrant, HEA and HEI.
           Incorporated by reference to exhibits filed with the Registrant's Registration Statement on Form
           8-K/A filed on October 20, 1998.
      2.2  First Amendment to Stock Purchase Agreement dated as of August 6, 1998, by and among the
           Registrant, HEA and HEI. Incorporated by reference to exhibits filed with the Registrant's
           Registration Statement on Form 8-K/A filed on October 20, 1998.
      2.3  Agreement and Plan of Reorganization and Merger dated February 21, 1999, by and among the
           Registrant, Stealth Acquisition Corporation and SEEQ Technology Inc. Incorporated by reference to
           Exhibit 99.1 filed with the Registrant's Current Report on Form 8-K filed on February 23, 1999.
      2.4  Agreement and Plan of Reorganization dated May 20, 2000 by and among Registrant, Diamond
           Acquisition Corporation, DataPath Systems, Inc., and certain individuals named therein. Incorporated
           by reference to exhibits filed with Registrant's Form 8-K filed on May 24, 2000.
      2.5  Agreement and Plan of Reorganization dated March 26, 2001 by and among Registrant, Clover
           Acquisition Corporation and C-Cube Microsystems, Inc. Incorporated by reference to exhibits filed
           with the Registrant's Registration Statement on Form S-4 (No. 333-58862) filed on April 13, 2001.
      3.1  Restated Certificate of Incorporation of Registrant. Incorporated by reference to exhibits filed with the
           Registrant's Registration Statement on Form S-8 (No. 333-46436) filed on September 22, 2000.
      3.2  Amended and Restated By-laws of Registrant. Incorporated by reference to exhibits filed with the
           Registrant's Annual Report on Form 10-K for the year ended December 31, 2001.
      4.1  Amended and Restated Preferred Shares Rights Agreement dated as of November 20, 1998, between
           LSI Logic Corporation and BankBoston N.A. Incorporated by reference to exhibits filed with the
           Registrant's Form 8-A12G/A on December 8, 1998.
      4.2  Indenture dated March 15, 1999 between LSI Logic Corporation and State Street Bank and Trust
           Company of California, N.A., Trustee, covering $345,000,000 principal amount of 41/4% Convertible
           Subordinated Notes due 2004. Incorporated by reference to exhibits filed with the Registrant's
           Form S-3 (No. 333-80611), filed on June 14, 1999.
      4.3  Indenture dated February 15, 2000 between LSI Logic Corporation and State Street Bank and Trust
           Company of California, Trustee. Incorporated by reference to exhibits filed with the Registrant's
           Form 8-K filed on February 24, 2000.
      4.4  See Exhibit 3.1.
     10.1  Registrant's 1982 Incentive Stock Option Plan, as amended, and forms of Stock Option Agreement.
           Incorporated by reference to exhibits filed with the Registrant's Annual Report on Form 10-K for the
           year ended December 31, 1988.*
     10.2  Lease Agreement dated November 22, 1983 for 48580 Kato Road, Fremont, California between the
           Registrant and BankAmerica Realty Investors. Incorporated by reference to exhibits filed with the
           Registrant's Annual Report on Form 10-K for the year ended December 31, 1983.
     10.3  Form of Indemnification Agreement entered and to be entered into between Registrant and our
           officers, directors and certain key employees. Incorporated by reference to exhibits filed with the
           Registrant's Annual Report on Form 10-K for the year ended December 31, 1987.*
     10.4  Amended and Restated LSI Logic Corporation 1991 Equity Incentive Plan. Incorporated by reference
           to documents filed as appendices with Registrant's Registration Statement on Form S-8 (No. 333-
           96543) on July 16, 2002.*
     10.5  Lease Agreement dated February 28, 1991 for 765 Sycamore Drive, Milpitas, California between the
           Registrant and the Prudential Insurance Company of America. Incorporated by reference to exhibits
           filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1987.
</TABLE>

