##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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FORM 10-Q



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(Mark One)

|                                     |  |                                                                                         
|------------------------------------ |  | ----------------------------------------------------------------------------------------
|(X BOX)                              |  | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934       
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|For the Quarter Ended March 31, 2002
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|OR                                  
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|(BOX)                                |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to ________

Commission File Number: 0-11674



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LSI LOGIC CORPORATION

(Exact name of registrant as specified in its charter)


|                         |  |                                        
|------------------------ |  | ---------------------------------------
|Delaware                 |  | 94-2712976                             
|                        
|                        
|                        
|                        
|(State of Incorporation) |  | (I.R.S. Employer Identification Number)

1551 McCarthy Boulevard
Milpitas, California 95035
(Address of principal executive offices)

(408) 433-8000
(Registrants telephone number)



---

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 BOX)       NO (BOX)

As of May 10, 2002, there were 369,940,636 shares of the registrants
Common Stock, $.01 par value, outstanding.

1



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TABLE OF CONTENTS



|           |                                                                                               |                                                      |  |  |  |  |  | 
|---------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I    
|           | Item 1. Financial Statements                                                                 
|           |                                                                                               | Consolidated Balance Sheets                         
|           |                                                                                               | Consolidated Statements of Operations               
|           |                                                                                               | Consolidated Statements of Cash Flows               
|           |                                                                                               | Notes to Unaudited Consolidated Financial Statements
|           | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|           | Item 3. Quantitative and Qualitative Disclosures about Market Risk                           
|PART II   
|           | Item 1. Legal Proceedings                                                                    
|           | Item 4. Submission of Matters to a Vote of Security Holders                                  
|           | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES



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##### Table of Contents



LSI LOGIC CORPORATION
Form 10-Q
For the Quarter Ended March 31, 2002
INDEX

|       |  |                                                                                       |  |     
|------ |  | ------------------------------------------------------------------------------------- |  | ----
|       |  |                                                                                       |  | Page
|       |  |                                                                                       |  | No. 
|       |  |                                                                                       |  |     
|       |  | PART I. FINANCIAL INFORMATION                                                         |  |     
|      
|      
|      
|      
|       |  |                                                                                       |  |     
|      
|      
|      
|      
|Item 1 |  | Financial Statements                                                                  |  |     
|      
|      
|      
|      
|       |  |                                                                                       |  |     
|      
|      
|      
|      
|       |  | Consolidated Balance Sheets  March 31, 2002 and December 31, 2001                    |  | 3   
|      
|      
|      
|      
|       |  |                                                                                       |  |     
|      
|      
|      
|      
|       |  | Consolidated Statements of Operations  Three Months Ended
March 31, 2002 and 2001    |  | 4   
|      
|      
|      
|      
|       |  |                                                                                       |  |     
|      
|      
|      
|      
|       |  | Consolidated Statements of Cash Flows  Three Months Ended
March 31, 2002 and 2001    |  | 5   
|      
|      
|      
|      
|       |  |                                                                                       |  |     
|      
|      
|      
|      
|       |  | Notes to Consolidated Financial Statements                                            |  | 6   
|      
|      
|      
|      
|       |  |                                                                                       |  |     
|      
|      
|      
|      
|Item 2 |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 15  
|      
|      
|      
|      
|       |  |                                                                                       |  |     
|      
|      
|      
|      
|Item 3 |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 25  
|      
|      
|      
|      
|       |  |                                                                                       |  |     
|      
|      
|      
|      
|       |  | PART II. OTHER INFORMATION                                                            |  |     
|      
|      
|      
|      
|       |  |                                                                                       |  |     
|      
|      
|      
|      
|Item 1 |  | Legal Proceedings                                                                     |  | 26  
|      
|      
|      
|      
|       |  |                                                                                       |  |     
|      
|      
|      
|      
|Item 4 |  | Submission of Matters to a Vote of Security Holders                                   |  | 27  
|      
|      
|      
|      
|       |  |                                                                                       |  |     
|      
|      
|      
|      
|Item 6 |  | Exhibits and Reports on Form 8-K                                                      |  | 28  

2



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##### Table of Contents






PART I




Item 1. Financial Statements




LSI LOGIC CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

|                                                                                                  |                                                          |      |           |           |              |   |           |           | 
|------------------------------------------------------------------------------------------------- | -------------------------------------------------------- | ---- | --------- | --------- | ------------ | - | --------- | --------- | 
|                                                                                                  |                                                          |      | March 31, |           | December 31,
|(In thousands, except per-share amounts)                                                          |                                                          | 2002 |           | 2001     
|                                                                                                  |                                                          |      |           |          
|Assets                                                                                            |                                                          |      |           |           |              |   |           |          
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Cash and cash equivalents                                                                         |                                                          | $    | 485,113   |           |              | $ | 757,138   |          
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Short-term investments                                                                            |                                                          |      | 481,980   |           |              |   | 256,169   |          
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Accounts receivable, less allowances of $12,835 and $20,151                                       |                                                          |      | 221,022   |           |              |   | 191,731   |          
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Inventories                                                                                       |                                                          |      | 196,252   |           |              |   | 256,629   |          
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Deferred tax assets                                                                               |                                                          |      | 160,262   |           |              |   | 160,371   |          
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Prepaid expenses and other current assets                                                         |                                                          |      | 158,308   |           |              |   | 146,930   |          
|                                                                                                  |                                                          |      |           |           |              |   |           |          
|                                                                                                  | Total current assets                                     |      |           | 1,702,937 |              |   |           | 1,768,968 | 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Property and equipment, net                                                                       |                                                          |      | 840,327   |           |              |   | 944,374   |          
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Goodwill and other intangibles (Note 2)                                                           |                                                          |      | 1,278,391 |           |              |   | 1,297,542 |          
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Deferred tax assets                                                                               |                                                          |      | 107,896   |           |              |   | 107,957   |          
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Non-current assets and deposits                                                                   |                                                          |      | 297,261   |           |              |   | 296,265   |          
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Investment in available-for-sale securities                                                       |                                                          |      | 70,300    |           |              |   | 78,433    |          
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Other assets                                                                                      |                                                          |      | 156,868   |           |              |   | 132,233   |          
|                                                                                                  |                                                          |      |           |           |              |   |           |          
|                                                                                                  | Total assets                                             |      | $         | 4,453,980 |              |   | $         | 4,625,772 | 
|                                                                                                  |                                                          |      |           |           |              |   |           |          
|Liabilities and Stockholders Equity                                                              |                                                          |      |           |           |              |   |           |          
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Accounts payable                                                                                  |                                                          | $    | 102,875   |           |              | $ | 136,739   |          
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Accrued salaries, wages and benefits                                                              |                                                          |      | 88,909    |           |              |   | 72,260    |          
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Other accrued liabilities                                                                         |                                                          |      | 235,129   |           |              |   | 227,467   |          
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Income tax payable                                                                                |                                                          |      | 70,205    |           |              |   | 73,187    |          
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Current portion of long-term obligations                                                          |                                                          |      | 338       |           |              |   | 332       |          
|                                                                                                  |                                                          |      |           |           |              |   |           |          
|                                                                                                  | Total current liabilities                                |      |           | 497,456   |              |   |           | 509,985   | 
|                                                                                                  |                                                          |      |           |           |              |   |           |          
|Deferred tax liabilities                                                                          |                                                          |      | 173,759   |           |              |   | 173,759   |          
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Other long-term obligations                                                                       |                                                          |      | 1,452,949 |           |              |   | 1,456,276 |          
|                                                                                                  |                                                          |      |           |           |              |   |           |          
|                                                                                                  | Total long-term obligations and deferred tax liabilities |      |           | 1,626,708 |              |   |           | 1,630,035 | 
|                                                                                                  |                                                          |      |           |           |              |   |           |          
|Commitments and contingencies (Note 11)                                                          
|Minority interest in subsidiary                                                                   |                                                          |      | 5,940     |           |              |   | 5,867     |          
|                                                                                                  |                                                          |      |           |           |              |   |           |          
|Stockholders equity:                                                                             |                                                          |      |           |           |              |   |           |          
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Preferred shares; $.01 par value; 2,000 shares authorized                                         |                                                          |      |          |           |              |   |          |          
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Common stock; $.01 par value; 1,300,000 shares authorized; 369,382 and
368,446 shares outstanding |                                                          |      | 3,694     |           |              |   | 3,684     |          
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Additional paid-in capital                                                                        |                                                          |      | 2,910,768 |           |              |   | 2,905,638 |          
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Deferred stock compensation                                                                       |                                                          |      | (100,343  | )         |              |   | (124,091  | )        
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Accumulated deficit                                                                               |                                                          |      | (491,556  | )         |              |   | (319,803  | )        
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Accumulated other comprehensive income                                                            |                                                          |      | 1,313     |           |              |   | 14,457    |          
|                                                                                                  |                                                          |      |           |           |              |   |           |          
|                                                                                                  | Total stockholders equity                               |      |           | 2,323,876 |              |   |           | 2,479,885 | 
|                                                                                                  |                                                          |      |           |           |              |   |           |          
|                                                                                                  | Total liabilities and stockholders equity               |      | $         | 4,453,980 |              |   | $         | 4,625,772 | 
|                                                                                                  |                                                          |      |           |           |              |   |           |          

See notes to unaudited consolidated financial statements.

