##### 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] |  | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934

For the Quarter Ended June 30, 2002

OR

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

For the transition period from _______ to ________

Commission File Number: 0-11674



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LSI LOGIC CORPORATION

(Exact name of registrant as specified in its charter)


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

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

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



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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

YES [X]    NO [   ]

As of August 2, 2002, there were 371,838,370 shares of the registrants
Common Stock, $.01 par value, outstanding.





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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 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES   
|EXHIBIT INDEX
|EXHIBIT 99.1 
|EXHIBIT 99.2 



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##### Table of Contents



LSI LOGIC CORPORATION
Form 10-Q
For the Quarter Ended June 30, 2002
INDEX

|                               |  |                                                                                           |  |     
|------------------------------ |  | ----------------------------------------------------------------------------------------- |  | ----
|                               |  |                                                                                           |  | Page
|                               |  |                                                                                           |  | No. 
|                               |  |                                                                                           |  |     
|PART  I. FINANCIAL INFORMATION
|                              
|Item 1                         |  | Financial Statements                                                                      |  |     
|                              
|                               |  | Consolidated Balance Sheets  June 30, 2002 and December 31, 2001                         |  | 3   
|                              
|                               |  | Consolidated Statements of Operations  Three and Six Months Ended June 30, 2002 and 2001 |  | 4   
|                              
|                               |  | Consolidated Statements of Cash Flows  Six Months Ended June 30, 2002 and 2001           |  | 5   
|                              
|                               |  | Notes to Consolidated Financial Statements                                                |  | 6   
|                              
|Item 2                         |  | Managements Discussion and Analysis of Financial Condition and Results of Operations     |  | 14  
|                              
|Item 3                         |  | Quantitative and Qualitative Disclosures About Market Risk                                |  | 24  
|                              
|PART II. OTHER INFORMATION    
|                              
|Item 1                         |  | Legal Proceedings                                                                         |  | 25  
|                              
|Item 6                         |  | Exhibits and Reports on Form 8-K                                                          |  | 25  

2



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##### Table of Contents






PART I




Item 1. Financial Statements




LSI LOGIC CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

|                                                                                                  |                                                          |      |           |           |              |   |           |           | 
|------------------------------------------------------------------------------------------------- | -------------------------------------------------------- | ---- | --------- | --------- | ------------ | - | --------- | --------- | 
|                                                                                                  |                                                          |      | June 30,  |           | December 31,
|(In thousands, except per-share amounts)                                                          |                                                          | 2002 |           | 2001     
|                                                                                                  |                                                          |      |           |          
|Assets                                                                                            |                                                          |      |           |           |              |   |           |          
|Cash and cash equivalents                                                                         |                                                          | $    | 445,942   |           |              | $ | 757,138   |          
|Short-term investments                                                                            |                                                          |      | 562,606   |           |              |   | 256,169   |          
|Accounts receivable, less allowances of $8,484 and $20,151                                        |                                                          |      | 244,659   |           |              |   | 191,731   |          
|Inventories                                                                                       |                                                          |      | 197,828   |           |              |   | 256,629   |          
|Deferred tax assets                                                                               |                                                          |      | 161,231   |           |              |   | 160,371   |          
|Prepaid expenses and other current assets                                                         |                                                          |      | 150,044   |           |              |   | 146,930   |          
|                                                                                                  |                                                          |      |           |           |              |   |           |          
|                                                                                                  | Total current assets                                     |      |           | 1,762,310 |              |   |           | 1,768,968 | 
|Property and equipment, net                                                                       |                                                          |      | 819,274   |           |              |   | 944,374   |          
|Goodwill and other intangibles (Note 2)                                                           |                                                          |      | 1,252,115 |           |              |   | 1,297,542 |          
|Deferred tax assets                                                                               |                                                          |      | 110,789   |           |              |   | 107,957   |          
|Non-current assets and deposits                                                                   |                                                          |      | 287,023   |           |              |   | 296,265   |          
|Investment in available-for-sale securities                                                       |                                                          |      | 60,611    |           |              |   | 78,433    |          
|Other assets                                                                                      |                                                          |      | 135,319   |           |              |   | 132,233   |          
|                                                                                                  |                                                          |      |           |           |              |   |           |          
|                                                                                                  | Total assets                                             |      | $         | 4,427,441 |              |   | $         | 4,625,772 | 
|                                                                                                  |                                                          |      |           |           |              |   |           |          
|Liabilities and Stockholders Equity                                                              |                                                          |      |           |           |              |   |           |          
|Accounts payable                                                                                  |                                                          | $    | 95,756    |           |              | $ | 136,739   |          
|Accrued salaries, wages and benefits                                                              |                                                          |      | 70,978    |           |              |   | 72,260    |          
|Other accrued liabilities                                                                         |                                                          |      | 244,063   |           |              |   | 227,467   |          
|Income tax payable                                                                                |                                                          |      | 67,949    |           |              |   | 73,187    |          
|Current portion of long-term obligations                                                          |                                                          |      | 342       |           |              |   | 332       |          
|                                                                                                  |                                                          |      |           |           |              |   |           |          
|                                                                                                  | Total current liabilities                                |      |           | 479,088   |              |   |           | 509,985   | 
|Deferred tax liabilities                                                                          |                                                          |      | 174,072   |           |              |   | 173,759   |          
|Long term debt and capital lease obligations                                                      |                                                          |      | 1,334,297 |           |              |   | 1,335,806 |          
|Other non-current liabilities                                                                     |                                                          |      | 111,795   |           |              |   | 120,470   |          
|                                                                                                  |                                                          |      |           |           |              |   |           |          
|                                                                                                  | Total long-term obligations and deferred tax liabilities |      |           | 1,620,164 |              |   |           | 1,630,035 | 
|                                                                                                  |                                                          |      |           |           |              |   |           |          
|Commitments and contingencies (Note 12)                                                           |                                                          |      |           |           |              |   |           |          
|Minority interest in subsidiary                                                                   |                                                          |      | 6,711     |           |              |   | 5,867     |          
|                                                                                                  |                                                          |      |           |           |              |   |           |          
|Stockholders equity:                                                                             |                                                          |      |           |           |              |   |           |          
|Preferred shares; $.01 par value; 2,000 shares authorized                                         |                                                          |      |          |           |              |   |          |          
|Common stock; $.01 par value; 1,300,000 shares
authorized; 371,772 and 368,446 shares outstanding |                                                          |      | 3,718     |           |              |   | 3,684     |          
|Additional paid-in capital                                                                        |                                                          |      | 2,935,711 |           |              |   | 2,905,638 |          
|Deferred stock compensation                                                                       |                                                          |      | (76,493   | )         |              |   | (124,091  | )        
|Accumulated deficit                                                                               |                                                          |      | (553,847  | )         |              |   | (319,803  | )        
|Accumulated other comprehensive income                                                            |                                                          |      | 12,389    |           |              |   | 14,457    |          
|                                                                                                  |                                                          |      |           |           |              |   |           |          
|                                                                                                  | Total stockholders equity                               |      |           | 2,321,478 |              |   |           | 2,479,885 | 
|                                                                                                  |                                                          |      |           |           |              |   |           |          
|                                                                                                  | Total liabilities and stockholders equity               |      | $         | 4,427,441 |              |   | $         | 4,625,772 | 
|                                                                                                  |                                                          |      |           |           |              |   |           |          

See notes to unaudited consolidated financial statements.