                                       86
<PAGE>

<TABLE>
<S>         <C>
     10.6   Stock Purchase Agreement dated as of January 20, 1995; Promissory Note dated January 26, 1995;
            Note Purchase Agreement dated as of January 26, 1995 in connection with our purchase of the
            minority interest in one of our Japanese subsidiaries. Incorporated by reference to exhibits filed with
            the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.
     10.7   1995 Director Option Plan. Incorporated by reference to exhibits filed with the Registrant's Annual
            Report on Form 10-K for the year ended December 31, 1995.*
     10.8   LSI Logic Corporation International Employee Stock Purchase Plan. Incorporated by reference to
            exhibits filed with the Registrant's Registration Statement on Form S-8 (No. 333-98807) on
            August 27, 2002.*
     10.9   Form of LSI Logic Corporation Change of Control Severance Agreement between LSI Logic
            Corporation and each of its executive officers. Incorporated by reference to exhibits filed with the
            Registrant's Annual Report on Form 10-K for the year ended December 31, 1998. *
     10.10  Technology Transfer Agreement between LSI Logic Corporation and Wafer Technology (Malaysia)
            Sdn. Bhd. Dated September 8, 1999. Incorporated by reference to exhibits filed with the Registrant's
            Quarterly Report on Form 10-Q for the quarter ended September 30, 1999.
     10.11  Mint Technology, Inc. Amended 1996 Stock Option Plan. Incorporated by reference to exhibits filed
            with the Registrant's Registration Statement on Form S-8 (No. 333-34285) filed August 25, 1997.
     10.12  Registrant's Amended and Restated Employee Stock Purchase Plan. Said document is included as an
            Exhibit to this Annual Report on Form 10-K for the year ended December 31, 2002.*
     10.13  Symbios Logic, Inc. 1995 Stock Plan. Incorporated by reference to exhibits filed with the Registrant's
            Form S-8 (No. 333-62159) filed on August 25, 1998.
     10.14  LSI Logic Corporation 1999 Nonstatutory Stock Option Plan. Incorporated by reference to exhibits filed
            with the Registrant's Registration Statement on Form S-8 (No. 333-96549) filed on July 16, 2002.
     10.15  SEEQ Technology, Inc. Amended and Restated 1982 Stock Option Plan. Incorporated by reference to
            exhibits filed with the Registrant's Form S-8 (No. 333-81435) filed on June 24, 1999.
     10.16  SEEQ Technology, Inc. 1989 Non-Employee Director Stock Option Plan. Incorporated by reference
            to exhibits filed with the Registrant's Form S-8 (No. 333-81435) filed on June 24, 1999.
     10.17  Amended and Restated Participation Agreement by and among Registrant, and ABN AMRO Bank
            N.V., ABN AMRO Bank N.V. as agent for Lessors and Participants dated April 18, 2000.
            Incorporated by reference to exhibits with Registrant's Quarterly Report on Form 10-Q for the quarter
            ended April 2, 2000.
     10.18  Second Amended and Restated Credit Agreement dated as of April 21, 2000, by and among
            Registrant, LSI Logic Japan Semiconductor, ABN AMRO Bank and Lenders. Incorporated by
            reference to exhibits filed with the Registrant's Annual Report on Form 10-K for the year ended
            December 31, 2000.
     10.19  IntraServer Technology, Inc. 1998 Stock Option Plan. Incorporated by reference to exhibits filed with
            Registrant's Form S-8 (No. 333-38746) filed on June 7, 2000.
     10.20  DataPath Systems, Inc. Amended 1994 Stock Option Plan. Incorporated by reference to exhibits filed
            with Registrant's Form S-8 (No. 333-42888) filed on August 2, 2000.
     10.21  DataPath Systems, Inc. Amended and Restated 1997 Stock Option Plan. Incorporated by reference to
            exhibits filed with Registrant's Form S-8 (No. 333-42888) filed on August 2, 2000.
     10.22  Syntax Systems, Inc. Restated Stock Option Plan of January 5, 1999. Incorporated by reference to
            exhibits filed with Registrant's Form S-8 (No. 333-52050) filed on December 18, 2000.
     10.23  C-Cube Microsystems Inc. Director Stock Option Plan. Incorporated by reference to exhibits filed
            with Registrant's Form S-8 (No. 333-62960) filed on June 14, 2001.
     10.24  C-Cube Microsystems Inc. 2000 Stock Plan. Incorporated by reference to exhibits filed with
            Registrant's Form S-8 (No. 333-62960) filed on June 14, 2001.
</TABLE>

