##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 
  þ
    
    REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended July 2, 2006
 OR
 o
    
    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: 1-10317
 LSI LOGIC CORPORATION
 (Exact name of registrant as specified in its charter
 Delaware
    
    94-2712976(State of Incorporation)
    
    (I.R.S. Employer Identification Number)
 1621 Barber Lane
Milpitas, California 95035  (Address of principal executive offices)
(Zip code)
 (408) 433-8000
( Registrants telephone number, including area code)
  þ o
  þ o o
  o þ




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##### 



LSI LOGIC CORPORATION
Form 10-Q
For the Quarter Ended July 2, 2006
INDEX
 PageNo.PART I. FINANCIAL INFORMATIONItem 1
    
    Financial StatementsConsolidated Condensed Balance Sheets as of July 2, 2006 (unaudited) and December 31, 2005
    
    
    3Consolidated Condensed Statements of Operations  for the Three Months and the Six Months
Ended July 2, 2006 and July 3, 2005 (unaudited)
    
    
    4Consolidated Condensed Statements of Cash Flows  for the Six Months Ended July 2, 2006
and July 3, 2005 (unaudited)
    
    
    5Notes to Unaudited Consolidated Condensed Financial Statements
    
    
    6Item 2
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 3
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    33Item 4
    
    Controls and Procedures
    
    
    33PART II. OTHER INFORMATIONItem 1
    
    Legal Proceedings
    
    
    34Item 1A
    
    Risk Factors
    
    
    34Item 2
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    40Item 4
    
    Submission of Matters to a Vote of Security Holders
    
    
    41Item 5
    
    Other Matters
    
    
    41Item 6
    
    Exhibits
    
    
    42Signatures
    
    
    43Index to Exhibits
    
    
    44EXHIBIT 10.56EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 LSI LOGIC CORPORATION
 
 CONSOLIDATED CONDENSED BALANCE SHEETS
 (UNAUDITED)
 July 2,
    
    December 31,2006
    
    2005(In thousands, exceptPer share amounts)AssetsCash and cash equivalents
    
    $
    359,454
    
    
    $
    264,649Short-term investments
    
    
    841,108
    
    
    
    674,260Accounts receivable, less allowances of $19,658 and $15,328
    
    
    310,807
    
    
    
    323,310Inventories
    
    
    173,753
    
    
    
    194,814Prepaid expenses and other current assets
    
    
    85,664
    
    
    
    163,086Total current assets
    
    
    1,770,786
    
    
    
    1,620,119Property and equipment, net
    
    
    94,082
    
    
    
    98,285Other intangibles assets, net
    
    
    20,632
    
    
    
    45,974Goodwill
    
    
    928,542
    
    
    
    928,542Other assets
    
    
    107,969
    
    
    
    103,146Total assets
    
    $
    2,922,011
    
    
    $
    2,796,066Liabilities and Stockholders EquityAccounts payable
    
    $
    188,736
    
    
    $
    171,632Accrued salaries, wages and benefits
    
    
    59,297
    
    
    
    77,713Other accrued liabilities
    
    
    149,080
    
    
    
    140,194Income taxes payable
    
    
    85,816
    
    
    
    79,290Current portion of long-term debt
    
    
    272,607
    
    
    
    273,940Total current liabilities
    
    
    755,536
    
    
    
    742,769Long-term debt
    
    
    350,000
    
    
    
    350,000Tax related liabilities and other
    
    
    73,532
    
    
    
    75,110Total long-term obligations and other liabilities
    
    
    423,532
    
    
    
    425,110Commitments and contingencies (Note 11)
    
    
    
    
    
    
    Minority interest in subsidiary
    
    
    236
    
    
    
    237Stockholders equity:Preferred shares; $0.01 par value; 2,000 shares authorized, none outstanding
    
    
    
    
    
    
    Common stock; $0.01 par value; 1,300,000 shares authorized; 399,175 and
394,015 shares outstanding, respectively
    
    
    3,992
    
    
    
    3,940Additional paid-in capital
    
    
    3,051,456
    
    
    
    2,996,102Accumulated deficit
    
    
    (1,322,929
    )
    
    
    (1,389,944
    )Accumulated other comprehensive income
    
    
    10,188
    
    
    
    17,852Total stockholders equity
    
    
    1,742,707
    
    
    
    1,627,950Total liabilities and stockholders equity
    
    $
    2,922,011
    
    
    $
    2,796,066
  3




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LSI LOGIC CORPORATION
 
 CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
 (UNAUDITED)
 Three Months Ended
    
    Six Months EndedJuly 2,
    
    July 3,
    
    July 2,
    
    July 3,2006
    
    2005
    
    2006
    
    2005(In thousands, except per share amounts)Revenues
    
    $
    489,635
    
    
    $
    481,292
    
    
    $
    965,519
    
    
    $
    931,299Cost of revenues
    
    
    280,428
    
    
    
    269,695
    
    
    
    551,823
    
    
    
    529,596Gross profit
    
    
    209,207
    
    
    
    211,597
    
    
    
    413,696
    
    
    
    401,703Research and development
    
    
    100,362
    
    
    
    100,229
    
    
    
    202,636
    
    
    
    200,301Selling, general and administrative
    
    
    64,636
    
    
    
    60,310
    
    
    
    133,514
    
    
    
    118,909Restructuring of operations and other items, net
    
    
    (21,648
    )
    
    
    7,156
    
    
    
    (15,998
    )
    
    
    8,689Amortization of intangibles
    
    
    10,801
    
    
    
    17,613
    
    
    
    22,017
    
    
    
    35,226Income from operations
    
    
    55,056
    
    
    
    26,289
    
    
    
    71,527
    
    
    
    38,578Interest expense
    
    
    (6,428
    )
    
    
    (6,320
    )
    
    
    (12,758
    )
    
    
    (13,030
    )Interest income and other, net
    
    
    10,319
    
    
    