3



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##### Table of Contents






LSI LOGIC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

|                                            |                                                                |                          |                        |         |                    |         |         |         |         |         | 
|------------------------------------------- | -------------------------------------------------------------- | ------------------------ | ---------------------- | ------- | ------------------ | ------- | ------- | ------- | ------- | ------- | 
|                                            |                                                                |                          |                        |         | Three Months Ended
|                                            |                                                                |                          |                        |         | March 31,         
|                                            |                                                                |                          |                        |         |                   
|(In thousands, except per share amounts)    |                                                                | 2002                     |                        | 2001   
|                                            |                                                                |                          |                        |        
|Revenues                                    |                                                                | $                        | 412,509                |         |                    | $       | 517,199 |        
|                                            |                                                                |                          |                        |         |                    |         |         |        
|Costs and expenses:                         |                                                                |                          |                        |         |                    |         |         |        
|                                           
|                                           
|                                           
|                                           
|                                            | Cost of revenues                                               |                          |                        | 265,909 |                    |         |         | 311,145 |        
|                                           
|                                           
|                                           
|                                           
|                                            | Additional excess inventory and related charges                |                          |                        | 40,754  |                    |         |         |        |        
|                                            |                                                                |                          |                        |         |                    |         |         |        
|                                            |                                                                |                          | Total cost of revenues |         |                    | 306,663 |         |         |         | 311,145 | 
|                                           
|                                           
|                                           
|                                           
|                                            | Research and development                                       |                          |                        | 114,343 |                    |         |         | 118,767 |        
|                                           
|                                           
|                                           
|                                           
|                                            | Selling, general and administrative                            |                          |                        | 58,180  |                    |         |         | 78,971  |        
|                                           
|                                           
|                                           
|                                           
|                                            | Restructuring of operations and other non-recurring
items, net |                          |                        | 65,060  |                    |         |         |        |        
|                                           
|                                           
|                                           
|                                           
|                                            | Amortization of non-cash deferred stock compensation(*)        |                          |                        | 26,921  |                    |         |         | 21,267  |        
|                                           
|                                           
|                                           
|                                           
|                                            | Amortization of intangibles (Note 2)                           |                          |                        | 19,157  |                    |         |         | 27,089  |        
|                                            |                                                                |                          |                        |         |                    |         |         |        
|                                            |                                                                | Total costs and expenses |                        |         | 590,324            |         |         |         | 557,239 |        
|                                            |                                                                |                          |                        |         |                    |         |         |        
|Loss from operations                        |                                                                |                          | (177,815               | )       |                    |         | (40,040 | )      
|                                           
|                                           
|                                           
|                                           
|Interest expense                            |                                                                |                          | (15,834                | )       |                    |         | (9,940  | )      
|                                           
|                                           
|                                           
|                                           
|Interest income and other, net              |                                                                |                          | 3,646                  |         |                    |         | 8,979   |        
|                                           
|                                           
|                                           
|                                           
|Gain on sale of equity securities           |                                                                |                          |                       |         |                    |         | 5,302   |        
|                                            |                                                                |                          |                        |         |                    |         |         |        
|Loss before income taxes                    |                                                                |                          | (190,003               | )       |                    |         | (35,699 | )      
|                                           
|                                           
|                                           
|                                           
|Benefit for income taxes                    |                                                                |                          | (18,250                | )       |                    |         | (4,451  | )      
|                                            |                                                                |                          |                        |         |                    |         |         |        
|Net loss                                    |                                                                | $                        | (171,753               | )       |                    | $       | (31,248 | )      
|                                            |                                                                |                          |                        |         |                    |         |         |        
|Loss per share:                             |                                                                |                          |                        |         |                    |         |         |        
|                                           
|                                           
|                                           
|                                           
|                                            | Basic                                                          |                          | $                      | (0.47   | )                  |         | $       | (0.10   | )      
|                                            |                                                                |                          |                        |         |                    |         |         |        
|                                            | Dilutive                                                       |                          | $                      | (0.47   | )                  |         | $       | (0.10   | )      
|                                            |                                                                |                          |                        |         |                    |         |         |        
|Shares used in computing per share amounts: |                                                                |                          |                        |         |                    |         |         |        
|                                           
|                                           
|                                           
|                                           
|                                            | Basic                                                          |                          |                        | 367,578 |                    |         |         | 320,369 |        
|                                            |                                                                |                          |                        |         |                    |         |         |        
|                                            | Dilutive                                                       |                          |                        | 367,578 |                    |         |         | 320,369 |        
|                                            |                                                                |                          |                        |         |                    |         |         |        



|(*) |  | Amortization of non-cash deferred stock compensation, if not shown
separately, of $550, $20,319 and $6,052 would have been included in cost of
revenues, research and development and selling, general and administrative
expenses, respectively, for the three months ended March 31, 2002.
Amortization of non-cash deferred stock compensation, if not shown
separately, of $163, $17,082 and $4,022 would have been included in cost of
revenues, research and development and selling, general and administrative
expenses, respectively, for the three months ended March 31, 2001.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

See notes to unaudited consolidated financial statements.

4



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##### Table of Contents






LSI LOGIC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

|                                                             |                                                                       |                                   |          |                    |         |   |         |          |         |  
|------------------------------------------------------------ | --------------------------------------------------------------------- | --------------------------------- | -------- | ------------------ | ------- | - | ------- | -------- | ------- | -
|                                                             |                                                                       |                                   |          | Three Months Ended
|                                                             |                                                                       |                                   |          | March 31,         
|                                                             |                                                                       |                                   |          |                   
|(In thousands)                                               |                                                                       | 2002                              |          | 2001              
|                                                             |                                                                       |                                   |          |                   
|Operating activities:                                        |                                                                       |                                   |          |                    |         |   |         |         
|                                                            
|                                                            
|                                                            
|                                                            
|Net loss                                                     |                                                                       | $                                 | (171,753 | )                  |         | $ | (31,248 | )       
|                                                            
|                                                            
|                                                            
|                                                            
|Adjustments:                                                 |                                                                       |                                   |          |                    |         |   |         |         
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Depreciation and amortization                                         |                                   |          | 88,899             |         |   |         | 115,676  |        
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Amortization of non-cash deferred stock compensation                  |                                   |          | 26,921             |         |   |         | 21,267   |        
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Non-cash restructuring and non-recurring items, net                   |                                   |          | 56,901             |         |   |         |         |        
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Gain on sale of equity securities                                     |                                   |          |                   |         |   |         | (5,302   | )      
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Changes in working capital components:                                |                                   |          |                    |         |   |         |          |        
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                       | Accounts receivable, net          |          |                    | (30,520 | ) |         |          | 159,214 |  
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                       | Inventories, net                  |          |                    | 59,328  |   |         |          | (69,898 | )
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                       | Prepaid expenses and other assets |          |                    | (23,045 | ) |         |          | (26,602 | )
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                       | Accounts payable                  |          |                    | (33,632 | ) |         |          | (48,280 | )
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                       | Accrued and other liabilities     |          |                    | (8,100  | ) |         |          | (16,831 | )
|                                                             |                                                                       |                                   |          |                    |         |   |         |         
|                                                             | Net cash (used in)/provided by operating activities                   |                                   |          | (35,001            | )       |   |         | 97,996   |        
|                                                             |                                                                       |                                   |          |                    |         |   |         |         
|Investing activities:                                        |                                                                       |                                   |          |                    |         |   |         |         
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Purchase of debt and equity securities available-for-sale             |                                   |          | (551,620           | )       |   |         | (364,402 | )      
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Maturities and sales of debt and equity securities available-for-sale |                                   |          | 324,443            |         |   |         | 435,842  |        
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Purchase of equity securities                                         |                                   |          | (1,394             | )       |   |         | (10,000  | )      
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Proceeds from sale of equity securities                               |                                   |          |                   |         |   |         | 7,926    |        
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Purchases of property and equipment, net of retirements               |                                   |          | (4,751             | )       |   |         | (144,503 | )      
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Increase in non-current assets and deposits                           |                                   |          | (6,847             | )       |   |         |         |        
|                                                             |                                                                       |                                   |          |                    |         |   |         |         
|                                                             | Net cash used in investing activities                                 |                                   |          | (240,169           | )       |   |         | (75,137  | )      
|                                                             |                                                                       |                                   |          |                    |         |   |         |         
|Financing activities:                                        |                                                                       |                                   |          |                    |         |   |         |         
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Repayment of debt obligations                                         |                                   |          | (108               | )       |   |         | (641     | )      
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Issuance of common stock, net                                         |                                   |          | 1,622              |         |   |         | 12,196   |        
|                                                             |                                                                       |                                   |          |                    |         |   |         |         
|                                                             | Net cash provided by financing activities                             |                                   |          | 1,514              |         |   |         | 11,555   |        
|                                                             |                                                                       |                                   |          |                    |         |   |         |         
|Effect of exchange rate changes on cash and cash equivalents |                                                                       |                                   | 1,631    |                    |         |   | 435     |         
|                                                             |                                                                       |                                   |          |                    |         |   |         |         
|(Decrease)/increase in cash and cash equivalents             |                                                                       |                                   | (272,025 | )                  |         |   | 34,849  |         
|                                                             |                                                                       |                                   |          |                    |         |   |         |         
|Cash and cash equivalents at beginning of period             |                                                                       |                                   | 757,138  |                    |         |   | 235,895 |         
|                                                             |                                                                       |                                   |          |                    |         |   |         |         
|Cash and cash equivalents at end of period                   |                                                                       | $                                 | 485,113  |                    |         | $ | 270,744 |         
|                                                             |                                                                       |                                   |          |                    |         |   |         |         

See notes to unaudited consolidated financial statements.

5



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##### Table of Contents






LSI LOGIC CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1  BASIS OF PRESENTATION

In the opinion of LSI Logic Corporation (the Company or LSI), the
accompanying unaudited consolidated financial statements contain all
adjustments (consisting only of normal recurring adjustments and
additional excess inventory and other related charges and restructuring and
other non-recurring items, net as discussed in Notes 3 and 7), necessary to
present fairly the financial information included herein. While the Company
believes that the disclosures are adequate to make the information not
misleading, it is suggested that these financial statements be read in
conjunction with the audited consolidated financial statements and accompanying
notes included in the Companys Annual Report on Form 10-K for the year ended
December 31, 2001.