3



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LSI LOGIC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

|                                            |          |                                                                 |                          |       |         |                    |          |                  |         |         |          |       |         |           |          |       |         |           |  | 
|------------------------------------------- | -------- | --------------------------------------------------------------- | ------------------------ | ----- | ------- | ------------------ | -------- | ---------------- | ------- | ------- | -------- | ----- | ------- | --------- | -------- | ----- | ------- | --------- |  | 
|                                            |          |                                                                 |                          |       |         | Three Months Ended |          | Six Months Ended
|                                            |          |                                                                 |                          |       |         | June 30,           |          | June 30,        
|                                            |          |                                                                 |                          |       |         |                    |          |                 
|(In thousands, except per share amounts)    |          | 2002                                                            |                          | 2001  |         | 2002               |          | 2001            
|                                            |          |                                                                 |                          |       |         |                    |          |                 
|Revenues                                    |          | $                                                               | 437,768                  |       |         | $                  | 465,219  |                  |         | $       | 850,277  |       |         | $         | 982,418  |      
|                                            |          |                                                                 |                          |       |         |                    |          |                  |         |         |          |       |         |           |          |      
|Costs and expenses:                         |          |                                                                 |                          |       |         |                    |          |                  |         |         |          |       |         |           |          |      
|                                            |          | Cost of revenues                                                |                          |       | 269,632 |                    |          |                  | 284,759 |         |          |       | 535,541 |           |          |       | 595,904 |          
|                                            |          | Additional excess inventory charges                             |                          |       | 4,772   |                    |          |                  | 108,026 |         |          |       | 45,526  |           |          |       | 108,026 |          
|                                            |          | Research and development                                        |                          |       | 112,833 |                    |          |                  | 127,412 |         |          |       | 227,176 |           |          |       | 246,179 |          
|                                            |          | Selling, general and administrative                             |                          |       | 57,366  |                    |          |                  | 77,480  |         |          |       | 115,546 |           |          |       | 156,451 |          
|                                            |          | Acquired in-process research and development                    |                          |       |        |                    |          |                  | 77,500  |         |          |       |        |           |          |       | 77,500  |          
|                                            |          | Restructuring of operations and other non-
recurring items, net |                          |       | (6,405  | )                  |          |                  | 59,839  |         |          |       | 58,655  |           |          |       | 59,839  |          
|                                            |          | Amortization of non-cash deferred stock
compensation (*)        |                          |       | 23,849  |                    |          |                  | 27,840  |         |          |       | 50,770  |           |          |       | 49,107  |          
|                                            |          | Amortization of intangibles                                     |                          |       | 19,147  |                    |          |                  | 43,469  |         |          |       | 38,304  |           |          |       | 70,558  |          
|                                            |          |                                                                 |                          |       |         |                    |          |                  |         |         |          |       |         |           |          |      
|                                            |          |                                                                 | Total costs and expenses |       |         | 481,194            |          |                  |         | 806,325 |          |       |         | 1,071,518 |          |       |         | 1,363,564 | 
|                                            |          |                                                                 |                          |       |         |                    |          |                  |         |         |          |       |         |           |          |      
|Loss from operations                        |          |                                                                 | (43,426                  | )     |         |                    | (341,106 | )                |         |         | (221,241 | )     |         |           | (381,146 | )    
|Interest expense                            |          |                                                                 | (15,486                  | )     |         |                    | (9,864   | )                |         |         | (31,320  | )     |         |           | (19,804  | )    
|Interest income and other, net              |          |                                                                 | 2,621                    |       |         |                    | 3,742    |                  |         |         | 6,267    |       |         |           | 18,023   |      
|                                            |          |                                                                 |                          |       |         |                    |          |                  |         |         |          |       |         |           |          |      
|Loss before income taxes                    |          |                                                                 | (56,291                  | )     |         |                    | (347,228 | )                |         |         | (246,294 | )     |         |           | (382,927 | )    
|Provision/(benefit) for income taxes        |          |                                                                 | 6,000                    |       |         |                    | (34,747  | )                |         |         | (12,250  | )     |         |           | (39,198  | )    
|                                            |          |                                                                 |                          |       |         |                    |          |                  |         |         |          |       |         |           |          |      
|Net loss                                    |          | $                                                               | (62,291                  | )     |         | $                  | (312,481 | )                |         | $       | (234,044 | )     |         | $         | (343,729 | )    
|                                            |          |                                                                 |                          |       |         |                    |          |                  |         |         |          |       |         |           |          |      
|Loss per share:                             |          |                                                                 |                          |       |         |                    |          |                  |         |         |          |       |         |           |          |      
|                                            |          | Basic                                                           |                          | $     | (0.17   | )                  |          | $                | (0.91   | )       |          | $     | (0.63   | )         |          | $     | (1.03   | )        
|                                            |          |                                                                 |                          |       |         |                    |          |                  |         |         |          |       |         |           |          |      
|                                            | Dilutive |                                                                 | $                        | (0.17 | )       |                    | $        | (0.91            | )       |         | $        | (0.63 | )       |           | $        | (1.03 | )      
|                                            |          |                                                                 |                          |       |         |                    |          |                  |         |         |          |       |         |           |          |      
|Shares used in computing per share amounts: |          |                                                                 |                          |       |         |                    |          |                  |         |         |          |       |         |           |          |      
|                                            |          | Basic                                                           |                          |       | 369,672 |                    |          |                  | 344,873 |         |          |       | 368,769 |           |          |       | 332,728 |          
|                                            |          |                                                                 |                          |       |         |                    |          |                  |         |         |          |       |         |           |          |      
|                                            |          | Dilutive                                                        |                          |       | 369,672 |                    |          |                  | 344,873 |         |          |       | 368,769 |           |          |       | 332,728 |          
|                                            |          |                                                                 |                          |       |         |                    |          |                  |         |         |          |       |         |           |          |      



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

|                                    |  |                             |        |                           |  |      |        |      |  |   |        |  |  |   |        | 
|----------------------------------- |  | --------------------------- | ------ | ------------------------- |  | ---- | ------ | ---- |  | - | ------ |  |  | - | ------ | 
|                                    |  | Three months ended June 30, |        | Six months ended June 30,
|                                    |  |                             |        |                          
|                                    |  | 2002                        |        | 2001                      |  | 2002 |        | 2001
|                                    |  |                             |        |                           |  |      |        |     
|Cost of revenues                    |  | $                           | 444    |                           |  | $    | 685    |      |  | $ | 994    |  |  | $ | 848    | 
|Research and development            |  |                             | 18,580 |                           |  |      | 19,625 |      |  |   | 38,899 |  |  |   | 36,707 | 
|Selling, general and administrative |  |                             | 4,825  |                           |  |      | 7,530  |      |  |   | 10,877 |  |  |   | 11,552 | 

See notes to unaudited consolidated financial statements.