    11,543
    
    
    
    19,846
    
    
    
    16,933Income before income taxes
    
    
    58,947
    
    
    
    31,512
    
    
    
    78,615
    
    
    
    42,481Provision for income taxes
    
    
    5,100
    
    
    
    6,250
    
    
    
    11,600
    
    
    
    12,500Net income
    
    $
    53,847
    
    
    $
    25,262
    
    
    $
    67,015
    
    
    $
    29,981Net income per share:Basic
    
    $
    0.14
    
    
    $
    0.06
    
    
    $
    0.17
    
    
    $
    0.08Diluted
    
    $
    0.13
    
    
    $
    0.06
    
    
    $
    0.17
    
    
    $
    0.08Shares used in computing per share amounts:Basic
    
    
    397,790
    
    
    
    389,088
    
    
    
    396,312
    
    
    
    388,371Diluted
    
    
    405,613
    
    
    
    393,427
    
    
    
    404,213
    
    
    
    391,954
  4




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LSI LOGIC CORPORATION
 
 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 Six Months EndedJuly 2, 2006
    
    July 3, 2005(In thousands)Operating activities:Net income
    
    $
    67,015
    
    
    $
    29,981Adjustments:Depreciation and amortization
    
    
    48,166
    
    
    
    82,293Stock-based compensation expense
    
    
    25,129
    
    
    
    2,627Non-cash restructuring and other items
    
    
    (2,749
    )
    
    
    1,350Gain on sale of intellectual property
    
    
    (15,000
    )
    
    
    Gain on sale of Gresham manufacturing facility and associated intellectual property
    
    
    (12,553
    )
    
    
    Write-off of intangible assets acquired in a purchase business combination
    
    
    3,325
    
    
    
    Non-cash foreign exchange loss
    
    
    469
    
    
    
    Gain on sale of equity securities
    
    
    (1,211
    )
    
    
    (2,311
    )Gain on repurchase of Convertible Subordinated Notes
    
    
    
    
    
    
    (4,123
    )Gain on sale of property and equipment
    
    
    (5
    )
    
    
    (3
    )Changes in deferred tax assets and liabilities
    
    
    20
    
    
    
    54Changes in assets and liabilities:Accounts receivable
    
    
    12,523
    
    
    
    (12,853
    )Inventories
    
    
    17,306
    
    
    
    33,160Prepaid expenses and other assets
    
    
    (5,977
    )
    
    
    (8,160
    )Accounts payable
    
    
    8,743
    
    
    
    (2,378
    )Accrued and other liabilities
    
    
    3,801
    
    
    
    (493
    )Net cash provided by operating activities
    
    
    149,002
    
    
    
    119,144Investing activities:Purchase of debt securities available-for-sale
    
    
    (382,212
    )
    
    
    (262,532
    )Proceeds from maturities and sales of debt securities available-for-sale
    
    
    205,913
    
    
    
    283,183Purchases of equity securities
    
    
    (5,150
    )
    
    
    Proceeds from sales of equity securities
    
    
    3,581
    
    
    
    3,871Purchases of property, equipment and software
    
    
    (28,657
    )
    
    
    (19,420
    )Proceeds from sale of property and equipment
    
    
    40
    
    
    
    3,215Proceeds from sale of intellectual property
    
    
    15,000
    
    
    
    Proceeds from sale of Fort Collins facility
    
    
    10,998
    
    
    
    Proceeds from sale of Colorado Spring facility
    
    
    7,029
    
    
    
    Proceeds from sale of Gresham manufacturing facility
    
    
    81,426
    
    
    
    Proceeds from sale of Gresham manufacturing facility associated intellectual property
    
    
    5,100
    
    
    
    Adjustment to goodwill acquired in a prior year for resolution of a pre-acquisition
income tax contingency
    
    
    
    
    
    
    7,662Net cash (used in)/provided by investing activities
    
    
    (86,932
    )
    
    
    15,979Financing activities:Repurchase of Convertible Subordinated Notes
    
    
    
    
    
    
    (148,126
    )Issuance of common stock
    
    
    32,137
    
    
    
    12,826Repayment of debt obligations
    
    
    
    
    
    
    (129
    )Net cash provided by /(used in) financing activities
    
    
    32,137
    
    
    
    (135,429
    )Effect of exchange rate changes on cash and cash equivalents.
    
    
    598
    
    
    
    (6,961
    )Increase/ (decrease) in cash and cash equivalents
    
    
    94,805
    
    
    
    (7,267
    )Cash and cash equivalents at beginning of period
    
    
    264,649
    
    
    
    218,723Cash and cash equivalents at end of period
    
    $
    359,454
    
    
    $
    211,456
  5




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LSI LOGIC CORPORATION
 
 NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 1  BASIS OF PRESENTATION
    Recent Accounting Pronouncements
   6




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NOTE 2  STOCK-BASED COMPENSATION
  Description of the Companys equity compensation plans:
 The 2003 Equity Incentive Plan (the 2003 Plan):
 The 1991 Equity Incentive Plan (the 1991 Plan):
 The 1995 Director Option Plan:
 The 1999 Nonstatutory Stock Option Plan (the 1999 Plan):
 The Employee Stock Purchase Plan, amended and restated (US ESPP):
 International Employee Stock Purchase Plan (IESPP):
 Stock-based compensation expense under SFAS 123R:
  7




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Three months ended
    
    
    Six months endedJuly 2,
    
    
    July 3,
    
    
    July 2,
    
    
    July 3,Stock-based compensation expense:
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands)
    
    
    (In thousands)Cost of revenues
    
    $
    2,458
    
    
    $
    164
    
    
    $
    3,983
    
    
    $
    325Research and development
    
    
    4,643
    
    
    
    570
    
    
    
    9,165
    
    
    
    1,405Selling, general and administrative
    
    
    6,197
    
    
    
    438
    
    
    
    11,981
    
    
    