For financial reporting purposes, the Company reports on a 13 or 14 week
quarter with a year ending December 31. For presentation purposes, the
consolidated financial statements refer to the quarters calendar month end for
convenience. The results of operations for the quarter ended March 31, 2002
are not necessarily indicative of the results to be expected for the full year.

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the consolidated financial statements and the reported amounts
of revenues and expenses during the reporting periods. Actual results could
differ significantly from these estimates.

NOTE 2  GOODWILL AND INTANGIBLE ASSETS

The Company adopted Statement of Financial Accounting Standards (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.

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. 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 SAN
Systems.

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

|                               |                |                    |                    |                    |         |                 |          |                   |         |                 |           |              |         |         |          |          |         |          |   | 
|------------------------------ | -------------- | ------------------ | ------------------ | ------------------ | ------- | --------------- | -------- | ----------------- | ------- | --------------- | --------- | ------------ | ------- | ------- | -------- | -------- | ------- | -------- | - | 
|                               |                |                    |                    |                    |         | March 31, 2002  |          | December 31, 2001
|                               |                |                    |                    |                    |         | Gross           |          | Accumulated       |         | Gross           |           | Accumulated 
|                               |                |                    |                    |                    |         | Carrying Amount |          | Amortization      |         | Carrying Amount |           | Amortization
|                               |                |                    |                    |                    |         |                 |          |                   |         |                 |           |             
|Unamortized
intangible assets: |                |                    |                    |                    |         |                 |          |                   |         |                 |           |              |         |         |          |         
|                              
|                              
|                              
|                              
|                               |                | Semiconductor      |                    | $                  | 899,180 |                 |          | $                 |        |                 |           | $            | 899,180 |         |          | $        |        |         
|                              
|                              
|                              
|                              
|                               |                | SAN Systems        |                    |                    | 53,000  |                 |          |                   |        |                 |           |              | 53,000  |         |          |          |        |         
|                               |                |                    |                    |                    |         |                 |          |                   |         |                 |           |              |         |         |          |         
|                               |                |                    |                    | Total goodwill (a) |         |                 | 952,180  |                   |         |                 |          |              |         |         | 952,180  |          |         |          |  | 
|                              
|                              
|                              
|                              
|Amortized intangible assets:   |                |                    |                    |                    |         |                 |          |                   |         |                 |           |              |         |         |          |         
|                              
|                              
|                              
|                              
|                               | Semiconductor: |                    |                    |                    |         |                 |          |                   |         |                 |           |              |         |         |          |          |        
|                              
|                              
|                              
|                              
|                               |                |                    | Current technology |                    |         | 374,513         |          |                   |         | (116,022        | )         |              |         | 374,513 |          |          |         | (100,538 | )
|                              
|                              
|                              
|                              
|                               |                |                    | Trademarks         |                    |         | 37,347          |          |                   |         | (9,245          | )         |              |         | 37,347  |          |          |         | (7,797   | )
|                               |                |                    |                    |                    |         |                 |          |                   |         |                 |           |              |         |         |          |         
|                               | Subtotal       |                    |                    | 411,860            |         |                 |          | (125,267          | )       |                 |           | 411,860      |         |         |          | (108,335 | )      
|                              
|                              
|                              
|                              
|                               | SAN Systems:   |                    |                    |                    |         |                 |          |                   |         |                 |           |              |         |         |          |          |        
|                              
|                              
|                              
|                              
|                               |                | Current technology |                    |                    | 56,490  |                 |          |                   | (22,718 | )               |           |              | 56,490  |         |          |          | (20,817 | )       
|                              
|                              
|                              
|                              
|                               |                | Trademarks         |                    |                    | 3,500   |                 |          |                   | (1,607  | )               |           |              | 3,500   |         |          |          | (1,498  | )       
|                              
|                              
|                              
|                              
|                               |                | Customer base      |                    |                    | 5,010   |                 |          |                   | (1,057  | )               |           |              | 5,010   |         |          |          | (848    | )       
|                               |                |                    |                    |                    |         |                 |          |                   |         |                 |           |              |         |         |          |         
|Subtotal                       |                |                    | 65,000             |                    |         |                 | (25,382  | )                 |         |                 | 65,000    |              |         |         | (23,163  | )       
|                               |                |                    |                    |                    |         |                 |          |                   |         |                 |           |              |         |         |          |         
|Total                          |                | $                  | 1,429,040          |                    |         | $               | (150,649 | )                 |         | $               | 1,429,040 |              |         | $       | (131,498 | )       
|                               |                |                    |                    |                    |         |                 |          |                   |         |                 |           |              |         |         |          |         



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

Amortization expense (in thousands):

|                   |  |                              |        |      |  |   |        | 
|------------------ |  | ---------------------------- | ------ | ---- |  | - | ------ | 
|                   |  | Three Months Ended March 31,
|                   |  | 2002                         |        | 2001
|                   |  |                              |        |     
|Goodwill           |  | $                            |       |      |  | $ | 16,708 | 
|                  
|                  
|                  
|                  
|Current technology |  |                              | 17,391 |      |  |   | 9,629  | 
|                  
|                  
|                  
|                  
|Trademarks         |  |                              | 1,557  |      |  |   | 543    | 
|                  
|                  
|                  
|                  
|Customer base      |  |                              | 209    |      |  |   | 209    | 
|                   |  |                              |        |      |  |   |        | 
|Total              |  | $                            | 19,157 |      |  | $ | 27,089 | 
|                   |  |                              |        |      |  |   |        | 

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

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



| |                              |  |         |     | 
| | ---------------------------- |  | ------- | --- | 
| | Fiscal year:                 |  | Amount:
|
| | 2002 (remaining nine months) |  | $       | 58  | 
| | 2003                         |  |         | 77  | 
| | 2004                         |  |         | 77  | 
| | 2005                         |  |         | 70  | 
| | 2006                         |  |         | 40  | 
| | 2007+                        |  |         | 4   | 
| |                              |  |         |     | 
| |                              |  | $       | 326 | 
| |                              |  |         |     | 

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Pro forma net loss and pro forma net loss per share excluding amortization
expense for goodwill is as follows:

(in thousands)

|                                    |  |                              |          |      |  |   |         |  
|----------------------------------- |  | ---------------------------- | -------- | ---- |  | - | ------- | -
|                                    |  | Three Months Ended March 31,
|                                    |  | 2002                         |          | 2001
|                                    |  |                              |          |     
|Net loss, as reported               |  | $                            | (171,753 | )    |  | $ | (31,248 | )
|                                   
|                                   
|                                   
|                                   
|Add back goodwill amortization      |  |                              |         |      |  |   | 16,708  |  
|                                    |  |                              |          |      |  |   |         |  
|Pro forma net loss                  |  |                              | (171,753 | )    |  |   | (14,540 | )
|                                    |  |                              |          |      |  |   |         |  
|Basic loss per share, as reported   |  |                              | (0.47    | )    |  |   | (0.10   | )
|                                   
|                                   
|                                   
|                                   
|Add back goodwill amortization      |  |                              |         |      |  |   | 0.05    |  
|                                    |  |                              |          |      |  |   |         |  
|Basic pro forma loss per share      |  |                              | (0.47    | )    |  |   | (0.05   | )
|                                    |  |                              |          |      |  |   |         |  
|Diluted loss per share, as reported |  |                              | (0.47    | )    |  |   | (0.10   | )
|                                   
|                                   
|                                   
|                                   
|Add back goodwill amortization      |  |                              |         |      |  |   | 0.05    |  
|                                    |  |                              |          |      |  |   |         |  
|Diluted loss per share              |  | $                            | (0.47    | )    |  | $ | (0.05   | )
|                                    |  |                              |          |      |  |   |         |  

NOTE 3  RESTRUCTURING AND OTHER NON-RECURRING ITEMS

The Company recorded approximately $65 million in restructuring and other
non-recurring items, net for the three months ended March 31, 2002.
Restructuring charges of $67 million were offset in part by a $2 million
non-recurring gain further described below.

Restructuring:

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.

In the first quarter of 2002, the Company announced a series 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 standard product line.
During the three months ended March 31, 2002, the Company recorded a
restructuring charge for severance for approximately 1,400 employees worldwide,
fixed asset write-downs due to impairment in the U.S. and Japan that will be
disposed of by sale, and exit costs primarily associated with cancelled
contracts and operating leases.

Assets held for sale of $107 million and $89 million were included as a
component of prepaid expenses and other current assets as of March 31, 2002 and
December 31, 2001, respectively. 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 its current net book value
for the assets. The Company will 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.

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The following table sets forth the Companys restructuring reserves as of
March 31, 2002:

(In thousands)

|                                                |       |   |                   |        |               |   |          |        |                |   |            |         |   |   |        |        | 
|----------------------------------------------- | ----- | - | ----------------- | ------ | ------------- | - | -------- | ------ | -------------- | - | ---------- | ------- | - | - | ------ | ------ | 
|                                                |       |   | Balance at        |        | Restructuring |   |          |        |                |   | Balance at
|                                                |       |   | December 31, 2001 |        | Expense       |   | Utilized |        | March 31, 2002
|                                                |       |   |                   |        |               |   |          |        |               
|Write-down of excess assets(a)                  |       | $ | 3,762             |        |               | $ | 25,933   |        |                | $ | (27,623    | )       |   | $ | 2,072  |       
|                                               
|                                               
|                                               
|                                               
|Lease terminations and maintenance contracts(c) |       |   | 10,695            |        |               |   | 12,871   |        |                |   | (1,623     | )       |   |   | 21,943 |       
|                                               
|                                               
|                                               
|                                               
|Facility closure and other exit costs(c)        |       |   | 14,153            |        |               |   | 415      |        |                |   | (3,142     | )       |   |   | 11,426 |       
|                                               
|                                               
|                                               
|                                               
|Payments to employees for severance(b)          |       |   | 724               |        |               |   | 27,490   |        |                |   | (10,352    | )       |   |   | 17,862 |       
|                                                |       |   |                   |        |               |   |          |        |                |   |            |         |   |   |        |       
|                                                | Total |   | $                 | 29,334 |               |   | $        | 66,709 |                |   | $          | (42,740 | ) |   | $      | 53,303 | 
|                                                |       |   |                   |        |               |   |          |        |                |   |            |         |   |   |        |       



|(a) |  | Amounts utilized in 2002 reflect a non-cash write-down of fixed assets
in the U.S. and Japan due to impairment of $25.3 million and cash
payments for machinery and equipment decommissioning costs of $2.3
million. The fixed asset write-downs were accounted for as a reduction
of the assets and did not result in a liability. The $2.1 million
balance as of March 31, 2002 relates to machinery and equipment
decommissioning costs in the U.S.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(b) |  | Amounts utilized represent cash payments related to the severance of
approximately 750 employees during the three months ended March 31,
2002. The $17.9 million balance as of March 31, 2002 will be paid during
2002.                                                                                                                                                                                                                               
|   
|   
|   
|   
|(c) |  | Amounts utilized represent cash payments.                                                                                                                                                                                                                                                                                                                                                                                                             

Other non-recurring items:

The Company recorded a net gain of approximately $2 million in other
non-recurring 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 operating expenses for the business
line held for sale.