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LSI LOGIC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

|                                                             |                                                                                                                 |      |                                   |          |                  |         |          |          |   |         |  
|------------------------------------------------------------ | --------------------------------------------------------------------------------------------------------------- | ---- | --------------------------------- | -------- | ---------------- | ------- | -------- | -------- | - | ------- | -
|                                                             |                                                                                                                 |      |                                   |          | Six Months Ended
|                                                             |                                                                                                                 |      |                                   |          | June 30,        
|                                                             |                                                                                                                 |      |                                   |          |                 
|(In thousands)                                               |                                                                                                                 | 2002 |                                   | 2001    
|                                                             |                                                                                                                 |      |                                   |         
|Operating activities:                                        |                                                                                                                 |      |                                   |          |                  |         |          |         
|Net loss                                                     |                                                                                                                 | $    | (234,044                          | )        |                  | $       | (343,729 | )       
|Adjustments:                                                 |                                                                                                                 |      |                                   |          |                  |         |          |         
|                                                             | Depreciation and amortization                                                                                   |      |                                   | 175,928  |                  |         |          | 243,614  |  
|                                                             | Amortization of non-cash deferred stock compensation                                                            |      |                                   | 50,770   |                  |         |          | 49,107   |  
|                                                             | Acquired in-process research and development                                                                    |      |                                   |         |                  |         |          | 77,500   |  
|                                                             | Non-cash restructuring and non-recurring items, net                                                             |      |                                   | 49,598   |                  |         |          | 54,215   |  
|                                                             | Changes in working capital components, net of assets acquired and liabilities
assumed in business combinations: |      |                                   |          |                  |         |          |          |  
|                                                             |                                                                                                                 |      | Accounts receivable, net          |          |                  | (49,577 | )        |          |   | 237,013 |  
|                                                             |                                                                                                                 |      | Inventories, net                  |          |                  | 61,115  |          |          |   | (54,763 | )
|                                                             |                                                                                                                 |      | Prepaid expenses and other assets |          |                  | (9,960  | )        |          |   | (48,477 | )
|                                                             |                                                                                                                 |      | Accounts payable                  |          |                  | (41,398 | )        |          |   | (91,166 | )
|                                                             |                                                                                                                 |      | Accrued and other liabilities     |          |                  | (12,366 | )        |          |   | (19,349 | )
|                                                             |                                                                                                                 |      |                                   |          |                  |         |          |         
|                                                             | Net cash (used in)/ provided by operating activities                                                            |      |                                   | (9,934   | )                |         |          | 103,965  |  
|                                                             |                                                                                                                 |      |                                   |          |                  |         |          |         
|Investing activities:                                        |                                                                                                                 |      |                                   |          |                  |         |          |         
|                                                             | Purchase of debt and equity securities available-for-sale                                                       |      |                                   | (947,636 | )                |         |          | (934,197 | )
|                                                             | Maturities and sales of debt and equity securities available-for-sale                                           |      |                                   | 627,823  |                  |         |          | 949,613  |  
|                                                             | Purchases of property and equipment, net of retirements                                                         |      |                                   | (12,148  | )                |         |          | (125,635 | )
|                                                             | Increase in non-current assets and deposits                                                                     |      |                                   | 236      |                  |         |          |         |  
|                                                             | Acquisition of companies, net of cash acquired                                                                  |      |                                   |         |                  |         |          | 43,979   |  
|                                                             |                                                                                                                 |      |                                   |          |                  |         |          |         
|                                                             | Net cash used in investing activities                                                                           |      |                                   | (331,725 | )                |         |          | (66,240  | )
|                                                             |                                                                                                                 |      |                                   |          |                  |         |          |         
|Financing activities:                                        |                                                                                                                 |      |                                   |          |                  |         |          |         
|                                                             | Repayment of debt obligations                                                                                   |      |                                   | (191     | )                |         |          | (869     | )
|                                                             | Issuance of common stock, net                                                                                   |      |                                   | 26,589   |                  |         |          | 44,367   |  
|                                                             |                                                                                                                 |      |                                   |          |                  |         |          |         
|                                                             | Net cash provided by financing activities                                                                       |      |                                   | 26,398   |                  |         |          | 43,498   |  
|                                                             |                                                                                                                 |      |                                   |          |                  |         |          |         
|Effect of exchange rate changes on cash and cash equivalents |                                                                                                                 |      | 4,065                             |          |                  |         | 791      |         
|                                                             |                                                                                                                 |      |                                   |          |                  |         |          |         
|(Decrease)/ increase in cash and cash equivalents            |                                                                                                                 |      | (311,196                          | )        |                  |         | 82,014   |         
|                                                             |                                                                                                                 |      |                                   |          |                  |         |          |         
|Cash and cash equivalents at beginning of period             |                                                                                                                 |      | 757,138                           |          |                  |         | 235,895  |         
|                                                             |                                                                                                                 |      |                                   |          |                  |         |          |         
|Cash and cash equivalents at end of period                   |                                                                                                                 | $    | 445,942                           |          |                  | $       | 317,909  |         
|                                                             |                                                                                                                 |      |                                   |          |                  |         |          |         

The Company paid $28 million and $18 million in
interest for the six months ended June 30, 2002 and 2001, respectively.

See notes to unaudited consolidated financial statements.

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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, additional excess
inventory and other related charges, and restructuring and other non-recurring
items, net as discussed in Note 3), 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 June 30, 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 Storage
Systems.

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

|                               |                  |                 |                    |                    |         |                 |          |                   |   |                 |           |              |         |         |          |   |   |          |          |  
|------------------------------ | ---------------- | --------------- | ------------------ | ------------------ | ------- | --------------- | -------- | ----------------- | - | --------------- | --------- | ------------ | ------- | ------- | -------- | - | - | -------- | -------- | -
|                               |                  |                 |                    |                    |         | June 30, 2002   |          | December 31, 2001
|                               |                  |                 |                    |                    |         |                 |          |                  
|                               |                  |                 |                    |                    |         | Gross           |          | Accumulated       |   | Gross           |           | Accumulated 
|                               |                  |                 |                    |                    |         | Carrying Amount |          | Amortization      |   | Carrying Amount |           | Amortization
|                               |                  |                 |                    |                    |         |                 |          |                   |   |                 |           |             
|Unamortized intangible assets: |                  |                 |                    |                    |         |                 |          |                   |   |                 |           |              |         |         |          |  
|                               |                  | Semiconductor   |                    | $                  | 892,057 |                 |          | $                 |  |                 |           | $            | 899,180 |         |          | $ |  |         
|                               |                  | Storage Systems |                    |                    | 53,000  |                 |          |                   |  |                 |           |              | 53,000  |         |          |   |  |         
|                               |                  |                 |                    |                    |         |                 |          |                   |   |                 |           |              |         |         |          |  
|                               |                  |                 |                    | Total goodwill (a) |         |                 | 945,057  |                   |   |                 |          |              |         |         | 952,180  |   |   |          |         |  
|Amortized intangible assets:   |                  |                 |                    |                    |         |                 |          |                   |   |                 |           |              |         |         |          |  
|                               | Semiconductor:   |                 |                    |                    |         |                 |          |                   |   |                 |           |              |         |         |          |   |  
|                               |                  |                 | Current technology |                    |         | 374,513         |          |                   |   | (131,505        | )         |              |         | 374,513 |          |   |   | (100,538 | )       
|                               |                  |                 | Trademarks         |                    |         | 37,347          |          |                   |   | (10,693         | )         |              |         | 37,347  |          |   |   | (7,797   | )       
|                               |                  |                 |                    |                    |         |                 |          |                   |   |                 |           |              |         |         |          |  
|                               |                  |                 |                    | Subtotal           |         |                 | 411,860  |                   |   |                 | (142,198  | )            |         |         | 411,860  |   |   |          | (108,335 | )
|                               | Storage Systems: |                 |                    |                    |         |                 |          |                   |   |                 |           |              |         |         |          |   |  
|                               |                  |                 | Current technology |                    |         | 56,490          |          |                   |   | (24,622         | )         |              |         | 56,490  |          |   |   | (20,817  | )       
|                               |                  |                 | Trademarks         |                    |         | 3,500           |          |                   |   | (1,716          | )         |              |         | 3,500   |          |   |   | (1,498   | )       
|                               |                  |                 | Customer base      |                    |         | 5,010           |          |                   |   | (1,266          | )         |              |         | 5,010   |          |   |   | (848     | )       
|                               |                  |                 |                    |                    |         |                 |          |                   |   |                 |           |              |         |         |          |  
|                               |                  |                 |                    | Subtotal           |         |                 | 65,000   |                   |   |                 | (27,604   | )            |         |         | 65,000   |   |   |          | (23,163  | )
|                               |                  |                 |                    |                    |         |                 |          |                   |   |                 |           |              |         |         |          |  
|Total                          |                  | $               | 1,421,917          |                    |         | $               | (169,802 | )                 |   | $               | 1,429,040 |              |         | $       | (131,498 | )
|                               |                  |                 |                    |                    |         |                 |          |                   |   |                 |           |              |         |         |          |   |   |         