    897Total stock-based compensation expense
    
    $
    13,298
    
    
    $
    1,172
    
    
    $
    25,129
    
    
    $
    2,627
 8




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Stock Options
  Three months ended
    
    Six months endedEmployee Stock Options Granted
    
    July 2, 2006
    
    July 2, 2006Weighted average estimated grant date fair value
    
    $
    3.95
    
    
    $
    3.59Weighted average assumptions in calculation:Expected life (years)
    
    
    4.35
    
    
    
    4.29Risk-free interest rate
    
    
    5
    %
    
    
    5
    %Volatility
    
    
    48
    %
    
    
    48
    %Dividend yield
    
    
    
    
    
    
    
      9




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2006Weighted
    
    Weighted
    
    AverageAverage
    
    Average
    
    IntrinsicNumber of
    
    Exercise
    
    Remaining
    
    ValueShares
    
    Price Per
    
    Contractual
    
    (In(In thousands)
    
    Share
    
    Term
    
    thousands)Options outstanding at January 1,
    
    
    70,618
    
    
    $
    13.21
    
    
    
    
    
    
    $
    Options granted
    
    
    3,759
    
    
    
    10.10
    
    
    
    
    
    
    
    Options exercised
    
    
    (2,844
    )
    
    
    (6.88
    )
    
    
    
    
    
    
    Options canceled
    
    
    (6,412
    )
    
    
    (17.58
    )
    
    
    
    
    
    
    Options outstanding at July 2,
    
    
    65,121
    
    
    $
    12.87
    
    
    
    4.93
    
    
    $
    64,537Options exercisable at July 2,
    
    
    42,825
    
    
    $
    15.46
    
    
    
    4.29
    
    
    $
    32,632
    Employee Stock Purchase Plans
  Three months endedEmployee Stock Purchase Plans Granted
    
    July 2, 2006Weighted average estimated grant date fair value
    
    $
    3.05Weighted average assumptions in calculation:Expected life (years)
    
    
    0.8Risk-free interest rate
    
    
    5
    %Volatility
    
    
    39
    %Dividend yield
    
    
    
 10




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Restricted Stock Awards
   2006Number ofShares(In thousands)Non-vested shares at January 1,
    
    
    2,375Granted
    
    
    392Vested
    
    
    (762
    )Forfeited
    
    
    (101
    )Non-vested shares at July 2,
    
    
    1,904
   Income taxes
   Earnings per share
  11




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Pro Forma Information under SFAS 123 for Period Prior to January 1, 2006 :
  Three months
    
    Six monthsended
    
    endedJuly 3, 2005
    
    July 3, 2005(In thousands, except per shareamounts)Net income, as reported
    
    $
    25,262
    
    
    $
    29,981Add: Amortization of
non-cash deferred stock
compensation determined
under the intrinsic
value method as
reported in net income,
net of related tax
effects*
    
    
    
    
    
    
    296Deduct: Total
stock-based employee
compensation expense
determined under fair
value method for all
awards, net of related
tax effects*
    
    
    (25,475
    )
    
    
    (43,514
    )Pro forma net loss
    
    $
    (213
    )
    
    $
    (13,237
    )Income/(loss) per share:Basic-as reported
    
    $
    0.06
    
    
    $
    0.08Basic-pro forma
    
    $
    
    
    
    $
    (0.03
    )Diluted-as reported
    
    $
    0.06
    
    
    $
    0.08Diluted-pro forma
    
    $
    
    
    
    $
    (0.03
    )
 
 *
    
    This amount excludes amortization of stock-based compensation on restricted stock
awards.  Three months ended
    
    Six months endedEmployee Stock Options Granted
    
    July 3, 2005
    
    July 3, 2005Weighted average estimated grant date fair value
    
    $
    4.25
    
    
    $
    4.14Assumptions in calculation:Expected life (years)
    
    
    4.59
    
    
    
    4.54Risk-free interest rate
    
    
    4
    %
    
    
    4
    %Volatility
    
    
    79
    %
    
    
    79
    %Dividend yield
    
    
    
    
    
    
    
 Three monthsendedEmployee Stock Purchase Plan Right to Purchase Stock
    
    July 3, 2005Weighted average estimated grant date fair value
    
    $
    2.65Assumptions in calculation:Expected life (years)
    
    
    0.75Risk-free interest rate
    
    
    3
    %Volatility
    
    
    84
    %Dividend yield
    
    
    
 12




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NOTE 3 RESTRUCTURING AND OTHER ITEMS
  Restructuring and impairment of long- lived assets:
 First quarter of 2006:
  Second quarter of 2006:
  
    
    $12.5 million net gain recorded for the sale of Gresham, Oregon manufacturing facility
and certain related manufacturing process intellectual property to ON Semiconductor;
    
    $15.0 million gain recorded for the sale of certain intellectual property to a
third-party based on the sale of zero basis intellectual property for $15.0 million in cash
proceeds;
    
    $7.4 million gain recorded for the sale of the Companys ZSP digital signal processor
intellectual technology;
    
    $8.6 million charge recorded for severance and termination benefits for employees
primarily related to the broad-based reorganization that was announced in August 2005;
    
    $3.3 million charge recorded for the write-off of certain intangible assets acquired in a
purchase business combination; and
    
    $1.4 million net charge recorded primarily for changes in sublease assumptions for
certain previously accrued facility lease termination costs.
 Sale of the Gresham facility:
   13




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Balance at
    
    Restructuring
    
    
    
    
    
    Balance at
    
    Restructuring
    
    Utilized
    
    Balance atDecember
    
    Expense
    
    Utilized during
    
    April 2,
    
    Expense
    
    during Q2,
    
    July 2,31, 2005
    
    Q1, 2006
    
    Q1, 2006
    
    2006
    
    Q2, 2006
    
    2006
    
    2006(In thousands)Write-down of
excess assets and
decommissioning costs
(a)
    
    $
    4,993
    
    
    $
    
    
    