                                       87
<PAGE>

<TABLE>
<S>          <C>
      10.25  Wilfred J. Corrigan Employment Agreement dated as of September 20, 2001. Incorporated by reference to
             exhibits filed with the Annual Report on Form 10-K for the year ended December 31, 2001.*
      10.26  First Amendment to Amended and Restated Participation Agreement by and among LSI Logic, ABN
             Amro Bank N.V., Keybank National Association, FBTC Leasing Corp. as Lessor, ABN Amro Bank N.V.,
             as agent for Lessors and Participants, dated as of August 2, 2001. Incorporated by reference to exhibits
             filed with Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.
      10.27  Second Amendment to Amended and Restated Participation Agreement by and among LSI Logic,
             ABN Amro Bank N.V., Keybank National Association, FBTC Leasing Corp. as Lessor, ABN Amro
             Bank N.V., as agent for Lessors and Participants, dated as of August 17, 2001. Incorporated by
             reference to exhibits filed with Registrant's Quarterly Report on Form 10-Q for the quarter ended
             September 30, 2001.
      10.28  Third Amendment to Participation Agreement and Omnibus Amendment by and among LSI Logic,
             Banc of America Leasing & Capital LLC, as Lessor, Fleet National Bank, as Lessor Agent and as
             Agent and Participants, dated as of September 28, 2001. Incorporated by reference to exhibits filed
             with Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.
      10.29  Participation Agreement by and among LSI Logic, First Security Bank, N.A. as Certificate Trustee,
             First Security Trust Company of Nevada, as Agent and Participants, dated as of April 20, 2001.
             Incorporated by reference to exhibits filed with Registrant's Quarterly Report on Form 10-Q for the
             quarter ended September 30, 2001.
      10.30  First Amendment to Participation Agreement by and among LSI Logic, Wells Fargo Bank Northwest,
             N.A. (f/k/a First Security Bank, N.A.), as Certificate Trustee, First Security Trust Company of
             Nevada, as Agent and Participants, dated as of August 2, 2001.
      10.31  Second Amendment to Participation Agreement by and among LSI Logic, Wells Fargo Bank
             Northwest, N.A. (f/k/a First Security Bank, N.A.), as Certificate Trustee, First Security Trust
             Company of Nevada, as Agent and Participants, dated as of August 17, 2001.
      10.32  Third Amendment to Participation Agreement and Omnibus Amendment by and among LSI Logic,
             Wells Fargo Bank Northwest, N.A., (f/k/a First Security Bank, N.A.), as Certificate Trustee, Wells
             Fargo Bank Nevada, National Association (f/k/a First Security Trust Company of Nevada), as Agent
             and Participants, dated as of September 28, 2001.
      10.33  Manufacturing Technology Joint Development and Foundry Supply Agreement dated as of March 30,
             2001, by and between the Registrant and Taiwan Semiconductor Manufacturing Co., Ltd. Said
             document is included as an Exhibit to this Annual Report on Form 10-K for the year ended
             December 31, 2002.**
      21.1   List of Subsidiaries.
      23.1   Consent of Independent Accountants.
      24.1   Power of Attorney (See page 90).
</TABLE>

------------
     *    Denotes management contract or compensatory plan or arrangement.
     **   Confidential treatment has been requested for portions of this
          document.

     (b)  REPORTS ON FORM 8-K.

     During the fourth quarter ended December 31, 2002, we filed the following
Current Reports on Form 8-K:

     On November 5, 2002, we filed a Current Report on Form 8-K pursuant to
Item 5 to report financial results set forth in the Registrant's news release
dated October 23, 2002.

     (c)  EXHIBITS.

     See Item 14(a)(3), above.

     (d)  FINANCIAL STATEMENT SCHEDULES

     See Item 14(a)(2), above.

                                       88
<PAGE>

TRADEMARK ACKNOWLEDGMENTS
     The LSI Logic logo design, CoreWare, ContinuStor, G10, G11, G12,
GigaBlaze, HyperPHY, MegaRAID, Merlin, MetaStor, and SeriaLink are registered
trademarks of LSI Logic Corporation; FusionMPT, Gflx, RapidChip, RapidSlice,
SANtricity, and SANshare are trademarks of LSI Logic Corporation.