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

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Amortization expense (in thousands):

|                   |  |                             |        |                           |  |      |        |      |  |   |        |  |  |   |        | 
|------------------ |  | --------------------------- | ------ | ------------------------- |  | ---- | ------ | ---- |  | - | ------ |  |  | - | ------ | 
|                   |  | Three Months Ended June 30, |        | Six Months Ended June 30,
|                   |  |                             |        |                          
|                   |  | 2002                        |        | 2001                      |  | 2002 |        | 2001
|                   |  |                             |        |                           |  |      |        |     
|Goodwill           |  | $                           |       |                           |  | $    | 30,887 |      |  | $ |       |  |  | $ | 47,595 | 
|Current technology |  |                             | 17,381 |                           |  |      | 11,353 |      |  |   | 34,772 |  |  |   | 20,982 | 
|Trademarks         |  |                             | 1,557  |                           |  |      | 1,020  |      |  |   | 3,114  |  |  |   | 1,563  | 
|Customer base      |  |                             | 209    |                           |  |      | 209    |      |  |   | 418    |  |  |   | 418    | 
|                   |  |                             |        |                           |  |      |        |      |  |   |        |  |  |   |        | 
|Total              |  | $                           | 19,147 |                           |  | $    | 43,469 |      |  | $ | 38,304 |  |  | $ | 70,558 | 
|                   |  |                             |        |                           |  |      |        |      |  |   |        |  |  |   |        | 

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 June
30, 2002 is as follows (in millions):

|                            |  |         |     | 
|--------------------------- |  | ------- | --- | 
|Fiscal year:                |  | Amount:
|                            |  |        
|2002 (remaining six months) |  | $       | 39  | 
|2003                        |  |         | 77  | 
|2004                        |  |         | 77  | 
|2005                        |  |         | 70  | 
|2006                        |  |         | 40  | 
|2007 and later              |  |         | 4   | 
|                            |  |         |     | 
|                            |  | $       | 307 | 
|                            |  |         |     | 

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

|                                    |  |                             |         |                           |  |      |          |      |  |   |          |   |  |   |          |  
|----------------------------------- |  | --------------------------- | ------- | ------------------------- |  | ---- | -------- | ---- |  | - | -------- | - |  | - | -------- | -
|(in thousands)                      |  |                             |         |                           |  |      |          |      |  |   |          |   |  |   |          |  
|                                    |  | Three Months Ended June 30, |         | Six Months Ended June 30,
|                                    |  |                             |         |                          
|                                    |  | 2002                        |         | 2001                      |  | 2002 |          | 2001
|                                    |  |                             |         |                           |  |      |          |     
|Net loss, as reported               |  | $                           | (62,291 | )                         |  | $    | (312,481 | )    |  | $ | (234,044 | ) |  | $ | (343,729 | )
|Add back goodwill amortization      |  |                             |        |                           |  |      | 30,887   |      |  |   |         |   |  |   | 47,595   |  
|                                    |  |                             |         |                           |  |      |          |      |  |   |          |   |  |   |          |  
|Pro forma net loss                  |  |                             | (62,291 | )                         |  |      | (281,594 | )    |  |   | (234,044 | ) |  |   | (296,134 | )
|                                    |  |                             |         |                           |  |      |          |      |  |   |          |   |  |   |          |  
|Basic loss per share, as reported   |  |                             | (0.17   | )                         |  |      | (0.91    | )    |  |   | (0.63    | ) |  |   | (1.03    | )
|Add back goodwill amortization      |  |                             |        |                           |  |      | 0.09     |      |  |   |         |   |  |   | 0.14     |  
|                                    |  |                             |         |                           |  |      |          |      |  |   |          |   |  |   |          |  
|Basic pro forma loss per share      |  |                             | (0.17   | )                         |  |      | (0.82    | )    |  |   | (0.63    | ) |  |   | (0.89    | )
|                                    |  |                             |         |                           |  |      |          |      |  |   |          |   |  |   |          |  
|Diluted loss per share, as reported |  |                             | (0.17   | )                         |  |      | (0.91    | )    |  |   | (0.63    | ) |  |   | (1.03    | )
|Add back goodwill amortization      |  |                             |        |                           |  |      | 0.09     |      |  |   |         |   |  |   | 0.14     |  
|                                    |  |                             |         |                           |  |      |          |      |  |   |          |   |  |   |          |  
|Diluted pro forma loss per share    |  | $                           | (0.17   | )                         |  | $    | (0.82    | )    |  | $ | (0.63    | ) |  | $ | (0.89    | )
|                                    |  |                             |         |                           |  |      |          |      |  |   |          |   |  |   |          |  

NOTE 3  RESTRUCTURING AND OTHER NON-RECURRING ITEMS

The Company recorded a gain of approximately $6 million and a charge of
approximately $59 million in restructuring and other non-recurring items for
the three and six months ended June 30, 2002, respectively. The details of the
restructuring and non-recurring items are discussed further below. The Company
recorded restructuring and non-recurring charges of approximately $60 million
for the second quarter and first half of 2001. For a discussion of
the 2001
restructuring actions, please refer to the Companys Annual
Report on Form 10-K.

Restructuring:

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. In the second quarter of 2002, the Company
completed the sale of the CDMA handset product line to a third party,
recognizing a net gain of approximately $6 million.

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

Assets held for sale of $98 million and $89 million were included as a
component of prepaid expenses and other current assets as of June 30, 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.