There were no restructuring and other non-recurring items for the three
months ended March 31, 2001.

NOTE 4  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 receives cash consideration of $75 million
and equity consideration over three years for which transfers and obligations
of the Company are scheduled to occur. The equity consideration was valued at
zero at March 31, 2002. The Company transferred technology to Silterra valued
at $4 million and $6 million for the three months ended March 31, 2002 and
2001, 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 $1 million for the three months ended March 31, 2001. This amount was
recorded as an offset to cost of revenues.

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NOTE 5  INVESTMENTS

(in thousands)

|                              |                        |   |           |         |              |   |         |         | 
|----------------------------- | ---------------------- | - | --------- | ------- | ------------ | - | ------- | ------- | 
|                              |                        |   | March 31, |         | December 31,
|                              |                        |   | 2002      |         | 2001        
|                              |                        |   |           |         |             
|Held-to-maturity securities   |                        |   |           |         |              |   |         |        
|                             
|                             
|                             
|                             
|                              | Cash equivalents       |   | $         | 269,988 |              |   | $       | 457,189 | 
|                              |                        |   |           |         |              |   |         |        
|                             
|                             
|                             
|                             
|Available-for-sale securities |                        |   |           |         |              |   |         |        
|                             
|                             
|                             
|                             
|                              | Short-term investments |   |           | 481,980 |              |   |         | 256,169 | 
|                             
|                             
|                             
|                             
|                              | Other long-term assets |   |           | 70,300  |              |   |         | 78,433  | 
|                              |                        |   |           |         |              |   |         |        
|Total available-for-sale      |                        | $ | 552,280   |         |              | $ | 334,602 |        
|                              |                        |   |           |         |              |   |         |        

Held-to-maturity debt securities included in cash and cash equivalents
consisted primarily of overnight deposits, commercial paper, mortgage backed
securities and corporate and municipal debt securities. Available-for-sale
securities included in short-term investments consisted primarily of corporate
and municipal debt securities, commercial paper, auction rate preferred stock,
mortgage backed securities and U.S. government and agency securities.
Unrealized holding gains and losses for these securities were not significant
and accordingly the amortized cost approximated fair market value at March 31,
2002 and December 31, 2001. Realized gains and losses for held-to-maturity and
available-for-sale debt securities were not significant for the three months
ended March 31, 2002 and 2001.

Available-for-sale securities included in other long-term assets consisted
of marketable and non-marketable equity securities. As of March 31, 2002, an
unrealized gain of $16 million, net of the related tax effect of $9 million,
related to these equity securities was included in accumulated other
comprehensive income. As of December 31, 2001, an unrealized gain of $22
million, net of the related tax effect of $12 million, on these equity
securities was included in accumulated other comprehensive income.

During the three months ended March 31, 2002, the Company did not sell any
equity securities. During the three months ended March 31, 2001, the Company
sold equity securities for approximately $8 million in the open market,
realizing a pre-tax gain of approximately $5 million.

NOTE 6  DERIVATIVE FINANCIAL INSTRUMENTS

The Company has foreign subsidiaries that operate and sell the Companys
products in various global markets. As a result, the Company is exposed to
changes in foreign currency exchange rates 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. The Company does not hold derivative financial
instruments for speculative or trading purposes.

Forward contracts

Forward contracts are used to hedge certain cash flows denominated in
non-functional currencies. 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 other income and expense. As of March 31, 2002 and December
31, 2001, there were two contracts and one contract outstanding, respectively.
They were set to expire within one to four months and were designated as
foreign currency fair-value hedges in accordance with SFAS No. 133. For the
three months ended March 31, 2002 and 2001, 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 for the three months ended March 31, 2002
and 2001.

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Forward exchange contracts are also used to hedge certain foreign currency
denominated assets or liabilities. These derivatives do not qualify for SFAS
No. 133 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 other income and expense were not significant.

Option contracts

The Company also enters into purchased currency option contracts that are
designated as foreign currency cash-flow hedges of third-party yen revenue
exposures. 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 other income and expense. As of March 31, 2002, the Company held
purchased currency option contracts that were designated as foreign currency
cash-flow hedges of third-party yen revenue exposures. The contracts expire
over a nine month period. There were no option contracts outstanding as of
December 31, 2001.

For the three months ended March 31, 2002 and 2001, the change in option
time value was not significant. Unrealized gains of $2.6 million were included
in accumulated other comprehensive income as of March 31, 2002, and will be
reclassified to revenue over the next nine months as the forecasted
transactions occur. As of December 31, 2001, no unrealized gains were included
in accumulated other comprehensive income. The Company did not record any
gains or losses due to hedge ineffectiveness for the three months ended March
31, 2002 and 2001.

NOTE 7 BALANCE SHEET DETAIL

|                           |                        |      |           |         |              |   |         |         | 
|-------------------------- | ---------------------- | ---- | --------- | ------- | ------------ | - | ------- | ------- | 
|                           |                        |      | March 31, |         | December 31,
|(In thousands)             |                        | 2002 |           | 2001   
|                           |                        |      |           |        
|Inventories:               |                        |      |           |         |              |   |         |        
|                          
|                          
|                          
|                          
|                           | Raw materials          |      | $         | 20,880  |              |   | $       | 31,797  | 
|                          
|                          
|                          
|                          
|                           | Work-in-process        |      |           | 43,963  |              |   |         | 88,354  | 
|                          
|                          
|                          
|                          
|                           | Finished goods         |      |           | 131,409 |              |   |         | 136,478 | 
|                           |                        |      |           |         |              |   |         |        
|                           |                        | $    | 196,252   |         |              | $ | 256,629 |        
|                           |                        |      |           |         |              |   |         |        
|Other accrued liabilities: |                        |      |           |         |              |   |         |        
|                          
|                          
|                          
|                          
|                           | Accrued expenses       |      | $         | 144,833 |              |   | $       | 158,673 | 
|                          
|                          
|                          
|                          
|                           | Sales tax payable      |      |           | 8,348   |              |   |         | 7,044   | 
|                          
|                          
|                          
|                          
|                           | Interest payable       |      |           | 11,119  |              |   |         | 14,890  | 
|                          
|                          
|                          
|                          
|                           | Restructuring reserves |      |           | 53,303  |              |   |         | 29,334  | 
|                          
|                          
|                          
|                          
|                           | Deferred tax liability |      |           | 17,526  |              |   |         | 17,526  | 
|                           |                        |      |           |         |              |   |         |        
|                           |                        | $    | 235,129   |         |              | $ | 227,467 |        
|                           |                        |      |           |         |              |   |         |        

The Company recorded additional excess inventory and related charges of
$41 million for the three months ended March 31, 2002. The additional excess
inventory and related charges during the three months ended March 31, 2002 were
primarily associated with underutilization charges related to a
partial
idling of the Companys fabrication facilities due to decreased demand.

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NOTE 8  RECONCILIATION OF BASIC AND DILUTED LOSS PER SHARE

A reconciliation of the numerators and denominators of the basic and
diluted loss per share amount computations as required by SFAS No. 128 Earnings
Per Share (EPS) is as follows:

|                                          |                                           |       |                              |          |      |        |         |         |  |         |           |        |   |   |         |         |   |  |         |         |           |   |       |       |  
|----------------------------------------- | ----------------------------------------- | ----- | ---------------------------- | -------- | ---- | ------ | ------- | ------- |  | ------- | --------- | ------ | - | - | ------- | ------- | - |  | ------- | ------- | --------- | - | ----- | ----- | -
|                                          |                                           |       | Three Months Ended March 31,
|                                          |                                           |       |                             
|                                          |                                           |       | 2002                         |          | 2001
|                                          |                                           |       |                              |          |     
|                                          |                                           |       |                              |          |      |        |         |         |  |         | Per-Share |        |   |   |         |         |   |  |         |         | Per-Share
|(In thousands except per share amounts)   |                                           | Loss* |                              | Shares+  |      | Amount |         | Loss*   |  | Shares+ |           | Amount
|                                          |                                           |       |                              |          |      |        |         |         |  |         |           |       
|Basic EPS:                                |                                           |       |                              |          |      |        |         |         |  |         |           |        |   |   |         |         |   |  |         |         |           |   |       |      
|                                         
|                                         
|                                         
|                                         
|Net loss available to
Common stockholders |                                           | $     | (171,753                     | )        |      |        | 367,578 |         |  | $       | (0.47     | )      |   | $ | (31,248 | )       |   |  | 320,369 |         |           | $ | (0.10 | )    
|                                          |                                           |       |                              |          |      |        |         |         |  |         |           |        |   |   |         |         |   |  |         |         |           |   |       |      
|                                          | Effect of dilutive securities:            |       |                              |         |      |        |         |        |  |         |           |       |   |   |         |        |   |  |         |        |           |   |       |      |  
|                                         
|                                         
|                                         
|                                         
|Diluted EPS:                              |                                           |       |                              |          |      |        |         |         |  |         |           |        |   |   |         |         |   |  |         |         |           |   |       |      
|                                         
|                                         
|                                         
|                                         
|                                          | Net loss available to
Common stockholders |       | $                            | (171,753 | )    |        |         | 367,578 |  |         | $         | (0.47  | ) |   | $       | (31,248 | ) |  |         | 320,369 |           |   | $     | (0.10 | )
|                                          |                                           |       |                              |          |      |        |         |         |  |         |           |        |   |   |         |         |   |  |         |         |           |   |       |      



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

Options to purchase approximately 75,503,226 shares were outstanding at
March 31, 2002 and were excluded from the computation of diluted shares because
of their antidilutive effect on loss per share for the three months ended March
31, 2002. The exercise price of these options ranged from $0.01 to $72.25 at
March 31, 2002. Options to purchase approximately 30,858,000 shares were
outstanding as of March 31, 2001 and were excluded from the computation of
diluted shares for the three months then ended because of their antidilutive
effect on loss per share. The exercise price of these options ranged from
$0.46 to $72.25 at March 31, 2001.