     ARM is a registered Trademark of Advanced RISC Machines Limited, used
under license. OakDSPCore is a registered trademark of DSP Group, Inc., used
under license. All other brand and product names appearing in this report are
the trademarks of their respective companies.

                                       89
<PAGE>

                                  SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.

                                     LSI LOGIC CORPORATION

                                     By: /s/ WILFRED J. CORRIGAN
                                     -----------------------------------
                                     Wilfred J. Corrigan
                                     Chairman of the Board and Chief Executive
                                     Officer

Dated: March 20, 2003

                               POWER OF ATTORNEY

     KNOW ALL PERSONS BY THESE PRESENT, that each person whose signature
appears below constitutes and appoints Wilfred J. Corrigan and David G. Pursel,
jointly and severally, their attorneys-in-fact, each with the power of
substitution, for them in any and all capacities, to sign any amendments to
this Report on Form 10-K, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that each of said attorneys-in-fact, or
their substitute or substitutes, may do or cause to be done by virtue hereof.

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
         Signature                                   Title                                Date
---------------------------   ---------------------------------------------------   ---------------
<S>                           <C>                                                   <C>
 /s/ WILFRED J. CORRIGAN      Chairman of the Board, Chief Executive Officer        March 20, 2003
-------------------------     (Principal Executive Officer) and Director
  (Wilfred J. Corrigan)

      /s/ BRYON LOOK          Executive Vice President and Chief Financial          March 20, 2003
-------------------------     Officer (Principal Financial Officer and Principal
       (Bryon Look)           Accounting Officer)

       /s/ T.Z. CHU           Director                                              March 20, 2003
-------------------------
       (T.Z. Chu)

   /s/ MALCOLM R. CURRIE      Director                                              March 20, 2003
-------------------------
   (Malcolm R. Currie)

    /s/ JAMES H. KEYES        Director                                              March 20, 2003
-------------------------
     (James H. Keyes)

  /s/ R. DOUGLAS NORBY        Director                                              March 20, 2003
-------------------------
   (R. Douglas Norby)

  /s/ MATTHEW O'ROURKE        Director                                              March 20, 2003
-------------------------
   (Matthew O'Rourke)

    /s/ GREGORIO REYES        Director                                              March 20, 2003
-------------------------
     (Gregorio Reyes)

   /s/ LARRY W. SONSINI       Director                                              March 20, 2003
-------------------------
   (Larry W. Sonsini)
</TABLE>

                                       90
<PAGE>

             CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO
                            18 U.S.C. SECTION 1350,
                            AS ADOPTED PURSUANT TO
                 SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     I, Wilfred J. Corrigan, certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the
Annual Report on Form 10-K of LSI Logic Corporation for the year ended December
31, 2002, fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 and that information contained in such Form
10-K fairly presents in all material respects the financial condition and
results of operations of LSI Logic Corporation.

                                     By: /s/ WILFRED J. CORRIGAN
                                         -----------------------------------
                                     Name: Wilfred J. Corrigan
                                     Title: Chairman & Chief Executive Officer

                                       91
<PAGE>

                   CERTIFICATION OF CHIEF FINANCIAL OFFICER
                                  PURSUANT TO
                            18 U.S.C. SECTION 1350,
                            AS ADOPTED PURSUANT TO
                 SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     I, Bryon Look, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual
Report on Form 10-K of LSI Logic Corporation for the year ended December 31,
2002, fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 and that information contained in such Form
10-K fairly presents in all material respects the financial condition and
results of operations of LSI Logic Corporation.