    $
    (48
    )
    
    $
    4,945
    
    
    $
    
    
    
    $
    (4,565
    )
    
    $
    380Lease terminations (b)
    
    
    22,287
    
    
    
    3,144
    
    
    
    (2,220
    )
    
    
    23,211
    
    
    
    1,627
    
    
    
    (1,684
    )
    
    
    23,154Facility closure and
other exit costs (c)
    
    
    
    
    
    
    1,368
    
    
    
    (463
    )
    
    
    905
    
    
    
    20
    
    
    
    (612
    )
    
    
    313Payments to employees
for severance (d)
    
    
    5,395
    
    
    
    5,693
    
    
    
    (1,743
    )
    
    
    9,345
    
    
    
    8,552
    
    
    
    (3,295
    )
    
    
    14,602Total
    
    $
    32,675
    
    
    $
    10,205
    
    
    $
    (4,474
    )
    
    $
    38,406
    
    
    $
    10,199
    
    
    $
    (10,156
    )
    
    $
    38,449
 
 (a)
    
    The $0.4 million balance as of July 2, 2006, relates to estimates for selling costs for
the remaining assets held for sale and is expected to be utilized during 2006.(b)
    
    Amounts utilized represent cash payments. The balance remaining for real estate lease
terminations will be paid during the remaining terms of these contracts, which extend through
2011.(c)
    
    Amounts utilized represent cash payments. The balance remaining for facility closure and
other exit costs will be paid during 2006.(d)
    
    Amounts utilized represent a) cash severance payments to 49 employees during the six months
ended July 2, 2006 and b) cash payments for one-time termination benefits for 494 employees
associated with the sale of the Gresham manufacturing facility. The majority of the balance
remaining for severance and other termination benefits is expected to be paid in the third
quarter of 2006. NOTE 4 INVESTMENTS
 July 2,
    
    December 31,2006
    
    2005(In thousands)Available-for-sale debt securitiesAsset and mortgage-backed securities
    
    $
    354,882
    
    
    $
    335,495U.S. government and agency securities
    
    
    306,473
    
    
    
    266,077Corporate and municipal debt securities
    
    
    179,753
    
    
    
    72,688Total short-term investments
    
    $
    841,108
    
    
    $
    674,260Long-term investments in equity securitiesMarketable equity securities available-for-sale
    
    $
    9,805
    
    
    $
    18,769Non-marketable equity securities
    
    
    9,976
    
    
    
    7,070Total long-term investments in equity securities
    
    $
    19,781
    
    
    $
    25,839
 14




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NOTE 5  BALANCE SHEET DETAIL
 July 2,
    
    December 31,2006
    
    2005(In thousands)Cash and cash equivalents:Cash in financial institutions
    
    $
    41,216
    
    
    $
    85,641Cash equivalents
    
    
    318,238
    
    
    
    179,008$
    359,454
    
    
    $
    264,649Inventories:Raw materials
    
    $
    27,853
    
    
    $
    30,541Work-in-process
    
    
    46,468
    
    
    
    62,167Finished goods
    
    
    99,432
    
    
    
    102,106$
    173,753
    
    
    $
    194,814
  15




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NOTE 6  DEBT
 Conversion
    
    July 2,
    
    December 31,Maturity
    
    Interest Rate
    
    Price
    
    2006
    
    2005(In thousands)2003 Convertible Subordinated Notes
    
    May 2010
    
    
    4
    %
    
    $
    13.4200
    
    
    $
    350,000
    
    
    $
    350,0002001 Convertible Subordinated Notes
    
    November 2006
    
    
    4
    %
    
    $
    26.3390
    
    
    
    271,848
    
    
    
    271,848Deferred gain on terminated swaps
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    759
    
    
    
    2,092622,607
    
    
    
    623,940Current portion of long-term debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (272,607
    )
    
    
    (273,940
    )Long-term debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    350,000
    
    
    $
    350,000
 NOTE 7 RECONCILIATION OF BASIC AND DILUTED INCOME PER SHARE
 Three Months EndedJuly 2, 2006
    
    July 3, 2005Per-Share
    
    
    
    
    
    
    
    
    
    Per-ShareIncome*
    
    Shares+
    
    Amount
    
    Income*
    
    Shares+
    
    Amount(In thousands except per share amounts)Basic EPS:Net income available to common stockholders
    
    $
    53,847
    
    
    
    397,790
    
    
    $
    0.14
    
    
    $
    25,262
    
    
    
    389,088
    
    
    $
    0.06Stock options, employee stock purchase
rights and restricted stock awards
    
    
    
    
    
    
    7,823
    
    
    
    
    
    
    
    
    
    
    
    4,339
    
    
    
    Diluted EPS:Net income available to common stockholders
    
    $
    53,847
    
    
    
    405,613
    
    
    $
    0.13
    
    
    $
    25,262
    
    
    
    393,427
    
    
    $
    0.06
 Six Months EndedJuly 2, 2006
    
    July 3, 2005Per-Share
    
    
    
    
    
    
    
    
    
    Per-ShareIncome*
    
    Shares+
    
    Amount
    
    Income*
    
    Shares+
    
    Amount(In thousands except per share amounts)Basic EPS:Net income available to common stockholders
    
    $
    67,015
    
    
    
    396,312
    
    
    $
    0.17
    
    
    $
    29,981
    
    
    
    388,371
    
    
    $
    0.08Stock options, employee stock purchase
rights and restricted stock awards
    
    
    
    
    
    
    7,901
    
    
    
    
    
    
    
    
    
    
    
    3,583
    
    
    
    Diluted EPS:Net income available to common stockholders
    
    $
    67,015
    
    
    
    404,213
    
    
    $
    0.17
    
    
    $
    29,981
    
    
    