The following table sets forth the Companys restructuring reserves as of
June 30, 2002:

|                                                |  |                   |        |                 |  |                  |        |                  |  |               |         |   |  |            |         |   |  |   |        | 
|----------------------------------------------- |  | ----------------- | ------ | --------------- |  | ---------------- | ------ | ---------------- |  | ------------- | ------- | - |  | ---------- | ------- | - |  | - | ------ | 
|                                                |  | Balance at        |        | Restructuring   |  |                  |        |                  |  |               |         |   |  | Balance at
|(In thousands)                                  |  | December 31, 2001 |        | Expense Q1 2002 |  | Utilized Q1 2002 |        | Utilized Q2 2002 |  | June 30, 2002
|                                                |  |                   |        |                 |  |                  |        |                  |  |              
|Write-down of excess assets(a)                  |  | $                 | 3,762  |                 |  | $                | 25,933 |                  |  | $             | (27,623 | ) |  | $          | (765    | ) |  | $ | 1,307  | 
|Lease terminations and maintenance contracts(c) |  |                   | 10,695 |                 |  |                  | 12,871 |                  |  |               | (1,623  | ) |  |            | (1,066  | ) |  |   | 20,877 | 
|Facility closure and other exit costs(c)        |  |                   | 14,153 |                 |  |                  | 415    |                  |  |               | (3,142  | ) |  |            | (2,723  | ) |  |   | 8,703  | 
|Payments to employees for severance(b)          |  |                   | 724    |                 |  |                  | 27,490 |                  |  |               | (10,352 | ) |  |            | (9,932  | ) |  |   | 7,930  | 
|                                                |  |                   |        |                 |  |                  |        |                  |  |               |         |   |  |            |         |   |  |   |        | 
|Total                                           |  | $                 | 29,334 |                 |  | $                | 66,709 |                  |  | $             | (42,740 | ) |  | $          | (14,486 | ) |  | $ | 38,817 | 
|                                                |  |                   |        |                 |  |                  |        |                  |  |               |         |   |  |            |         |   |  |   |        | 



|(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 $3.1 million. The
fixed asset write-downs were accounted for as a reduction of the assets
and did not result in a liability. The $1.3 million balance as of June 30,
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 and 400 employees during the three months ended March
31, 2002 and June 30, 2002, respectively. The $7.9 million balance as of
June 30, 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 CDMA handset
product line held for sale.

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 granted 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 will receive 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 June 30, 2002. The Company transferred technology to Silterra
valued at $2 million and $6 million for the three months ended June 30, 2002
and 2001, respectively and $6 million and $12 million for the six months ended
June 30, 2002 and 2001, respectively. The amount was recorded as an offset to
the Companys R&D expenses.

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NOTE 5  INVESTMENTS

|                                            |                                 |          |         |              |  |   |         |         | 
|------------------------------------------- | ------------------------------- | -------- | ------- | ------------ |  | - | ------- | ------- | 
|(In thousands)                              |                                 | June 30, |         | December 31,
|                                            |                                 | 2002     |         | 2001        
|                                            |                                 |          |         |              | 
|Cash and cash equivalents                   |                                 |          |         |              |  |   |         |        
|Overnight deposits                          |                                 | $        | 73,969  |              |  | $ | 295,439 |        
|Commercial paper                            |                                 |          | 68,833  |              |  |   | 151,793 |        
|Corporate and municipal debt securities     |                                 |          | 45,878  |              |  |   | 9,957   |        
|                                            |                                 |          |         |              |  |   |         |        
|                                            | Total held-to-maturity          |          |         | 188,680      |  |   |         | 457,189 | 
|Cash                                        |                                 |          | 257,262 |              |  |   | 299,949 |        
|                                            |                                 |          |         |              |  |   |         |        
|                                            | Total cash and cash equivalents |          | $       | 445,942      |  |   | $       | 757,138 | 
|                                            |                                 |          |         |              |  |   |         |        
|Available-for-sale                          |                                 |          |         |              |  |   |         |        
|Corporate and municipal debt securities     |                                 | $        | 295,052 |              |  | $ | 191,405 |        
|Commercial paper                            |                                 |          | 17,409  |              |  |   | 19,851  |        
|Auction rate preferred stock                |                                 |          | 9,713   |              |  |   | 29,887  |        
|U.S. government and agency securities       |                                 |          | 137,150 |              |  |   | 15,026  |        
|Asset and mortgage backed securities        |                                 |          | 103,282 |              |  |   |        |        
|                                            |                                 |          |         |              |  |   |         |        
|                                            | Total short-term investments    |          | $       | 562,606      |  |   | $       | 256,169 | 
|                                            |                                 |          |         |              |  |   |         |        
|Investment in available-for-sale securities |                                 | $        | 60,611  |              |  | $ | 78,433  |        
|                                            |                                 |          |         |              |  |   |         |        
|                                            | Total other long-term assets    |          | $       | 60,611       |  |   | $       | 78,433  | 
|                                            |                                 |          |         |              |  |   |         |        
|                                            | Total available-for-sale        |          | $       | 623,217      |  |   | $       | 334,602 | 
|                                            |                                 |          |         |              |  |   |         |        

Unrealized holding gains and losses for held-to-maturity and
available-for-sale debt securities were not significant and accordingly the
amortized cost approximated fair market value at June 30, 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 and six months ended June
30, 2002 and 2001.

An unrealized gain of $6 million, net of the related tax effect of $3
million, and $22 million, net of the related tax effect of $12 million, related
to marketable equity securities was included in accumulated other comprehensive
income as of June 30, 2002 and December 31, 2001, respectively.

NOTE 6  DERIVATIVE FINANCIAL INSTRUMENTS

Foreign currency risk

The Company has foreign subsidiaries that operate and sell the Companys
products in various global markets. As a result, the Company is exposed to
changes in foreign currency exchange rates and interest rates. The Company
utilizes various hedge instruments, primarily forward contracts, interest rate
swap 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 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 June 30, 2002 and December
31, 2001, there was one contract outstanding at each date. The contracts were
each set to expire within one month and were designated as foreign currency
fair-value hedges in accordance with SFAS No. 133. For the three and six months
ended June 30, 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 and six months ended June 30, 2002 and
2001.

The Company also enters into purchased currency option contracts that are
designated as foreign currency cash-flow hedges of third-party yen revenue
exposures. Changes in the fair value of currency option contracts due to
changes in time value are excluded

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from the assessment of effectiveness and are recognized in other income
and expense. As of June 30, 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 six month
period. There were no option contracts outstanding as of December 31, 2001.
For the three and six months ended June 30, 2002 and 2001, the change in option time
value was not significant. There were no unrealized
gains or losses included in accumulated other comprehensive income as of June
30, 2002 or December 31, 2001. The Company did not record any gains or losses
due to hedge ineffectiveness for the three and six months ended June 30, 2002
and 2001.

Forward exchange contracts and options 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.

Interest rate risk

In June 2002, the Company entered into interest rate swap transactions
(the swaps) with various investment banks. The swaps effectively convert
fixed interest payments on the notional amount of $1.085 billion Convertible
Subordinated Notes to LIBOR based floating rates. The swaps were entered into
in order to hedge the fixed rate interest expense on the Companys 4% and 4.25%
Convertible Subordinated Notes (the Notes). Under the terms of the swaps,
the Company must provide collateral to match any mark-to-market exposure on the
swaps. The collateral of approximately $10.9 million was included in
non-current assets as of June 30, 2002. The swaps qualify to be accounted for
as a fair value hedge under the provisions of SFAS No. 133 with changes in the
fair value of the interest rate risk being offset by changes in the fair value of the swaps
through income. The changes in fair value of the interest rate risk and the swaps were not
significant for the three months ended June 30, 2002.