                                     By: /s/ BRYON LOOK
                                         -------------------------------
                                     Name: Bryon Look
                                     Title: Executive Vice President &
                                           Chief Financial Officer

                                       92
<PAGE>

                   CERTIFICATION OF CHIEF EXECUTIVE OFFICER
                            AS ADOPTED PURSUANT TO
               SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002

I, Wilfred J. Corrigan, certify that:

1. I have reviewed this annual report on Form 10-K of LSI Logic Corporation;

2. Based on my knowledge, this annual report does not contain any untrue
   statement of a material fact or omit to state a material fact necessary to
   make the statements made, in light of the circumstances under which such
   statements were made, not misleading with respect to the period covered by
   this annual report;

3. Based on my knowledge, the financial statements, and other financial
   information included in this annual report, fairly present in all material
   respects the financial condition, results of operations and cash flows of
   LSI Logic Corporation as of, and for, the periods presented in this annual
   report;

4. LSI Logic Corporation's other certifying officers and I are responsible for
   establishing and maintaining disclosure controls and procedures (as defined
   in Exchange Act Rules 13a-14 and 15d-14) for LSI Logic Corporation and we
   have:

  a. designed such disclosure controls and procedures to ensure that material
     information relating to LSI Logic Corporation, including its consolidated
     subsidiaries, is made known to us by others within those entities,
     particularly during the period in which this annual report is being
     prepared;

  b. evaluated the effectiveness of LSI Logic Corporation's disclosure controls
     and procedures as of a date within 90 days prior to the filing date of
     this annual report (the "Evaluation Date"); and

  c. presented in this annual report our conclusions about the effectiveness of
     the disclosure controls and procedures based on our evaluation as of the
     Evaluation Date;

5. LSI Logic Corporation's other certifying officers and I have disclosed,
   based on our most recent evaluation, to LSI Logic Corporation's auditors
   and the audit committee of LSI Logic Corporation's board of directors:

  a. all significant deficiencies in the design or operation of internal
     controls which could adversely affect LSI Logic Corporation's ability to
     record, process, summarize and report financial data and have identified
     for LSI Logic Corporation's auditors any material weaknesses in internal
     controls; and

  b. any fraud, whether or nor material, that involves management or other
     employees who have a significant role in LSI Logic Corporation's internal
     controls; and

6. LSI Logic Corporation's other certifying officers and I have indicated in
   this annual report whether or not there were significant changes in
   internal controls or in other factors that could significantly affect
   internal controls subsequent to the date of our most recent evaluation,
   including any corrective actions with regard to significant deficiencies
   and material weaknesses.

Date: March 20, 2003

By: /s/ WILFRED J. CORRIGAN
     -------------------------------
Name: Wilfred J. Corrigan
Title: Chairman & Chief Executive Officer

                                       93
<PAGE>

                   CERTIFICATION OF CHIEF FINANCIAL OFFICER
                            AS ADOPTED PURSUANT TO
               SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002

I, Bryon Look, certify that:

1. I have reviewed this annual report on Form 10-K of LSI Logic Corporation;

2. Based on my knowledge, this annual report does not contain any untrue
   statement of a material fact or omit to state a material fact necessary to
   make the statements made, in light of the circumstances under which such
   statements were made, not misleading with respect to the period covered by
   this annual report;

3. Based on my knowledge, the financial statements, and other financial
   information included in this annual report, fairly present in all material
   respects the financial condition, results of operations and cash flows of
   LSI Logic Corporation as of, and for, the periods presented in this annual
   report;

4. LSI Logic Corporation's other certifying officers and I are responsible for
   establishing and maintaining disclosure controls and procedures (as defined
   in Exchange Act Rules 13a-14 and 15d-14) for LSI Logic Corporation and we
   have:

  a. designed such disclosure controls and procedures to ensure that material
     information relating to LSI Logic Corporation, including its consolidated
     subsidiaries, is made known to us by others within those entities,
     particularly during the period in which this annual report is being
     prepared;

  b. evaluated the effectiveness of LSI Logic Corporation's disclosure controls
     and procedures as of a date within 90 days prior to the filing date of
     this annual report (the "Evaluation Date"); and

  c. presented in this annual report our conclusions about the effectiveness of
     the disclosure controls and procedures based on our evaluation as of the
     Evaluation Date;

5. LSI Logic Corporation's other certifying officers and I have disclosed,
   based on our most recent evaluation, to LSI Logic Corporation's auditors
   and the audit committee of LSI Logic Corporation's board of directors:

  a. all significant deficiencies in the design or operation of internal
     controls which could adversely affect LSI Logic Corporation's ability to
     record, process, summarize and report financial data and have identified
     for LSI Logic Corporation's auditors any material weaknesses in internal
     controls; and

  b. any fraud, whether or nor material, that involves management or other
     employees who have a significant role in LSI Logic Corporation's internal
     controls; and

6. LSI Logic Corporation's other certifying officers and I have indicated in
   this annual report whether or not there were significant changes in
   internal controls or in other factors that could significantly affect
   internal controls subsequent to the date of our most recent evaluation,
   including any corrective actions with regard to significant deficiencies
   and material weaknesses.