For the three months ended March 31, 2002, common equivalent shares of
47,720,853 associated with the 2001, 2000 and 1999 Convertible Notes were
excluded from the calculation of diluted shares because of their antidilutive
effect on loss per share. For the three months ended March 31, 2001, common
equivalent shares of 29,117,261 associated with the 2000 and 1999 Convertible
Notes were excluded from the calculation of diluted shares because of their
antidilutive effect on loss per share.

NOTE 9  COMPREHENSIVE LOSS

Comprehensive loss is defined as a change in equity of a company during a
period from transactions and other events and circumstances, excluding
transactions resulting from investments by owners and distributions to owners.
The primary difference between net loss and comprehensive loss for the Company
arises from foreign currency translation adjustments, unrealized gains and
losses on derivative instruments designated as and qualifying as cash-flow
hedges and unrealized gains and losses on available-for-sale securities, net of
applicable taxes. Comprehensive loss, net of taxes for the current reporting
period and comparable period in the prior year is as follows:

12



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|                                                                                                     |  |                              |          |      |  |   |         |  
|---------------------------------------------------------------------------------------------------- |  | ---------------------------- | -------- | ---- |  | - | ------- | -
|                                                                                                     |  | Three Months Ended March 31,
|                                                                                                     |  |                             
|(In thousands)                                                                                       |  | 2002                         |          | 2001
|                                                                                                     |  |                              |          |     
|Net loss                                                                                             |  | $                            | (171,753 | )    |  | $ | (31,248 | )
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|Change in unrealized gain on derivative instruments
designated as and qualifying as cash-flow hedges |  |                              | 2,608    |      |  |   | 4,200   |  
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|Change in unrealized gain on available for sale securities                                           |  |                              | (6,193   | )    |  |   | (21,165 | )
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|Change in foreign currency translation adjustments                                                   |  |                              | (9,559   | )    |  |   | (20,133 | )
|                                                                                                     |  |                              |          |      |  |   |         |  
|Comprehensive loss                                                                                   |  | $                            | (184,897 | )    |  | $ | (68,346 | )
|                                                                                                     |  |                              |          |      |  |   |         |  

NOTE 10  SEGMENT REPORTING

The Company operates in two reportable segments: the Semiconductor segment
and the SAN 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, application specific standard products
in silicon, or ASSPs, as well as RAID host bus adapters and related products
and services. In the SAN 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.

The following is a summary of operations by segment for the three months
ended March 31, 2002 and 2001:

|                               |               |       |   |                              |          |   |   |         |         |  
|------------------------------ | ------------- | ----- | - | ---------------------------- | -------- | - | - | ------- | ------- | -
|                               |               |       |   | Three months ended March 31,
|(In thousands)                 |               | 2002  |   | 2001                        
|                               |               |       |   |                             
|Revenues:                      |               |       |   |                              |          |   |   |        
|                              
|                              
|                              
|                              
|                               | Semiconductor |       | $ | 352,590                      |          |   | $ | 454,989 |        
|                              
|                              
|                              
|                              
|                               | SAN Systems   |       |   | 59,919                       |          |   |   | 62,210  |        
|                               |               |       |   |                              |          |   |   |        
|                               |               | Total |   | $                            | 412,509  |   |   | $       | 517,199 |  
|                               |               |       |   |                              |          |   |   |        
|(Loss)/income from operations: |               |       |   |                              |          |   |   |        
|                              
|                              
|                              
|                              
|                               | Semiconductor |       | $ | (176,713                     | )        |   | $ | (31,156 | )      
|                              
|                              
|                              
|                              
|                               | SAN Systems   |       |   | (1,102                       | )        |   |   | (8,884  | )      
|                               |               |       |   |                              |          |   |   |        
|                               |               | Total |   | $                            | (177,815 | ) |   | $       | (40,040 | )
|                               |               |       |   |                              |          |   |   |        

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

One customer represented 14% and 16% of the Companys total consolidated
revenues for each of the three months ended March 31, 2002 and 2001,
respectively. In the Semiconductor segment, one customer represented 16% and
18% of total Semiconductor revenues for the three months ended March 31, 2002
and 2001, respectively. In the SAN Systems segment, there were two customers
with revenues representing 34% and 17% of total SAN Systems revenues for the
three months ended March 31, 2002. For the three months ended March 31, 2001,
there were four customers with revenues representing 23%, 19%, 15% and 12% of
total SAN Systems revenues, respectively.

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

|               |               |       |   |           |           |              |   |           |           | 
|-------------- | ------------- | ----- | - | --------- | --------- | ------------ | - | --------- | --------- | 
|               |               |       |   | March 31, |           | December 31,
|(In thousands) |               | 2002  |   | 2001     
|               |               |       |   |          
|Total assets:  |               |       |   |           |           |              |   |          
|              
|              
|              
|              
|               | Semiconductor |       | $ | 4,130,467 |           |              | $ | 4,301,326 |          
|              
|              
|              
|              
|               | SAN Systems   |       |   | 323,513   |           |              |   | 324,446   |          
|               |               |       |   |           |           |              |   |          
|               |               | Total |   | $         | 4,453,980 |              |   | $         | 4,625,772 | 
|               |               |       |   |           |           |              |   |          

Revenues from domestic operations were $214 million, representing 52% of
consolidated revenues for the first quarter of 2002 compared to $283 million,
representing 55% of consolidated revenues for the same period of 2001.

NOTE 11  COMMITMENTS AND CONTINGENCIES

The Company uses operating leases to finance certain equipment used in its
wafer fabrication facilities. As of March 31, 2002 the Company had two
operating leases, commonly referred to as synthetic leases. A synthetic lease
represents a form of off-balance sheet financing under which an unrelated third
party funds up to 100% of the costs of acquisition and installation of the
property.

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
will have 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 stated amount all the equipment. As of March 31, 2002, the Company had
fully drawn against the 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 will have 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 the equipment. The agreement
was amended in the fourth quarter of 2001 to reduce the total availability to
$180 million. As of March 31, 2002, the Company had drawn down a total of $161
million under 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 March 31, 2002, there were $297 million 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
March 31, 2002, the Companys debt contribution of $242 million and cash
collateral of $55 million were recorded as non-current assets. 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 cash balance
of $350 million. The Company was in compliance with this requirement as of
March 31, 2002.

No officer or employee of the Company has any financial interest with
regards to these leasing arrangements or with the trust used in the April 2001
lease. The minimum lease payments under the two lease agreements, excluding
option periods, are $3.1 million for the year 2003, and $1.0 million in 2004
and 2005. These payments reflect the amendments and as such, exclude any
payments on the Companys debt participation.

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NOTE 12  LEGAL MATTERS

Reference is made to Item 3, Legal Proceedings, of the Companys Annual
Report on Form 10-K for the fiscal year ended December 31, 2001 for a
discussion of certain pending legal proceedings. The information provided at
such reference regarding those matters remains substantially unchanged. In
addition, the Company is a party to other litigation matters and claims that
are normal in the course of its operations. While the results of such
litigation and claims cannot be predicted with certainty, the final outcome of
such matters is not expected to have a significant adverse effect on the
Companys consolidated financial position or results of operations. No
assurance can be given, however, that these matters will be resolved without
the Company becoming obligated to make payments or to pay other costs to the
opposing parties, with the potential for having an adverse effect on the
Companys financial position or its results of operations.




Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations

GENERAL

We believe that our future operating results will continue to be subject
to quarterly variations based upon a wide variety of factors detailed in Risk
Factors in Part I of our Annual Report on Form 10-K for the year ended December
31, 2001.

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. 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. Risks and uncertainties that may
affect our results may include, among others:



| |  | The current economic downturn;                                                               
|- |  | ---------------------------------------------------------------------------------------------
| 
| |  | Cyclical nature of the
Semiconductor industry and the markets addressed by our products;     
| 
| |  | Availability and extent of utilization of manufacturing capacity;                            
| 
| |  | Price erosion;                                                                               
| 
| |  | Competitive factors;                                                                         
| 
| |  | Timing of new product introductions;                                                         
| 
| |  | Changes in product mix;                                                                      
| 
| |  | Fluctuations in manufacturing yields;                                                        
| 
| |  | Product obsolescence;                                                                        
| 
| |  | Business and product market cycles;                                                          
| 
| |  | Economic and technological risks associated with our acquisition and alliance activities; and
| 
| |  | The ability to develop and implement new technologies.                                       

Our operating results could also be impacted by sudden fluctuations in
customer requirements, 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.

15



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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 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
to the Consolidated Financial Statements, hereafter referred to as the Notes.)
There is no assurance that these hedging transactions will eliminate exposure
to currency rate fluctuations that could affect our operating results.