NOTE 7  BALANCE SHEET DETAIL

|                           |                        |      |          |         |              |   |         |         | 
|-------------------------- | ---------------------- | ---- | -------- | ------- | ------------ | - | ------- | ------- | 
|                           |                        |      | June 30, |         | December 31,
|(In thousands)             |                        | 2002 |          | 2001   
|                           |                        |      |          |        
|Inventories:               |                        |      |          |         |              |   |         |        
|                           | Raw materials          |      | $        | 16,022  |              |   | $       | 31,797  | 
|                           | Work-in-process        |      |          | 56,678  |              |   |         | 88,354  | 
|                           | Finished goods         |      |          | 125,128 |              |   |         | 136,478 | 
|                           |                        |      |          |         |              |   |         |        
|                           |                        | $    | 197,828  |         |              | $ | 256,629 |        
|                           |                        |      |          |         |              |   |         |         | 
|Other accrued liabilities: |                        |      |          |         |              |   |         |        
|                           | Accrued expenses       |      | $        | 156,824 |              |   | $       | 158,673 | 
|                           | Sales tax payable      |      |          | 15,225  |              |   |         | 7,044   | 
|                           | Interest payable       |      |          | 15,463  |              |   |         | 14,890  | 
|                           | Restructuring reserves |      |          | 38,817  |              |   |         | 29,334  | 
|                           | Deferred tax liability |      |          | 17,734  |              |   |         | 17,526  | 
|                           |                        |      |          |         |              |   |         |        
|                           |                        | $    | 244,063  |         |              | $ | 227,467 |        
|                           |                        |      |          |         |              |   |         |         | 

10



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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 computations are as follows:

|                                          |                                           |       |                             |         |      |        |         |         |  |         |           |        |   |   |          |          |   |  |         |         |           |   |       |       |  
|----------------------------------------- | ----------------------------------------- | ----- | --------------------------- | ------- | ---- | ------ | ------- | ------- |  | ------- | --------- | ------ | - | - | -------- | -------- | - |  | ------- | ------- | --------- | - | ----- | ----- | -
|                                          |                                           |       | Three Months Ended June 30,
|                                          |                                           |       |                            
|                                          |                                           |       | 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 |                                           | $     | (62,291                     | )       |      |        | 369,672 |         |  | $       | (0.17     | )      |   | $ | (312,481 | )        |   |  | 344,873 |         |           | $ | (0.91 | )    
|                                          |                                           |       |                             |         |      |        |         |         |  |         |           |        |   |   |          |          |   |  |         |         |           |   |       |      
|                                          | Effect of dilutive securities:            |       |                             |        |      |        |         |        |  |         |           |       |   |   |          |         |   |  |         |        |           |   |       |      |  
|Diluted EPS:                              |                                           |       |                             |         |      |        |         |         |  |         |           |        |   |   |          |          |   |  |         |         |           |   |       |      
|                                          | Net loss available to common stockholders |       | $                           | (62,291 | )    |        |         | 369,672 |  |         | $         | (0.17  | ) |   | $        | (312,481 | ) |  |         | 344,873 |           |   | $     | (0.91 | )
|                                          |                                           |       |                             |         |      |        |         |         |  |         |           |        |   |   |          |          |   |  |         |         |           |   |       |      

|                                          |                                           |       |                           |          |      |        |         |         |  |         |           |        |   |   |          |          |   |  |         |         |           |   |       |       |  
|----------------------------------------- | ----------------------------------------- | ----- | ------------------------- | -------- | ---- | ------ | ------- | ------- |  | ------- | --------- | ------ | - | - | -------- | -------- | - |  | ------- | ------- | --------- | - | ----- | ----- | -
|                                          |                                           |       | Six Months Ended June 30,
|                                          |                                           |       |                          
|                                          |                                           |       | 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 |                                           | $     | (234,044                  | )        |      |        | 368,769 |         |  | $       | (0.63     | )      |   | $ | (343,729 | )        |   |  | 332,728 |         |           | $ | (1.03 | )    
|                                          |                                           |       |                           |          |      |        |         |         |  |         |           |        |   |   |          |          |   |  |         |         |           |   |       |      
|                                          | Effect of dilutive securities:            |       |                           |         |      |        |         |        |  |         |           |       |   |   |          |         |   |  |         |        |           |   |       |      |  
|Diluted EPS:                              |                                           |       |                           |          |      |        |         |         |  |         |           |        |   |   |          |          |   |  |         |         |           |   |       |      
|                                          | Net loss available to common stockholders |       | $                         | (234,044 | )    |        |         | 368,769 |  |         | $         | (0.63  | ) |   | $        | (343,729 | ) |  |         | 332,728 |           |   | $     | (1.03 | )
|                                          |                                           |       |                           |          |      |        |         |         |  |         |           |        |   |   |          |          |   |  |         |         |           |   |       |      



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

Options to purchase approximately 74,740,226 shares and 71,395,129 shares
were outstanding at June 30, 2002 and 2001, respectively, and were excluded
from the computation of diluted shares because of their antidilutive effect on
loss per share for the three and six months then ended. The exercise price of
these options ranged from $0.01 to $72.25 at June 30, 2002 and 2001.

For the three and six months ended June 30, 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 and six months ended June 30, 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.
Comprehensive loss, net of taxes for the current reporting period and
comparable period in the prior year is as follows:

|                                                                                                     |  |                             |         |                           |  |      |          |      |  |   |          |   |  |   |          |  
|---------------------------------------------------------------------------------------------------- |  | --------------------------- | ------- | ------------------------- |  | ---- | -------- | ---- |  | - | -------- | - |  | - | -------- | -
|                                                                                                     |  | Three Months Ended June 30, |         | Six Months Ended June 30,
|                                                                                                     |  |                             |         |                          
|(In thousands)                                                                                       |  | 2002                        |         | 2001                      |  | 2002 |          | 2001
|                                                                                                     |  |                             |         |                           |  |      |          |     
|Net loss                                                                                             |  | $                           | (62,291 | )                         |  | $    | (312,481 | )    |  | $ | (234,044 | ) |  | $ | (343,729 | )
|Change in unrealized gain on derivative instruments designated
as and qualifying as cash-flow hedges |  |                             | (2,608  | )                         |  |      | 726      |      |  |   |         |   |  |   | 4,926    |  
|Change in unrealized gain on available for sale securities, net of
tax                               |  |                             | (10,074 | )                         |  |      | 14,362   |      |  |   | (16,267  | ) |  |   | (6,801   | )
|Change in foreign currency translation adjustments                                                   |  |                             | 23,758  |                           |  |      | (3,396   | )    |  |   | 14,199   |   |  |   | (23,531  | )
|                                                                                                     |  |                             |         |                           |  |      |          |      |  |   |          |   |  |   |          |  
|Comprehensive loss                                                                                   |  | $                           | (51,215 | )                         |  | $    | (300,789 | )    |  | $ | (236,112 | ) |  | $ | (369,135 | )
|                                                                                                     |  |                             |         |                           |  |      |          |      |  |   |          |   |  |   |          |  