Date: March 20, 2003

By: /s/ BRYON LOOK
     -------------------------------
Name: Bryon Look
Title: Executive Vice President & Chief Financial Officer

                                       94
<PAGE>

INDEX TO EXHIBITS

<TABLE>
<S>        <C>
      2.1  Stock Purchase Agreement dated as of June 28, 1998, by and among the Registrant, HEA and HEI.
           Incorporated by reference to exhibits filed with the Registrant's Registration Statement on Form
           8-K/A filed October 20, 1998.
      2.2  First Amendment to Stock Purchase Agreement dated as of August 6, 1998, by and among the
           Registrant, HEA and HEI. Incorporated by reference to exhibits filed with the Registrant's
           Registration Statement on Form 8-K/A filed October 20, 1998.
      2.3  Agreement and Plan of Reorganization and Merger dated February 21, 1999, among the Registrant,
           Stealth Acquisition Corporation and SEEQ Technology Inc. Incorporated by reference to Exhibit 99.1
           filed with the Registrant's Current Report on Form 8-K as of February 23, 1999.
      2.4  Agreement and Plan of Reorganization dated May 20, 2000 by and among Registrant, Diamond
           Acquisition Corporation, DataPath Systems, Inc., and certain individuals named therein. Incorporated
           by reference to exhibits filed with Registrant's Form 8-K filed May 24, 2000.
      2.5  Agreement and Plan of Reorganization dated March 26, 2001 by and among Registrant, Clover
           Acquisition Corporation and C-Cube Microsystems, Inc. Incorporated by reference to exhibits filed
           with the Registrant's Registration Statement on Form S-4 (No. 333-58862) filed April 13, 2001.
      3.1  Restated Certificate of Incorporation of Registrant. Incorporated by reference to exhibits filed with the
           Registrant's Registration Statement on Form S-8 (No. 333-46436) filed September 22, 2000.
      3.2  Amended and Restated By-laws of Registrant. Incorporated by reference to exhibits filed with the
           Registrant's Annual Report on Form 10-K for the year ended December 31, 2001.
      4.1  Amended and Restated Preferred Shares Rights Agreement dated as of November 20, 1998, between
           LSI Logic Corporation and BankBoston N.A. Incorporated by reference to exhibits filed with the
           Registrant's Form 8-A12G/A on December 8, 1998.
      4.2  Indenture dated March 15, 1999 between LSI Logic Corporation and State Street Bank and Trust
           Company of California, N.A., Trustee, covering $345,000,000 principal amount of 4 1/4% Convertible
           Subordinated Notes due 2004. Incorporated by reference to exhibits filed with the Registrant's Form
           S-3 (No. 333-80611), filed on June 14, 1999.
      4.3  Indenture dated February 15, 2000 between LSI Logic Corporation and State Street Bank and Trust
           Company of California, Trustee. Incorporated by reference to exhibits filed with the Registrant's
           Form 8-K filed on February 24, 2000.
      4.4  See Exhibit 3.1.
     10.1  Registrant's 1982 Incentive Stock Option Plan, as amended, and forms of Stock Option Agreement.
           Incorporated by reference to exhibits filed with the Registrant's Annual Report on Form 10-K for the
           year ended December 31, 1988.*
     10.2  Lease Agreement dated November 22, 1983 for 48580 Kato Road, Fremont, California between the
           Registrant and BankAmerica Realty Investors. Incorporated by reference to exhibits filed with the
           Registrant's Annual Report on Form 10-K for the year ended December 31, 1983.
     10.3  Form of Indemnification Agreement entered and to be entered into between Registrant and our
           officers, directors and certain key employees. Incorporated by reference to exhibits filed with the
           Registrant's Annual Report on Form 10-K for the year ended December 31, 1987.*
     10.4  Amended and Restated LSI Logic Corporation 1991 Equity Incentive Plan. Incorporated by reference to
           exhibits filed with Registrant's Registration Statement on Form S-8 (No. 333-96543) on July 16, 2002. *
     10.5  Lease Agreement dated February 28, 1991 for 765 Sycamore Drive, Milpitas, California between the
           Registrant and the Prudential Insurance Company of America. Incorporated by reference to exhibits
           filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1987.
</TABLE>