    391,954
    
    
    $
    0.08
 
 *
    
    Numerator+
    
    Denominator   16




---



##### Table of Contents



NOTE 8  COMPREHENSIVE INCOME
  Three Months Ended
    
    Six Months EndedJuly 2,
    
    July 3,
    
    July 2,
    
    July 3,2006
    
    2005
    
    2006
    
    2005(In thousands)Net income
    
    $
    53,847
    
    
    $
    25,262
    
    
    $
    67,015
    
    
    $
    29,981Change in unrealized (loss)/gain on derivative instruments
designated as and qualifying as cash-flow hedges
    
    
    
    
    
    
    (369
    )
    
    
    
    
    
    
    (535
    )Change in unrealized (loss)/gain on available-for-sale
securities
    
    
    (5,749
    )
    
    
    (1,450
    )
    
    
    (8,760
    )
    
    
    (4,273
    )Change in foreign currency translation adjustments
    
    
    1,462
    
    
    
    (3,341
    )
    
    
    1,096
    
    
    
    (6,790
    )Comprehensive income
    
    $
    49,560
    
    
    $
    20,102
    
    
    $
    59,351
    
    
    $
    18,383
 NOTE 9  SEGMENT REPORTING
   Three months ended
    
    Six months endedJuly 2, 2006
    
    July 3, 2005
    
    July 2, 2006
    
    July 3, 2005(In thousands)Revenues:Semiconductor
    
    $
    307,391
    
    
    $
    325,163
    
    
    $
    605,765
    
    
    $
    629,201Storage Systems
    
    
    182,244
    
    
    
    156,129
    
    
    
    359,754
    
    
    
    302,098Total
    
    $
    489,635
    
    
    $
    481,292
    
    
    $
    965,519
    
    
    $
    931,299Income from operations:Semiconductor
    
    $
    42,372
    
    
    $
    24,451
    
    
    $
    45,901
    
    
    $
    38,453Storage Systems
    
    
    12,684
    
    
    
    1,838
    
    
    
    25,626
    
    
    
    125Total
    
    $
    55,056
    
    
    $
    26,289
    
    
    $
    71,527
    
    
    $
    38,578
  17




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##### Table of Contents



Significant Customers.
 Three months ended
    
    Six months endedJuly 2,
    
    July 3,
    
    July 2,
    
    July 3,2006
    
    2005
    
    2006
    
    2005Semiconductor segment:Number of significant customers
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    1Percentage of segment revenues
    
    
    19
    %
    
    
    18
    %
    
    
    19
    %
    
    
    17
    %Storage Systems segment:Number of significant customers
    
    
    2
    
    
    
    2
    
    
    
    2
    
    
    
    3Percentage of segment revenues
    
    
    46%, 16
    %
    
    
    43%,14
    %
    
    
    45%,15
    %
    
    
    41%, 14%, 11
    %Consolidated:Number of significant customers
    
    
    2
    
    
    
    2
    
    
    
    2
    
    
    
    2Percentage of consolidated
revenues
    
    
    18%,12
    %
    
    
    15%,12
    %
    
    
    18%,12
    %
    
    
    14%,11
    %
  July 2,
    
    December 31,2006
    
    2005(In thousands)Total assets:Semiconductor
    
    $
    2,401,223
    
    
    $
    2,285,913Storage Systems
    
    
    520,788
    
    
    
    510,153Total
    
    $
    2,922,011
    
    
    $
    2,796,066
   NOTE 10 RELATED PARTY TRANSACTIONS
  NOTE 11  COMMITMENTS, CONTINGENCIES AND LEGAL MATTERS
  18




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  OVERVIEW
  19




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RESULTS OF OPERATIONS
 Revenues:
 Three Months Ended
    
    Six Months EndedJuly 2,
    
    July 3,
    
    July 2,
    
    July 3,2006
    
    2005
    
    2006
    
    2005(in millions)Semiconductor segment
    
    $
    307.4
    
    
    $
    325.2
    
    
    $
    605.8
    
    
    $
    629.2Storage Systems segment
    
    
    182.2
    
    
    
    156.1
    
    
    
    359.7
    
    
    
    302.1Consolidated
    
    $
    489.6
    
    
    $
    481.3
    
    
    $
    965.5
    
    
    $
    931.3
  Three months ended July 2, 2006 compared to the three months ended July 3, 2005
  20




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Semiconductor segment
  
 
  Storage Systems segment
  Six months ended July 2, 2006 compared to the six months ended July 3, 2005
  Semiconductor segment
  
 
 Storage Systems segment
  Significant Customers.
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Three months ended
    
    Six months endedJuly 2,
    
    July 3,
    
    July 2,
    
    July 3,2006
    
    2005
    
    2006
    
    2005Semiconductor segment:Number of significant customers
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    1Percentage of segment revenues
    
    
    19
    %
    
    
    18
    %
    
    
    19
    %
    
    
    17
    %Storage Systems segment:Number of significant customers
    
    
    2
    
    
    
    2
    
    
    
    2
    
    
    
    3Percentage of segment revenues
    
    
    46%, 16
    %
    
    
    43%,14
    %
    
    
    45%,15
    %
    
    
    41%, 14%, 11
    %Consolidated:Number of significant customers
    
    
    2
    
    
    
    2
    
    
    
    2
    
    
    
    2Percentage of consolidated revenues
    
    
    18%,12
    %
    
    
    15%,12
    %
    
    
    18%,12
    %
    
    
    14%,11
    %
 Revenues by geography.
 Three months ended
    
    Six months endedJuly 2, 2006
    
    July 3, 2005
    
    July 2, 2006
    
    July 3, 2005(in millions)Revenues:North America
    
    $
    235.6
    
    
    $
    228.1
    
    
    $
    472.5
    
    
    $
    435.6Asia, including Japan
    
    
    194.6
    
    
    
    195.4
    
    
    
    381.0
    
    
    
    390.7Europe
    
    
    59.4
    
    
    
    57.8
    
    
    
    112.0
    
    
    