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NOTE 10  SEGMENT REPORTING

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

The following is a summary of operations by segment for the three and six
months ended June 30, 2002 and 2001:

|                               |                 |       |   |                             |         |                           |   |          |          |   |   |          |          |   |   |          |          |  
|------------------------------ | --------------- | ----- | - | --------------------------- | ------- | ------------------------- | - | -------- | -------- | - | - | -------- | -------- | - | - | -------- | -------- | -
|                               |                 |       |   | Three months ended June 30, |         | Six months ended June 30,
|                               |                 |       |   |                             |         |                          
|(In thousands)                 |                 | 2002  |   | 2001                        |         | 2002                      |   | 2001    
|                               |                 |       |   |                             |         |                           |   |         
|Revenues:                      |                 |       |   |                             |         |                           |   |          |          |   |   |          |          |   |   |         
|                               | Semiconductor   |       | $ | 354,761                     |         |                           | $ | 413,870  |          |   | $ | 707,351  |          |   | $ | 868,859  |         
|                               | Storage Systems |       |   | 83,007                      |         |                           |   | 51,349   |          |   |   | 142,926  |          |   |   | 113,559  |         
|                               |                 |       |   |                             |         |                           |   |          |          |   |   |          |          |   |   |         
|                               |                 | Total |   | $                           | 437,768 |                           |   | $        | 465,219  |   |   | $        | 850,277  |   |   | $        | 982,418  |  
|                               |                 |       |   |                             |         |                           |   |          |          |   |   |          |          |   |   |         
|(Loss)/income from operations: |                 |       |   |                             |         |                           |   |          |          |   |   |          |          |   |   |         
|                               | Semiconductor   |       | $ | (51,879                     | )       |                           | $ | (319,984 | )        |   | $ | (228,592 | )        |   | $ | (351,140 | )       
|                               | Storage Systems |       |   | 8,453                       |         |                           |   | (21,122  | )        |   |   | 7,351    |          |   |   | (30,006  | )       
|                               |                 |       |   |                             |         |                           |   |          |          |   |   |          |          |   |   |         
|                               |                 | Total |   | $                           | (43,426 | )                         |   | $        | (341,106 | ) |   | $        | (221,241 | ) |   | $        | (381,146 | )
|                               |                 |       |   |                             |         |                           |   |          |          |   |   |          |          |   |   |         

Intersegment revenues for the periods presented above were not
significant. Restructuring of operations and other non-recurring items
primarily impacted the Semiconductor segment.

One customer represented 15% and 19% of the Companys total consolidated
revenues for the three months ended June 30, 2002 and 2001, respectively. In
the Semiconductor segment, one customer represented 19% and 21% of total
Semiconductor revenues for the three months ended June 30, 2002 and 2001,
respectively. In the Storage Systems segment, there were three customers with
revenues representing 32%, 22% and 18% of total Storage Systems revenues for
the three months ended June 30, 2002. For the three months ended June 30, 2001,
there were three customers with revenues representing 21%, 17% and 14% and two
customers with revenues representing 11% each of total Storage Systems
revenues.

One customer represented 15% and 17% of the Companys total consolidated
revenues for the six months ended June 30, 2002 and 2001, respectively. In the
Semiconductor segment, one customer represented 18% and 20% of total
Semiconductor revenues for the six months ended June 30, 2002 and 2001,
respectively. In the Storage Systems segment, there were three customers with
revenues representing 33%, 18% and 17% of total Storage Systems revenues for
the six months ended June 30, 2002, respectively. For the six months ended June
30, 2001, there were four customers with revenues representing 20%, 19%, 16%
and 12% of total Storage Systems revenues.

The following is a summary of total assets by segment as of June 30, 2002
and December 31, 2001:

|               |                 |       |   |           |           |              |   |           |           | 
|-------------- | --------------- | ----- | - | --------- | --------- | ------------ | - | --------- | --------- | 
|               |                 |       |   | June 30,  |           | December 31,
|(In thousands) |                 | 2002  |   | 2001     
|               |                 |       |   |          
|Total assets:  |                 |       |   |           |           |              |   |          
|               | Semiconductor   |       | $ | 4,087,915 |           |              | $ | 4,301,326 |          
|               | Storage Systems |       |   | 339,526   |           |              |   | 324,446   |          
|               |                 |       |   |           |           |              |   |          
|               |                 | Total |   | $         | 4,427,441 |              |   | $         | 4,625,772 | 
|               |                 |       |   |           |           |              |   |           |          

Revenues from domestic operations were $227 million, representing 52% of
consolidated revenues for the second quarter of 2002 compared to $256 million,
representing 55% of consolidated revenues for the same period of 2001.

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Revenues from domestic operations were $441 million, representing 52% of
consolidated revenues, for the first half of 2002 compared to $539 million,
representing 55% of consolidated revenues, for the same period of 2001.

NOTE 11  ACQUISITION OF C-CUBE

On May 11, 2001, the Company completed the acquisition
of C-Cube Microsystems, Inc. (C-Cube). The Company issued approximately 40.2 million
shares of its common stock, 10.6 million options and 0.8 million warrants in exchange for
the outstanding ordinary shares, options and warrants of C-Cube. The
fair value of common shares issued was
$18.73 per share. The total purchase price for the acquisition of C-Cube was $893.7 million. For a
discussion of the acquisition of C-Cube, please refer to our Annual
Report on Form 10-K.

The following pro forma summary is provided for illustrative purposes only
and is not necessarily indicative of the consolidated results of
operations for future periods or that actually would have been
realized had the Company and C-Cube been a consolidated entity during
the periods presented. The summary combines the results of operations
as if C-Cube had been acquired as of January 1, 2001.

The summary includes
the impact of certain adjustments such as amortization of intangibles
and non-cash deferred stock compensation. Additionally, the
in-process research and development charge of $77.5 million has
been excluded from the periods presented as it arose from the
acquisition of C-Cube. The restructuring and other non-recurring
charges were included in the pro forma calculation as the charges did
not relate to the acquisition of C-Cube.

|                          |  |                            |          |      |  |   |           |  
|------------------------- |  | -------------------------- | -------- | ---- |  | - | --------- | -
|                          |  | Six Months ended June, 30,
|(Unaudited, in
thousands, |  |                           
|except per share amounts) |  | 2002                       |          | 2001
|                          |  |                            |          |     
|Revenues                  |  | $                          | 850,277  |      |  | $ | 1,000,275 |  
|Net loss                  |  | $                          | (234,044 | )    |  | $ | (324,665  | )
|Basic EPS                 |  | $                          | (0.63    | )    |  | $ | (0.90     | )
|Diluted EPS               |  | $                          | (0.63    | )    |  | $ | (0.90     | )

NOTE 12  COMMITMENTS AND CONTINGENCIES

The Company uses operating leases to finance certain equipment used in its
wafer fabrication facilities. As of June 30, 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 June 30, 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.
As of June 30, 2002, the Company had fully drawn under this
agreement with an outstanding balance of $161 million.

In the third quarter of 2001, the Company amended the master lease and
security agreements entered into in March 2000 and April 2001 as described
above. As of June 30, 2002, there was $287 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 June 30,
2002, the Companys debt contribution of $232 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. The Company
is required to maintain a minimum balance in cash, cash equivalents and
short-term investments of $350 million. The Company was in compliance with this
requirement as of June 30, 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 each in
2004 and 2005. These payments reflect the amendments and as such, exclude any
payments on the Companys debt participation.

NOTE 13  LEGAL MATTERS

Reference is made to
the Companys most recent Form 10-K with respect to
Item 3, Legal Proceedings and the matter pertaining to the
Companys Canadian subsidiary (LSI Canada). During
July 2002, the Company (including LSI Canada) entered into a
negotiated settlement (Settlement) with those parties who
represent a substantial majority of the dissenting shares. As a
result and in accordance with the provisions of the Settlement, the
Court has been asked by the parties to the Settlement to find and so
order that payment by LSI Canada of the proposed all-inclusive
settlement proceeds will fully satisfy the obligation of LSI Canada
to pay fair value for the dissenting shares, that the parties to the
Settlement may bind all other dissenting shares to such result and to
order certain other actions be taken that will cause a full and final
resolution including all claims that are or may be associated with
the matter. The Company does not expect the resolution of this matter
to have a material adverse effect on the Company.