                                       95
<PAGE>

<TABLE>
<S>         <C>
     10.6   Stock Purchase Agreement dated as of January 20, 1995; Promissory Note dated January 26, 1995;
            Note Purchase Agreement dated as of January 26, 1995 in connection with our purchase of the
            minority interest in one of our Japanese subsidiaries. Incorporated by reference to exhibits filed with
            the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.
     10.7   1995 Director Option Plan. Incorporated by reference to exhibits filed with the Registrant's Annual
            Report on Form 10-K for the year ended December 31, 1995.*
     10.8   LSI Logic Corporation International Employee Stock Purchase Plan. Incorporated by reference to
            exhibits filed with the Registrant's Registration Statement on Form S-8 (No. 333-98807) on
            August 27, 2002.*
     10.9   Form of LSI Logic Corporation Change of Control Severance Agreement between LSI Logic
            Corporation and each of its executive officers. Incorporated by reference to exhibits filed with the
            Registrant's Annual Report on Form 10-K for the year ended December 31, 1998.*
     10.10  Technology Transfer Agreement between LSI Logic Corporation and Wafer Technology (Malaysia)
            Sdn. Bhd. Dated September 8, 1999. Incorporated by reference to exhibits filed with the Registrant's
            Quarterly Report on Form 10-Q for the quarter ended September 30, 1999.
     10.11  Mint Technology, Inc. Amended 1996 Stock Option Plan. Incorporated by reference to exhibits filed
            with the Registrant's Registration Statement on Form S-8 (No. 333-34285) filed August 25, 1997.
     10.12  Registrant's Amended and Restated Employee Stock Purchase Plan. Said document is included as an
            Exhibit to this Annual Report on Form 10-K for the year ended December 31, 2002.*
     10.13  Symbios Logic, Inc. 1995 Stock Plan. Incorporated by reference to exhibits filed with the Registrant's
            Form S-8 (No. 333-62159) filed on August 25, 1998.
     10.14  LSI Logic Corporation 1999 Nonstatutory Stock Option Plan. Incorporated by reference to exhibits
            filed with the Registrant's Registration Statement on Form S-8 (No. 333-96549) on July 16, 2002.
     10.15  SEEQ Technology, Inc. Amended and Restated 1982 Stock Option Plan. Incorporated by reference to
            exhibits filed with the Registrant's Form S-8 (No. 333-81435) filed on June 24, 1999.
     10.16  SEEQ Technology, Inc. 1989 Non-Employee Director Stock Option Plan. Incorporated by reference
            to exhibits filed with the Registrant's Form S-8 (No. 333-81435) filed on June 24, 1999.
     10.17  Amended and Restated Participation Agreement by and among Registrant, and ABN AMRO Bank
            N.V., ABN AMRO Bank N.V. as agent for Lessors and Participants dated April 18, 2000.
            Incorporated by reference to exhibits with Registrant's Quarterly Report on Form 10-Q for the quarter
            ended April 2, 2000.
     10.18  Second Amended and Restated Credit Agreement dated as of April 21, 2000, by and among
            Registrant, LSI Logic Japan Semiconductor, ABN AMRO Bank and Lenders. Incorporated by
            reference to exhibits filed with the Registrant's Annual Report on Form 10-K for the year ended
            December 31, 2000.
     10.19  IntraServer Technology, Inc. 1998 Stock Option Plan. Incorporated by reference to exhibits filed with
            Registrant's Form S-8 (No. 333-38746) filed on June 7, 2000.
     10.20  DataPath Systems, Inc. Amended 1994 Stock Option Plan. Incorporated by reference to exhibits filed
            with Registrant's Form S-8 (No. 333-42888) filed on August 2, 2000.
     10.21  DataPath Systems, Inc. Amended and Restated 1997 Stock Option Plan. Incorporated by reference to
            exhibits filed with Registrant's Form S-8 (No. 333-42888) filed on August 2, 2000.
     10.22  Syntax Systems, Inc. Restated Stock Option Plan of January 5, 1999. Incorporated by reference to
            exhibits filed with Registrant's Form S-8 (No. 333-52050) filed on December 18, 2000.
     10.23  C-Cube Microsystems Inc. Director Stock Option Plan. Incorporated by reference to exhibits filed
            with Registrant's Form S-8 (No. 333-62960) filed on June 14, 2001.
     10.24  C-Cube Microsystems Inc. 2000 Stock Plan. Incorporated by reference to exhibits filed with
            Registrant's Form S-8 (No. 333-62960) filed on June 14, 2001.
</TABLE>