    105.0Total
    
    $
    489.6
    
    
    $
    481.3
    
    
    $
    965.5
    
    
    $
    931.3
 Three months ended July 2, 2006 compared to the three months ended July 3, 2005
  Six months ended July 2, 2006 compared to the six months ended July 3, 2005
  22




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Operating costs and expenses.
 Gross profit margin:
 Three months ended
    
    Six months endedJuly 2, 2006
    
    July 3, 2005
    
    July 2, 2006
    
    July 3, 2005(in millions)Semiconductor segment
    
    $
    150.2
    
    
    $
    158.0
    
    
    $
    289.6
    
    
    $
    300.5Percentage of revenues
    
    
    49
    %
    
    
    49
    %
    
    
    48
    %
    
    
    48
    %Storage Systems segment
    
    $
    59.0
    
    
    $
    53.6
    
    
    $
    124.1
    
    
    $
    101.2Percentage of revenues
    
    
    32
    %
    
    
    34
    %
    
    
    35
    %
    
    
    33
    %Consolidated
    
    $
    209.2
    
    
    $
    211.6
    
    
    $
    413.7
    
    
    $
    401.7Percentage of revenues
    
    
    43
    %
    
    
    44
    %
    
    
    43
    %
    
    
    43
    %
 Three months ended July 2, 2006 compared to the three months ended July 3, 2005
  Semiconductor segment:
  
 
 
 
 Storage Systems segment:
  Six months ended July 2, 2006 compared to the six months ended July 3, 2005
  23




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Semiconductor segment:
  
    
    Manufacturing variances for the Gresham facility were more favorable for the first six
months of 2006 compared to the same period of 2005 as a result of yield improvements and
operating cost savings attributable to write-downs recorded for the six months ended July 3,
2005 related to the impairment of the Gresham manufacturing facility. These improvements
were offset by:
    
    An unfavorable shift in product mix including selling fewer semiconductors for
applications such as video games for the three months ended July 2, 2006,
    
    Lower average selling prices for semiconductors used in DVD-R products, and
    
    Stock-based compensation expense associated with the adoption of SFAS 123R as of January
1, 2006 (See Note 2 of the Notes).
 Storage Systems segment:
     
    
    Competitive pricing pressures;
    
    Product mix;
    
    Factory capacity and utilization;
    
    Geographic location of manufacturing;
    
    Manufacturing yields;
    
    Availability of certain raw materials;
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
    
    Adoption of new industry standards;
    
    Terms negotiated with third-party subcontractors; and
    
    Foreign currency fluctuations.
  Research and development:
 Three months ended
    
    Six months endedJuly 2, 2006
    
    July 3, 2005
    
    July 2, 2006
    
    July 3, 2005(in millions)Semiconductor segment
    
    $
    77.6
    
    
    $
    77.6
    
    
    $
    159.2
    
    
    $
    156.8Percentage of revenues
    
    
    25
    %
    
    
    24
    %
    
    
    26
    %
    
    
    25
    %Storage Systems segment
    
    $
    22.8
    
    
    $
    22.6
    
    
    $
    43.4
    
    
    $
    43.5Percentage of revenues
    
    
    13
    %
    
    
    15
    %
    
    
    12
    %
    
    
    14
    %Consolidated
    
    $
    100.4
    
    
    $
    100.2
    
    
    $
    202.6
    
    
    $
    200.3Percentage of revenues
    
    
    21
    %
    
    
    21
    %
    
    
    21
    %
    
    
    22
    %
 Three months ended July 2, 2006 compared to the three months ended July 3, 2005
  Semiconductor segment:
  25




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Storage Systems segment:
  Six months ended July 2, 2006 compared to the six months ended July 3, 2005
  Semiconductor segment:
  26




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Storage Systems segment:
  Selling, general and administrative:
 Three months ended
    
    Six months endedJuly 2, 2006
    
    July 3, 2005
    
    July 2, 2006
    
    July 3, 2005(in millions)Semiconductor segment
    
    $
    43.2
    
    
    $
    38.3
    
    
    $
    83.5
    
    
    $
    75.5Percentage of revenues
    
    
    14
    %
    
    
    12
    %
    
    
    14
    %
    
    
    12
    %Storage Systems segment
    
    $
    21.4
    
    
    $
    22.0
    
    
    $
    50.0.
    
    
    $
    43.4Percentage of revenues
    
    
    12
    %
    
    
    14
    %
    
    
    14
    %
    
    
    14
    %Consolidated
    
    $
    64.6
    
    
    $
    60.3
    
    
    $
    133.5
    
    
    $
    118.9Percentage of revenue
    
    
    13
    %
    
    
    13
    %
    
    
    14
    %
    
    
    13
    %
 Three months ended July 2, 2006 compared to the three months ended July 3, 2005
  Semiconductor segment:
  Storage Systems segment:
  
 
 Six months ended July 2, 2006 compared to the six months ended July 3, 2005
  27




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Semiconductor segment:
  Storage Systems segment:
  
 
 
 Restructuring of operations and other items:
 Stock-based compensation
  Amortization of intangibles:
 Interest expense:
 Interest income and other, net:
 28




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##### Table of Contents



Provision for income taxes:
   FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
  Working capital.
 
    
    Cash, cash equivalents and short-term investments increased by $261.7 million.
    
    Accrued salaries, wages and benefits decreased by $18.4 million primarily due to timing differences in payment of
salaries, benefits and performance-based compensation.
    
    Current portion of long-term obligation decreased by $1.3 million due to the amortization of deferred gain on the
terminated Swaps.The increase in working capital was offset, in part, by the following:
    
    Prepaid expenses and other current assets decreased by $77.4 million primarily due to decreases in assets held for sale
of $100.3 million mainly due to the sale of our Gresham Oregon manufacturing facility and two Colorado facilities,
offset in part by an increase in other receivable of $15.0 million from ON Semiconductor in connection with the sale of
Gresham manufacturing facility and $7.7 million from the sale of our ZSP digital signal processor unit, an increase in
prepaid software maintenance and other miscellaneous items which are individually insignificant. (See Note 3 of the
Notes).
 29




---



##### Table of Contents




    
    Inventories decreased by $21.0 million to $173.8 million as of July 2, 2006, from $194.8 million as of December 31,
2005. The decline in inventory levels reflects a) our continued focus on supply chain management and b) inventory sold
to ON Semiconductor as part of the sale of the Gresham manufacturing facility.
    