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 security values are highly volatile
and may be influenced by economic and other factors beyond our control. See
additional discussion contained in Risk Factors set forth in Part I of our
Annual Report on Form 10-K for the year ended December 31, 2001.

Where more than one significant factor contributed to changes in results
from year to year, we have quantified such factors throughout the MD&A where
practicable.

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 Annual Report on Form
10-K.

16



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##### Table of Contents



RESULTS OF OPERATIONS

Our results of operations for the three months ended March 31, 2002 were
impacted by continued weakness in the overall economy, the cyclical
semiconductor industry downturn and excess inventory in the supply chain,
particularly in the communications market.

Revenues:Total consolidated revenues for the first quarter of 2002
decreased $104.7 million or 20% to $412.5 million from $517.2 million for the
same period of 2001. Revenues for the Semiconductor segment decreased $102.4
million or 23% to $352.6 million for the first quarter of 2002 from $455.0
million for the same period of 2001. The decrease was primarily attributable to
decreased demand for products used in broadband access and networks
and networking
and storage infrastructure applications. The decline in demand for
products used in ASIC entertainment applications was offset
by revenues from products used in broadband entertainment applications, which became a part of
the Semiconductor segment revenues with the acquisition of C-Cube in the second quarter
of 2001. Revenues for the SAN Systems segment decreased $2.3 million or 4% to
$59.9 million for the first quarter of 2002 from $62.2 million for the same
period of 2001 due to decreased demand for products in the SAN Systems
segment. There were no significant intersegment revenues during the periods
presented.

One customer represented 14% and 16% of the Companys total consolidated
revenues for each of the three months ended March 31, 2002 and 2001,
respectively. In the Semiconductor segment, one customer represented 16% and
18% of total Semiconductor revenues for the three months ended March 31, 2002
and 2001, respectively. In the SAN Systems segment, there were two customers
with revenues representing 34% and 17% of total SAN Systems revenues for the
three months ended March 31, 2002. For the three months ended March 31, 2001,
there were four customers with revenues representing 23%, 19%, 15% and 12% of
total SAN Systems revenues, respectively.

Revenues from domestic operations were $214 million, representing 52% of
consolidated revenues for the first quarter of 2002 compared to $283 million,
representing 55% of consolidated revenues for the same period of 2001.

We expect revenues to grow approximately 3% to 6% in the second quarter of
2002 as compared to the first quarter of 2002.

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##### Table of Contents



Operating costs and expenses:Key elements of the consolidated statements
of operations, expressed as a percentage of revenues, were as follows:

|                                    |  |                              |     |      |  |  |    |   
|----------------------------------- |  | ---------------------------- | --- | ---- |  |  | -- | --
|                                    |  | Three months ended March 31,
|Consolidated:                       |  | 2002                         |     | 2001
|                                    |  |                              |     |     
|Gross profit margin                 |  |                              | 26  | %    |  |  | 40 | % 
|                                   
|                                   
|                                   
|                                   
|Research and development            |  |                              | 28  | %    |  |  | 23 | % 
|                                   
|                                   
|                                   
|                                   
|Selling, general and administrative |  |                              | 14  | %    |  |  | 15 | % 
|                                   
|                                   
|                                   
|                                   
|(Loss)/income from operations       |  |                              | (43 | )%   |  |  | (8 | )%

Key elements of the statement of operations for the Semiconductor and SAN
Systems segments, expressed as a percentage of revenues, were as follows:

|                                    |  |                              |     |      |  |  |    |   
|----------------------------------- |  | ---------------------------- | --- | ---- |  |  | -- | --
|                                    |  | Three months ended March 31,
|Semiconductor Segment:              |  | 2002                         |     | 2001
|                                    |  |                              |     |     
|Gross profit margin                 |  |                              | 24  | %    |  |  | 41 | % 
|                                   
|                                   
|                                   
|                                   
|Research and development            |  |                              | 30  | %    |  |  | 24 | % 
|                                   
|                                   
|                                   
|                                   
|Selling, general and administrative |  |                              | 13  | %    |  |  | 14 | % 
|                                   
|                                   
|                                   
|                                   
|(Loss)/income from operations       |  |                              | (50 | )%   |  |  | (7 | )%

|                                    |  |                              |    |      |  |  |     |   
|----------------------------------- |  | ---------------------------- | -- | ---- |  |  | --- | --
|                                    |  | Three months ended March 31,
|SAN Systems Segment:                |  | 2002                         |    | 2001
|                                    |  |                              |    |     
|Gross profit margin                 |  |                              | 37 | %    |  |  | 35  | % 
|                                   
|                                   
|                                   
|                                   
|Research and development            |  |                              | 13 | %    |  |  | 13  | % 
|                                   
|                                   
|                                   
|                                   
|Selling, general and administrative |  |                              | 19 | %    |  |  | 26  | % 
|                                   
|                                   
|                                   
|                                   
|(Loss)/income from operations       |  |                              | (2 | )%   |  |  | (14 | )%

Gross profit margin:We have advanced wafer manufacturing operations in
Oregon and Japan. We also acquire wafers from foundries in other locations.
This allows us to maintain our ability to provide products to customers with
minimal disruption in the manufacturing process due to economic and geographic
risks associated with each geographic location.

The consolidated gross profit margin percentage decreased to 26% in the
first quarter of 2002 from 40% in the same period of 2001. The gross profit
margin percentage for the Semiconductor segment decreased to 24% from 41% in
the same period of 2001.

The decrease for the Semiconductor segment for the three months ended
March 31, 2002, as compared to the same period of the prior year is primarily a
result of the following factors:



| |  |  | Decreased revenue for higher
margin products due to an unfavorable
change in product mix in the current quarter;
| | - |  | ----------------------------------------------------------------------------------------------------------------
|
| |  |  | Higher manufacturing variances and period costs as a percentage of
revenues;                                    
|
| |  |  | Additional excess inventory and related charges of $40.8 million
for the three months ended March 31, 2002.     

We recorded excess inventory and related charges of $40.8 million for the
three months ended March 31, 2002. These charges were primarily associated
with underutilization charges related to a partial idling of our fabrication
facilities due to decreased demand. No such charge was recorded for the
quarter ended March 31, 2001.

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The gross profit margin percentage for the SAN Systems segment increased
to 37% in the first quarter of 2002 from 35% in the same period of 2001. The
increase was primarily attributable to increased revenue for higher margin
products during the current quarter.

Our operating environment, combined with the resources required to operate
in the Semiconductor industry, requires that we manage a variety of factors.
These factors include, among other things:



| |  |  | Product mix;                                         
| | - |  | -----------------------------------------------------
|
| |  |  | Factory capacity and utilization;                    
|
| |  |  | Manufacturing yields;                                
|
| |  |  | Availability of certain raw materials;               
|
| |  |  | Terms negotiated with third-party subcontractors; and
|
| |  |  | Foreign currency fluctuations.                       

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

Changes in the relative strength of the yen may have a greater impact on
our gross profit margin than other foreign exchange fluctuations due
to yen denominated revenues and expenses and our
wafer fabrication operations in Japan. Although the yen weakened (the average
yen exchange rate for the first quarter of 2002 depreciated 15% from the same
period of 2001), the effect on gross profit margin and net income was not
significant because yen-denominated sales offset a substantial portion of
yen-denominated costs during the period. Moreover, we hedged a portion of our
remaining yen exposure. (See Note 6 of the Notes.) Future changes in the
relative strength of the yen or mix of foreign currency denominated revenues
and costs could have a significant effect on our gross profit margin or
operating results.

Research and development:Research and development (R&D) expenses
decreased $4.5 million or 4% to $114.3 million during the first quarter of 2002
as compared to $118.8 million during the same period of 2001 on a consolidated
basis. R&D expenses for the Semiconductor segment decreased $4.2 million or 4%
to $106.4 million in the first quarter of 2002 from $110.6 million in the same
period of 2001.

The decrease in R&D expenses for the Semiconductor segment for the three
months ending March 31, 2002 as compared to the same period of the prior year
was primarily attributable to the various cost cutting measures implemented in
2001 and 2002. (See Note 3 of the Notes.)

The cost cutting measures with respect to R&D expenses were offset in part
by the following:

     A lower benefit of $4 million was recorded in the first quarter of 2002
as compared to $6 million in the same period of 2001 associated with a
technology transfer agreement entered into with Silterra in Malaysia during
1999. (See Note 4 of the Notes.)

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

R&D expenses for the SAN Systems segment decreased $0.2 million or 2% to
$8.0 million in the first quarter of 2002 from $8.2 million in the same period
of 2001. The decrease reflects lower
compensation related expenses due to a decrease in average headcount
during the first quarter of 2002 compared to the same period of 2001.
The decrease in
headcount is primarily a result of the restructuring actions taken in the
second and third quarters of 2001 and the first
quarter of 2002.

As a percentage of revenues, R&D expenses increased to 28% in the first
quarter of 2002 from 23% in the same period of 2001 on a consolidated basis.
R&D expenses as a percentage of revenues for the Semiconductor segment
increased to 30% in the first quarter of 2002 from 24% in the same period of
2001. R&D expenses as a percentage

19



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##### Table of Contents



of revenues for the SAN Systems segment stayed flat at 13% in the first
quarters of 2002 and 2001. The increase in R&D expenses as a percentage of
revenues for the Semiconductor segment is primarily a result of lower revenues
for the periods presented in 2002 as compared to 2001 and the effects of R&D
spending changes as discussed above. For the SAN Systems segment, the decrease
in R&D expenses is offset by lower revenues for the current quarter, resulting
in R&D expense being flat as a percentage of revenues for that segment as
compared to the first quarter of 2001.