                                       96
<PAGE>

<TABLE>
<S>          <C>
      10.25  Wilfred J. Corrigan Employment Agreement dated as of September 20, 2001. Incorporated by
             reference to exhibits to the Annual Report on Form 10-K for the year ended December 31, 2001.*
      10.26  First Amendment to Amended and Restated Participation Agreement by and among LSI Logic, ABN
             Amro Bank N.V., Keybank National Association, FBTC Leasing Corp. as Lessor, ABN Amro Bank N.V.,
             as agent for Lessors and Participants, dated as of August 2, 2001. Incorporated by reference to exhibits
             filed with Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.
      10.27  Second Amendment to Amended and Restated Participation Agreement by and among LSI Logic,
             ABN Amro Bank N.V., Keybank National Association, FBTC Leasing Corp. as Lessor, ABN Amro
             Bank N.V., as agent for Lessors and Participants, dated as of August 17, 2001. Incorporated by
             reference to exhibits filed with Registrant's Quarterly Report on Form 10-Q for the quarter ended
             September 30, 2001.
      10.28  Third Amendment to Participation Agreement and Omnibus Amendment by and among LSI Logic,
             Banc of America Leasing & Capital LLC, as Lessor, Fleet National Bank, as Lessor Agent and as
             Agent and Participants, dated as of September 28, 2001. Incorporated by reference to exhibits filed
             with Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.
      10.29  Participation Agreement by and among LSI Logic, First Security Bank, N.A. as Certificate Trustee,
             First Security Trust Company of Nevada, as Agent and Participants, dated as of April 20, 2001.
             Incorporated by reference to exhibits filed with Registrant's Quarterly Report on Form 10-Q for the
             quarter ended September 30, 2001.
      10.30  First Amendment to Participation Agreement by and among LSI Logic, Wells Fargo Bank Northwest,
             N.A. (f/k/a First Security Bank, N.A.), as Certificate Trustee, First Security Trust Company of
             Nevada, as Agent and Participants, dated as of August 2, 2001.
      10.31  Second Amendment to Participation Agreement by and among LSI Logic, Wells Fargo Bank
             Northwest, N.A. (f/k/a First Security Bank, N.A.), as Certificate Trustee, First Security Trust
             Company of Nevada, as Agent and Participants, dated as of August 17, 2001.
      10.32  Third Amendment to Participation Agreement and Omnibus Amendment by and among LSI Logic,
             Wells Fargo Bank Northwest, N.A., (f/k/a First Security Bank, N.A.), as Certificate Trustee, Wells
             Fargo Bank Nevada, National Association (f/k/a First Security Trust Company of Nevada), as Agent
             and Participants, dated as of September 28, 2001.
      10.33  Manufacturing Technology Joint Development and Foundry Supply Agreement dated as of March 30,
             2001, by and between the Registrant and Taiwan Semiconductor Manufacturing Co., Ltd. Said
             document is included as an Exhibit to this Annual Report on Form 10-K for the year ended
             December 31, 2002.**
      21.1   List of Subsidiaries.
      23.1   Consent of Independent Accountants.
      24.1   Power of Attorney (See page 90).
</TABLE>

------------
*  Denotes management contract or compensatory plan or arrangement.
** Confidential treatment has been requested for portions of this document.

                                       97