    Accounts payable increased by $17.1 million due to the timing of invoice receipt and payments.
    
    Accounts receivable decreased by $12.5 million to $310.8 million as of July 2, 2006 from $323.3 million as of December
31, 2005. The decrease is mainly attributed to lower revenues and improved collections during the three months ended
July 2, 2006 as compared to the three months ended December 31, 2005.
    
    Other accrued liabilities increased by $8.9 million due to increases in the restructuring reserve (Note 3 of the Notes)
and deferred revenue, offset in part by other miscellaneous items which are individually insignificant.
    
    Income taxes payable increased by $6.5 million due to the timing of income tax payments made and the income tax
provision recorded during the six months ended July 2, 2006.
 Cash and cash equivalents generated from operating activities.
 
    
    Net income adjusted for non-cash transactions. The non-cash items and
other non-operating adjustments are quantified in our Consolidated
Condensed Statements of Cash Flows included in this Form 10-Q; and
    
    A net increase in assets and liabilities, including changes in working
capital components from December 31, 2005 to July 2, 2006, as
discussed above.
  Cash and cash equivalents (used in)/ provided by investing activities.
 
    
    Purchases of debt and equity securities available for sale, net of sales and maturities; and
    
    Proceeds from sale of Gresham, Oregon manufacturing facility, two Colorado facilities and intellectual property, net of
purchases of property, equipment and software.
  Cash and cash equivalents provided by/ (used in) financing activities
  30




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Contractual Obligations
  Payments due by periodLess than
    
    1  3
    
    4  5
    
    After 51 year
    
    years
    
    years
    
    years
    
    TotalContractual Obligations
    
    (in millions)Convertible Subordinated Notes
    
    $
    271.8
    
    
    $
    
    
    
    $
    350.0
    
    
    $
    
    
    
    $
    621.8Operating lease obligations
    
    
    41.8
    
    
    
    53.2
    
    
    
    37.6
    
    
    
    13.8
    
    
    
    146.4Purchase commitments
    
    
    374.9
    
    
    
    55.5
    
    
    
    0.1
    
    
    
    
    
    
    
    430.5Total
    
    $
    688.5
    
    
    $
    108.7
    
    
    $
    387.7
    
    
    $
    13.8
    
    
    $
    1,198.7
 Convertible Subordinated Notes
   Operating Lease Obligations
  Purchase Commitments
   Critical Accounting Policies
  31




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Stock-Based compensation:
  Stock Options
  Three months ended
    
    Six months endedEmployee Stock Options Granted
    
    July 2, 2006
    
    July 2, 2006Weighted average estimated grant date fair value
    
    $
    3.95
    
    
    $
    3.59Weighted average assumptions in calculation:Expected life (years)
    
    
    4.35
    
    
    
    4.29Risk-free interest rate
    
    
    5
    %
    
    
    5
    %Volatility
    
    
    48
    %
    
    
    48
    %Dividend yield
    
    
    
    
    
    
    
      Employee Stock Purchase Plans
  32




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##### Table of Contents



Three months endedEmployee Stock Purchase Plans Granted
    
    July 2, 2006Weighted average estimated grant date fair value
    
    $
    3.05Weighted average assumptions in calculation:Expected life (years)
    
    
    0.8Risk-free interest rate
    
    
    5
    %Volatility
    
    
    39
    %Dividend yield
    
    
    
 Restricted Stock Awards
   Recent Accounting Pronouncements
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
  
 Item 4. Controls and Procedures
   33




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
    General economic weakness and geopolitical factors may harm our operating results and
financial condition.
 We depend entirely on independent foundry subcontractors to manufacture our semiconductor
products; accordingly, any failure to secure and maintain sufficient foundry capacity could
materially and adversely affect our business.
   
    
    a lack of guaranteed wafer supply and potential wafer shortages and higher wafer prices;
    
    limited control over delivery schedules, quality assurance, manufacturing yields and production costs; and
    
    the unavailability of, or potential delays in obtaining access to, key process technologies.
  34




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##### Table of Contents



Our target markets are characterized by rapid technological change.
 We operate in highly competitive markets.
 We are dependent on a limited number of customers.
  
    
    we do not win new product designs from major existing customers;
    
    major customers reduce or cancel their existing business with us;
    
    major customers make significant changes in scheduled deliveries; or
    
    there are declines in the prices of products that we sell to these customers.
 35




---



##### Table of Contents



We are potentially subject to credit risk from accounts receivable.
 Our new products may not achieve market acceptance.
 The storage manufacturing facility we operate is complex
 
    
    maintain a competitive manufacturing cost structure;
    
    exercise stringent quality control measures to ensure high yields;
    
    effectively manage the subcontractors engaged in the wafer fabrication, test and assembly of products; and
    
    update equipment and facilities as required for leading edge production capabilities.
 We procure parts and raw materials from a limited number of domestic and foreign sources.
 We utilize indirect channels of distribution over which we have limited control.
 We engage in acquisitions and alliances giving rise to financial and technological risks.
  36




---



##### Table of Contents



.
 The price of our securities may be subject to wide fluctuations.
 We may rely on capital and bank markets to provide liquidity.
 We design and develop highly complex semiconductors and storage systems.
 The high technology industry in which we operate is prone to intellectual property litigation.
   37