Selling, general and administrative:Selling, general and administrative
(SG&A) expenses decreased $20.8 million or 26% to $58.2 million during the
first quarter of 2002 as compared to $79.0 million in the same period of 2001
on a consolidated basis. SG&A expenses for the Semiconductor segment decreased
$15.9 million or 25% to $46.8 million in the first quarter of 2002 from $62.7
million in the same period of 2001. SG&A expenses for the SAN Systems segment
decreased $4.8 million or 30% to $11.4 million in the first quarter of 2002
from $16.2 million in the same period of 2001. The decrease on a consolidated
basis was primarily attributable to the various cost cutting measures
implemented in 2001 and 2002 (See Note 3 of the Notes). This decrease was
offset by continued SG&A expenses for the former C-Cube and AMI RAID business,
which are part of the Semiconductor segment and included in our consolidated
financial statements from May 11, 2001 and August 31, 2001, respectively, and
an increase in compensation related expenses for the SAN Systems segment.

As a percentage of revenues, SG&A expenses decreased to 14% in the first
quarter of 2002 from 15% in the same period of 2001 on a consolidated basis.
SG&A expenses as a percentage of revenues for the Semiconductor segment
decreased to 13% in the first quarter of 2002 from 14% in the same period of
2001. SG&A expenses as a percentage of revenues for the SAN Systems segment
decreased to 19% in the first quarter of 2002 from 26% in the same period of
2001. The decrease in SG&A expenses as a percentage of revenues for both
segments are primarily a result of the positive effects of SG&A spending
changes as discussed above, offset by lower revenues for the period presented
in 2002 as compared to 2001.

Restructuring of operations and other non-recurring items:We recorded
approximately $65.1 million in restructuring and other non-recurring items, net
for the three months ended March 31, 2002. Restructuring charges of $67
million were offset in part by a $2 million non-recurring gain further
described below.

Restructuring:

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.

In the first quarter of 2002, we announced a series 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 the CDMA handset standard product line. During the three
months ended March 31, 2002, we recorded a restructuring charge for severance
for approximately 1,400 employees worldwide, fixed asset write-downs due to
impairment in the U.S. and Japan that will be disposed of by sale and exit
costs primarily associated with cancelled contracts and operating leases.

Assets held for sale of $107 million and $89 million were included as a
component of prepaid expenses and other current assets as of March 31, 2002 and
December 31, 2001, respectively. 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 book value for the
assets. We will reassess the realizability

20



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##### Table of Contents



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.

21



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##### Table of Contents



The following table sets forth our restructuring reserves as of March 31,
2002:

|                                                |       |                   |            |         |               |          |        |                |  |   |            |         |   |   |        |        | 
|----------------------------------------------- | ----- | ----------------- | ---------- | ------- | ------------- | -------- | ------ | -------------- |  | - | ---------- | ------- | - | - | ------ | ------ | 
|                                                |       |                   | Balance at |         | Restructuring |          |        |                |  |   | Balance at
|(In thousands)                                  |       | December 31, 2001 |            | Expense |               | Utilized |        | March 31, 2002
|                                                |       |                   |            |         |               |          |        |               
|Write-down of excess assets(a)                  |       | $                 | 3,762      |         |               | $        | 25,933 |                |  | $ | (27,623    | )       |   | $ | 2,072  |       
|                                               
|                                               
|                                               
|                                               
|Lease terminations and maintenance contracts(c) |       |                   | 10,695     |         |               |          | 12,871 |                |  |   | (1,623     | )       |   |   | 21,943 |       
|                                               
|                                               
|                                               
|                                               
|Facility closure and other exit costs(c)        |       |                   | 14,153     |         |               |          | 415    |                |  |   | (3,142     | )       |   |   | 11,426 |       
|                                               
|                                               
|                                               
|                                               
|Payments to employees for severance(b)          |       |                   | 724        |         |               |          | 27,490 |                |  |   | (10,352    | )       |   |   | 17,862 |       
|                                                |       |                   |            |         |               |          |        |                |  |   |            |         |   |   |        |       
|                                                | Total |                   | $          | 29,334  |               |          | $      | 66,709         |  |   | $          | (42,740 | ) |   | $      | 53,303 | 
|                                                |       |                   |            |         |               |          |        |                |  |   |            |         |   |   |        |       



|(a) |  | Amounts utilized in 2002 reflect a non-cash write-down of fixed assets
in the U.S. and Japan due to impairment of $25.3 million and cash
payments for machinery and equipment decommissioning costs of $2.3
million. The fixed asset write-downs were accounted for as a reduction
of the assets and did not result in a liability. The $2.1 million
balance as of March 31, 2002 relates to machinery and equipment
decommissioning costs in the U.S.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(b) |  | Amounts utilized represent cash payments related to the severance of
approximately 750 employees during the three months ended March 31,
2002. The $17.9 million balance as of March 31, 2002 will be paid
during 2002.                                                                                                                                                                                                                               
|   
|   
|   
|   
|(c) |  | Amounts utilized represent cash payments.                                                                                                                                                                                                                                                                                                                                                                                                             

Other non-recurring items:

We recorded a net gain of approximately $2 million in other non-recurring
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 operating expenses incurred in the first quarter for the
business line held for sale.

As a result of the restructuring actions taken during 2002, we expect to
reduce expenses by approximately $120 million during the year or $30 million
per quarter.

There were no restructuring and other non-recurring items for the three
months ended March 31, 2001.

Amortization of intangibles:We adopted Statement of Financial Accounting
Standards (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 2 of the
Notes.)

Amortization of intangible assets was $19.2 million for the three months
ended March 31, 2002. Amortization of goodwill and other intangibles was $27.1
million for the three months ended March 31, 2001. The decrease is primarily
attributable to the adoption of SFAS Nos. 141 and 142 as discussed above,
offset by the additional goodwill and related amortization recorded in
connection with the acquisitions of C-Cube and the RAID business of AMI in the
second and third quarters of 2001, respectively. We had approximately
$326.2
million of intangible assets, net of accumulated amortization that will
continue to amortize at March 31, 2002.

Amortization of non-cash deferred stock compensation:Amortization of
non-cash deferred stock compensation of $26.9 million and $21.3 million for
the three months ended March 31, 2002 and 2001, respectively, is due to the
amortization of non-cash deferred stock compensation recorded in connection
with the acquisitions of C-Cube and the RAID business during the second and
third quarters of 2001, respectively, Syntax in the fourth quarter of 2000 and
DataPath in the third quarter of 2000.

Interest expense:Interest expense increased $5.9 million to $15.8 million
in the first quarter of 2002 from $9.9 million in the same period of 2001. The
increase is primarily attributable to higher debt outstanding at March 31, 2002
due to the issuance of the 4% Convertible Subordinated Notes for $490.0 million
(the 2001 Convertible Notes) in October 2001.

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Interest income and other, net:Interest income and other decreased $5.4
million to $3.6 million in the first quarter of 2002 from $9.0 million in the
same period of 2001. Interest income decreased to $5.5 million in the first
quarter of 2002 from $15.1 million in the same period in 2001, this is mainly
attributed to lower average cash balances together with lower interest rates
during the current period as compared to the prior period. The decrease in
other expenses was primarily attributable to higher losses on sale of fixed
assets and the time value of purchased option contracts in the first quarter of
2001 as compared to the current period. (See Note 6 of the Notes.)

Gain on sale of equity securities:We did not sell marketable equity
securities during the first quarter of 2002. During the first quarter of 2001,
we sold certain marketable equity securities for $7.9 million in the open
market, realizing a pre-tax gain of approximately $5.3 million.

Provision for income taxes:During the three months ended March 31, 2002,
we recorded an income tax benefit of $18.3 million as a result of changes in the U.S. tax laws enacted
in the first quarter of 2002 that impacted net operating loss
carrybacks. The benefit was reduced for income taxes incurred
by certain foreign subsidiaries. We expect to record
$4.3 million of income tax expense in each quarter of 2002 related to income taxes for certain foreign
subsidiaries. The future benefit of certain operating losses is not
currently being recognized. For the three months ended March 31,
2001, an income tax benefit of $4.5 million was recorded. This
benefit differs from the U.S. statutory rate
primarily due to losses of our foreign subsidiaries, which are
benefited at lower rates, and items related to acquisitions, which
are not deductible for tax purposes.

Financial Condition and Liquidity

Cash, cash equivalents and short-term investments decreased 5% to $967.1
million at March 31, 2002 from $1.01 billion at December 31, 2001. The
decrease is due to lower net cash inflows from our operating,
investing and financing activities as described below:

Working capital.Working capital decreased by $53.5 million to $1.21
billion at March 31, 2002 from $1.26 billion as of December 31, 2001. Working
capital in the current quarter was impacted by the following activities:



| |  |  | Cash and cash equivalents were lower by $272.0 million at March 31,
2002 as compared to December 31, 2001. This decrease was partially
offset by $225.8 million of higher short-term investments resulting
from higher purchases of securities available for sale, net of
maturities and sales.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Inventory levels were lower in the current quarter due to lower
production volumes and increased sales in the first quarter of 2002 as
compared to the fourth quarter of 2001.                                                                                                                 
|
| |  |  | Accrued salaries, wages and benefits were higher due to the
timing of payment of payroll; and                                                                                                                                                                                                  
|
| |  |  | Accrued and other liabilities were higher primarily from
restructuring-related accruals.                                                                                                                                                                                                       

The decrease in working
capital was offset in part by higher accounts
receivable during the first quarter of 2002 as
compared to the fourth quarter of 2001, higher prepaid expenses and other
current assets due to a reclassification from property and equipment to current
assets held for sale, lower accounts payable due to lower purchases in the
current quarter, and lower income taxes payable due to the timing of tax
payments and the tax benefit recorded in the current quarter.

Cash and cash equivalents generated from operating activities.During the
first quarter of 2002, we used $35.0 million of cash and cash equivalents from
operating activities compared to $98.0 million generated in the same period in
2001. The decrease in cash and cash equivalents provided by operating
activities was primarily attributable to lower net income for the quarter
ended March 31, 2002 when compared to the same quarter of 2001 (before
depreciation and amortization, non-cash restructuring and non recurring items,
net, amortization of non-cash deferred stock compensation and gains on stock
investments).