---



##### Table of Contents



We may not be able to adequately protect or enforce our intellectual property rights, which
could harm our competitive position.
  Our Storage Systems manufacturing facility is subject to disruption
 We depend on third-party subcontractors to assemble, obtain packaging materials for, and test
substantially all of our current semiconductor products. If we lose the services of any of our
subcontractors or if these subcontractors are unable to obtain sufficient packaging materials,
shipments of our products may be disrupted, which could harm our customer relationships and
adversely affect our revenues.
  We depend on third-party subcontractors to manufacture all of our current board products.
 38




---



##### Table of Contents



We are increasingly exposed to various legal, business, political and economic risks
associated with our international operations.
 
    
    political, social and economic instability;
    
    exposure to different legal standards, particularly with respect to intellectual property;
    
    natural disasters and public health emergencies;
    
    nationalization of business and blocking of cash flows;
    
    trade and travel restrictions;
    
    the imposition of governmental controls and restrictions;
    
    burdens of complying with a variety of foreign laws;
    
    import and export license requirements and restrictions of the United States and each
other country in which we operate;
    
    unexpected changes in regulatory requirements;
    
    foreign technical standards;
    
    changes in tariffs;
    
    difficulties in staffing and managing international operations;
    
    fluctuations in currency exchange rates;
    
    difficulties in collecting receivables from foreign entities or delayed revenue recognition; and
    
    potentially adverse tax consequences.
  We are exposed to fluctuations in foreign currency exchange rates.
 39




---



##### Table of Contents



We must attract and retain key employees in a highly competitive environment.
 The adoption of new accounting standards related to the expensing of stock awards adversely
affected our results for the six months ended July 2, 2006 and is expected to negatively impact the
results of operations in subsequent periods. Future changes in financial accounting standards or
practices or existing taxation rules or practices may also cause adverse unexpected fluctuations
and affect our reported results of operations.
  We face uncertainties related to the effectiveness of internal controls.
  Internal control deficiencies or weaknesses that are not yet identified could emerge.
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  40




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##### Table of Contents



Item 4. Submission of Matters to a Vote of Security Holder.
  Proposal 1.
    
    To elect seven directors to serve for the ensuing year and until their successors
are elected.
 Director
    
    Votes For
    
    Votes WithheldT.Z. Chu
    
    
    333,599,121
    
    
    
    8,508,438Malcolm R. Currie
    
    
    325,899,296
    
    
    
    16,208,263James H. Keyes
    
    
    328,630,524
    
    
    
    13,477,035R. Douglas Norby
    
    
    310,768,266
    
    
    
    31,339,293Matthew J. ORourke
    
    
    328,787,067
    
    
    
    13,320,492Gregorio Reyes
    
    
    330,371,492
    
    
    
    11,736,067Abhijit Y. Talwalkar
    
    
    335,204,217
    
    
    
    6,903,342
 Proposal 2.
    
    To approve an amendment to the Companys Employee Stock Purchase Plan to increase
the number of shares of common stock reserved for issuance thereunder by 9,000,000.
 Votes For
    
    Votes Against
    
    Abstentions
    
    Broker Non-Votes210,657,061
    
    19,378,803
    
    2,766,824
    
    109,304,871
 Proposal 3.
    
    To approve an amendment to the Companys International Employee Stock Purchase
Plan to increase the number of shares of common stock reserved for issuance thereunder
by 1,000,000.
 Votes For
    
    Votes Against
    
    Abstentions
    
    Broker Non-Votes210,551,743
    
    19,423,440
    
    2,827,506
    
    109,304,870
 Proposal 4.
    
    To ratify the appointment of PricewaterhouseCoopers LLP as the independent
registered public accounting firm of the Company for its 2006 fiscal year.
 Votes For
    
    Votes Against
    
    Abstentions
    
    Broker Non-Votes333,316,584
    
    6,309,584
    
    2,481,391
    
    
 
 Item 5. Other Matters
  41




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##### Table of Contents



Item 6. Exhibits
 10.55
    
    Wafer Supply and Test Services Agreement between LSI Logic Corporation and Semiconductor
Components Industries, LLC, as of May 16, 2006. Incorporated by reference to exhibit filed
with the Quarterly Report on Form 10-Q on April 27, 2006 by ON Semiconductor Corporation.+10.56
    
    Letter Agreement dated June 13, 2005 between LSI Logic Corporation and Wilfred J.
Corrigan.31.1
    
    Certification of the Chief Executive Officer pursuant to Securities and Exchange Act Rules
13a-15(e) and 15d-1(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of the Chief Financial Officer pursuant to Securities Exchange Act Rules
13a-15(e) and 15d-1(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**32.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
 
 +
    
    Schedules to this exhibit not filed herewith shall be furnished to the SEC upon request.
Portions of this exhibit have been omitted pursuant to a request for confidential treatment.**
    
    Furnished not filed. 42




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##### Table of Contents



SIGNATURES
  LSI LOGIC CORPORATION(Registrant)Date: August 10, 2006
    
    By
    
    /s/ Bryon LookBryon LookExecutive Vice President &Chief Financial Officer
 43




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##### Table of Contents



INDEX TO EXHIBITS
 10.55
    
    Wafer Supply and Test Services Agreement between LSI Logic Corporation and Semiconductor
Components Industries, LLC, as of May 16, 2006. Incorporated by reference to exhibit filed
with the Quarterly Report on Form 10-Q on April 27, 2006 by ON Semiconductor Corporation.+10.56
    
    Letter Agreement dated June 13, 2005 between LSI Logic Corporation and Wilfred J.
Corrigan31.1
    
    Certification of the Chief Executive Officer pursuant to Securities and Exchange Act Rules
13a-15(e) and 15d-1(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of the Chief Financial Officer pursuant to Securities and Exchange Act Rules
13-15(e) and 15d-1(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**32.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
 
 +
    
    Schedules to this exhibit not filed herewith shall be furnished to the SEC upon request.
Portions of this exhibit have been omitted pursuant to a request for confidential treatment.**
    
    Furnished not filed. 44