23



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##### Table of Contents



Cash and cash equivalents used in investing activities.Cash and cash
equivalents used in investing activities was $240.2 million in the first
quarter of 2002, compared to $75.1 million used in the same period in 2001. The
primary investing activities during the current quarter included the following:



| |  | Higher purchases of debt and equity securities available for sale, net
of maturities and sales, as compared to net inflow of cash due to
sales and maturities of such securities in the first quarter of 2001;
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Lower purchases of property and equipment, net of retirements;                                                                                                                                                
| 
| |  | Lower purchases of equity securities in the current quarter;                                                                                                                                                  
| 
| |  | No sale of stock investments in the current quarter as compared to
proceeds of $7.9 million in the first quarter of 2001.                                                                                     

Net capital additions were $4.8 million in the current quarter as compared
to $144.5 million for the same period in 2001. We expect the level of capital
expenditures to be less than $200 million in 2002.

Cash and cash equivalents provided by financing activities. Cash and cash
equivalents provided by financing activities during the three months ended
March 31, 2002 was $1.5 million compared to $11.6 million in 2001. The decrease
is primarily attributable to lower net cash proceeds from our employee stock
option and purchase plans in 2002 as compared to 2001.

In order to remain competitive, we must continue to make 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 through 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.

We have Convertible Subordinated Notes of $345 million due in 2004, $500
million due in 2005, and $490 million due in 2006. All the Convertible Notes
are convertible at the holders option, at any time after 60 days following
issuance, into shares of the Companys common stock. The Notes are redeemable
at our 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 Notes has the right to cause us to
repurchase all of such holders convertible notes at 100% of their principle
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 we are required to redeem any of the convertible securities for cash it may
affect our liquidity position.

As of March 31, 2002, we had operating leases financing certain wafer
fabrication equipment (See Note 11 of the Notes).

24



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##### Table of Contents



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

|                               |       |                        |      |             |  |             |       |               |  |       |       |       |  |   |      |      |  |   |         |         | 
|------------------------------ | ----- | ---------------------- | ---- | ----------- |  | ----------- | ----- | ------------- |  | ----- | ----- | ----- |  | - | ---- | ---- |  | - | ------- | ------- | 
|(in millions)                  |       | Payments due by period
|Contractual Obligations        |       | Less than 1 year       |      | 1  3 years |  | 4  5 years |       | After 5 years |  | Total
|                               |       |                        |      |             |  |             |       |               |  |      
|Convertible Subordinated Notes |       | $                      |     |             |  | $           | 845.0 |               |  | $     | 490.0 |       |  | $ |     |      |  | $ | 1,335.0 |        
|                              
|                              
|                              
|                              
|Operating lease obligations    |       |                        | 37.1 |             |  |             | 69.1  |               |  |       | 9.0   |       |  |   | 25.0 |      |  |   | 140.2   |        
|                              
|                              
|                              
|                              
|Capital lease obligations      |       |                        | 0.3  |             |  |             | 0.8   |               |  |       |      |       |  |   |     |      |  |   | 1.1     |        
|                               |       |                        |      |             |  |             |       |               |  |       |       |       |  |   |      |      |  |   |         |        
|                               | Total |                        | $    | 37.4        |  |             | $     | 914.9         |  |       | $     | 499.0 |  |   | $    | 25.0 |  |   | $       | 1,476.3 | 
|                               |       |                        |      |             |  |             |       |               |  |       |       |       |  |   |      |      |  |   |         |        

Recent Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board (FASB) issued
FASB Statements Nos. 141 and 142 (SFAS No. 141 and SFAS No. 142), Business
Combinations and Goodwill and Other Intangible Assets. SFAS No. 141 replaces
APB 16 and eliminates pooling-of-interests accounting prospectively. It also
provides guidance on purchase accounting related to the recognition of
intangible assets and accounting for negative goodwill. SFAS No. 142 changes
the accounting for goodwill from an amortization method to an impairment-only
approach. Under SFAS No. 142, goodwill and indefinite-lived intangibles will be
tested annually and whenever events or circumstances occur indicating that they
might be impaired. Goodwill is tested for impairment employing a two-step
method. First the fair value of the reporting unit is compared to its carrying
amount. If the fair value is less than the carrying amount, the impairment is
measured as the excess of recorded goodwill over its implied fair value.
Indefinite-lived intangibles are tested for impairment by comparing the
carrying amount to the fair value. SFAS No. 141 and SFAS No. 142 are effective
for all business combinations completed after June 30, 2001. Upon adoption of
SFAS No. 142, amortization of goodwill recorded for business combinations
consummated prior to July 1, 2001 will cease, and intangible assets acquired
prior to July 1, 2001 that do not meet the criteria for recognition under SFAS
No. 141 will be reclassified to goodwill. We adopted SFAS No. 142 on January
1, 2002, the beginning of fiscal 2002. As a result of the adoption of SFAS No.
142, amortization of goodwill and intangibles will be lower by approximately
$112 million in 2002 as compared to 2001 and approximately $952 million of
goodwill and indefinite-lived intangibles will no longer be amortized. We have
completed the transitional goodwill impairment assessment in accordance with
SFAS No. 142 and concluded that goodwill is not impaired as of January 1, 2002.

In August 2001, the 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. We adopted SFAS
No. 143 on January 1, 2002 and it did not have a significant effect on our
financial position and results of operations.

In October 2001, the FASB issued Statement 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. We adopted SFAS No. 144 on January 1, 2002
and it did not have a significant effect on our financial position and results
of operations.




Item 3. Quantitative and Qualitative Disclosures about Market Risk

There have been no significant changes in the market risk disclosures
during the three months ended March 31, 2002 as compared to the discussion in
Part II of our Annual Report on Form 10-K for the year ended December 31, 2001.

25



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##### Table of Contents






PART II




Item 1. Legal Proceedings

Reference is made to Item 3, Legal Proceedings, of the Companys Annual
Report on Form 10-K for the fiscal year ended December 31, 2001 for a
discussion of certain pending legal proceedings. The information provided at
such reference regarding those matters remains substantially unchanged. In
addition, the Company is a party to other litigation matters and claims that
are normal in the course of its operations. While the results of such
litigation and claims cannot be predicted with certainty, the final outcome of
such matters is not expected to have a significant adverse effect on the
Companys consolidated financial position or results of operations. No
assurance can be given, however, that these matters will be resolved without
the Company becoming obligated to make payments or to pay other costs to the
opposing parties, with the potential for having an adverse effect on the
Companys financial position or its results of operations.




Item 4. Submission of Matters to a Vote of Security Holders

The Annual Meeting of Stockholders of LSI Logic Corporation was held on
May 2, 2002 in Milpitas, California. Proxies representing 332,281,113 shares of
common stock or 90% of the total outstanding shares were voted at the meeting.
The table below presents the voting results of election of the Companys Board
of Directors:

|                    |  |           |             |                |  |  |           | 
|------------------- |  | --------- | ----------- | -------------- |  |  | --------- | 
|                    |  | Votes For |             | Votes Withheld
|                    |  |           |             |               
|Wilfred J. Corrigan |  |           | 327,604,950 |                |  |  | 4,676,163 | 
|                   
|                   
|                   
|                   
|T.Z. Chu            |  |           | 323,441,029 |                |  |  | 8,840,084 | 
|                   
|                   
|                   
|                   
|Malcolm R. Currie   |  |           | 326,907,488 |                |  |  | 5,373,625 | 
|                   
|                   
|                   
|                   
|James H. Keyes      |  |           | 327,115,783 |                |  |  | 5,165,330 | 
|                   
|                   
|                   
|                   
|R. Douglas Norby    |  |           | 327,546,324 |                |  |  | 4,734,789 | 
|                   
|                   
|                   
|                   
|Matthew J. ORourke |  |           | 327,036,597 |                |  |  | 5,244,516 | 
|                   
|                   
|                   
|                   
|Gregorio Reyes      |  |           | 327,491,154 |                |  |  | 4,789,959 | 
|                   
|                   
|                   
|                   
|Larry W. Sonsini    |  |           | 323,906,972 |                |  |  | 8,374,141 | 

The stockholders approved an amendment to the Amended and Restated
Employee Stock Purchase Plan to increase the number of shares of common stock
reserved for issuance thereunder by 10,000,000. The proposal received
310,694,898 affirmative votes, 20,385,004 negative votes, 901,497 abstentions,
and 299,714 broker non-votes.

The stockholders approved an amendment to the 1991 Equity Incentive Plan
to increase the number of shares of common stock reserved for issuance
thereunder by 6,000,000. The proposal received 244,766,678 affirmative votes,
106,434,452 negative votes, 1,097,983 abstentions and zero broker non-votes.

The stockholders approved the appointment of PricewaterhouseCoopers LLP as
independent accountants of the Company for the fiscal year 2002. The proposal
received 324,462,956 affirmative votes, 7,058,772 negative votes, 759,385
abstentions and zero broker non-votes.

26



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##### Table of Contents






Item 6. Exhibits and Reports on Form 8-K



|(a) |  | Exhibits           
|--- |  | -------------------
|   
|    |  | None               
|   
|(b) |  | Reports on Form 8-K

On January 25, 2002, pursuant to Item 5 to report information set forth in
the Registrants news releases dated January 16, 2002 and January 23, 2002 and
Item 7.

On April 26, 2002, pursuant to Item 5 to report information set forth in
the Registrants news release dated April 24, 2002.

27



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##### Table of Contents






SIGNATURES

Pursuant to the requirements 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
(Registrant)
|                  
|                  
|                  
|                  
|                   |  |                                    |  |                                                                            
|                  
|                  
|                  
|                  
|Date: May 14, 2002 |  | By                                 |  | /s/ Bryon Look
Bryon LookExecutive Vice President &
Chief Financial Officer

28