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NOTE 14  ASSET PURCHASE AGREEMENT

In June 2002, the Company entered into an asset purchase agreement to purchase certain tangible and intangible assets of the Mylex
business unit from International Business Machines Corporation. The
transaction is expected to enhance product offerings in the expanding
entry-level storage systems space within the Storage Systems segment and the
PCI-RAID offerings in the Semiconductor segment. The transaction is expected
to close in the third quarter of 2002 pending regulatory reviews and other
closing conditions.




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:



| |  |  | Cyclical nature of the Semiconductor industry and the markets addressed by our products;                                                                 
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Availability and extent of utilization of manufacturing capacity;                                                                                        
|
| |  |  | Disruptions in general economic activity due to worsening global
business conditions or caused by the effects of terrorist activities and
armed conflict;
|
| |  |  | Price erosion;                                                                                                                                           
|
| |  |  | Competitive factors;                                                                                                                                     
|
| |  |  | Timing and success 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 acquisitions, investments and alliance activities; and                                              
|
| |  |  | The ability to develop and implement new technologies.                                                                                                   

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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.

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.

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

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 for the year ended December 31, 2001.

RESULTS OF OPERATIONS

Our results of operations for the three and six months ended June 30, 2002
are as follows:

Revenues:

|                        |  |                    |       |                  |  |               |       |               |  |               |       |  |  |   |       |  |  |   |       | 
|----------------------- |  | ------------------ | ----- | ---------------- |  | ------------- | ----- | ------------- |  | ------------- | ----- |  |  | - | ----- |  |  | - | ----- | 
|                        |  | Three months ended |       | Six months ended
|                        |  |                    |       |                 
|(in millions)           |  | June 30, 2002      |       | March 31, 2002   |  | June 30, 2001 |       | June 30, 2002 |  | June 30, 2001
|                        |  |                    |       |                  |  |               |       |               |  |              
|Semiconductor segment   |  | $                  | 354.8 |                  |  | $             | 352.6 |               |  | $             | 413.9 |  |  | $ | 707.4 |  |  | $ | 868.8 | 
|Storage Systems segment |  |                    | 83.0  |                  |  |               | 59.9  |               |  |               | 51.3  |  |  |   | 142.9 |  |  |   | 113.6 | 
|                        |  |                    |       |                  |  |               |       |               |  |               |       |  |  |   |       |  |  |   |       | 
|Consolidated            |  | $                  | 437.8 |                  |  | $             | 412.5 |               |  | $             | 465.2 |  |  | $ | 850.3 |  |  | $ | 982.4 | 
|                        |  |                    |       |                  |  |               |       |               |  |               |       |  |  |   |       |  |  |   |       | 

Second Quarter of 2002 compared to the First Quarter of 2002

Total consolidated revenues for the second quarter of 2002 increased $25.3
million or 6% from the first quarter of 2002. Revenues for the Semiconductor
segment increased $2.2 million or 1% for the second quarter of 2002 as compared
to the first quarter of 2002. The increase for the Semiconductor segment was
primarily attributable to growth in the demand for products used in ASIC and
broadband entertainment applications, offset in part by declines in demand for
products used in networking and storage infrastructure applications.
Generally, revenues for products used in broadband entertainment applications
are seasonally lower in the first quarter of our fiscal year as compared to
other quarters. Revenues for the Storage Systems segment increased $23.1
million or 39% from the first quarter of 2002. The increase is primarily due
to increased sales of products to a new master distributor and sales to
original equipment manufacturers.

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Second Quarter and first half of 2002 compared to the same periods of 2001

Total consolidated revenues for the second quarter of 2002 decreased $27.4
million or 6% compared to the second quarter of 2001. Revenues for the
Semiconductor segment decreased $59.1 million or 14% for the second quarter of
2002 as compared to the same period of the previous year. Total consolidated
revenues for the first half of 2002 decreased $132.1 million or 13% from the
same period of 2001 while Semiconductor revenues decreased $161.4 million or
19% for the first half of 2002 compared to the same period of the previous
year. The decrease for the 2002 periods was primarily attributable to
decreased sales of products used in ASIC entertainment, broadband access,
networking and storage infrastructure applications. This decline in demand was
offset in part by revenues from products used in broadband entertainment
applications, which became a part of the Semiconductor segment with the
acquisition of C-Cube in the second quarter of 2001, and revenues from RAID
products, which became a part of the Semiconductor segment with the acquisition
of the RAID business of AMI in the third quarter of 2001.

Revenues for the Storage Systems segment increased $31.7 million or 62%
for the second quarter of 2002 from the same period of 2001. Revenues for this
segment increased $29.3 million or 26% for the first half of 2002 from the same
period of 2001. The increases for the three and six months ended June 30, 2002
as compared to the same periods of 2001 are due to overall increased demand for
products in the Storage Systems segment and sales to a new master distributor.

There were no significant intersegment revenues during the periods
presented.

One customer represented 15% and 19% of our total consolidated revenues
for the three months ended June 30, 2002 and 2001, respectively. In the
Semiconductor segment, one customer represented 19% and 21% of total
Semiconductor revenues for the three months ended June 30, 2002 and 2001,
respectively. In the Storage Systems segment, there were three customers with
revenues representing 32%, 22% and 18% of total Storage Systems revenues for
the three months ended June 30, 2002. For the three months ended June 30, 2001,
there were three customers with revenues representing 21%, 17% and 14% of total
Storage Systems revenues.

One customer represented 15% and 17% of our total consolidated revenues
for the six months ended June 30, 2002 and 2001, respectively. In the
Semiconductor segment, one customer represented 18% and 20% of total
Semiconductor revenues for the six months ended June 30, 2002 and 2001,
respectively. In the Storage Systems segment, there were three customers with
revenues representing 33%, 18% and 17% of total Storage Systems revenues for
the six months ended June 30, 2002. For the six months ended June 30, 2001,
there were four customers with revenues representing 20%, 19%, 16% and 12% of
total Storage Systems revenues.

Revenues from domestic operations were $227 million, representing 52% of
consolidated revenues for the second quarter of 2002 compared to $256 million,
representing 55% of consolidated revenues for the same period of 2001. For the
six months ended June 30, 2002, revenues from domestic operations were $441
million, representing 52% of consolidated revenues compared to $539 million,
representing 55% of consolidated revenues for the same period of 2001.

We expect total consolidated revenues to grow approximately 10% in the
third quarter of 2002 as compared to the second quarter of 2002.

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

Gross profit margin:

|                        |  |                        |       |                    |    |                  |       |               |    |               |      |  |    |   |       |  |    |   |       |  |    |  
|----------------------- |  | ---------------------- | ----- | ------------------ | -- | ---------------- | ----- | ------------- | -- | ------------- | ---- |  | -- | - | ----- |  | -- | - | ----- |  | -- | -
|                        |  |                        |       | Three months ended |    | Six months ended
|                        |  |                        |       |                    |    |                 
|(in millions)           |  | June 30, 2002          |       | March 31, 2002     |    | June 30, 2001    |       | June 30, 2002 |    | June 30, 2001
|                        |  |                        |       |                    |    |                  |       |               |    |              
|Semiconductor segment   |  | $                      | 133.4 |                    |    | $                | 83.4  |               |    | $             | 62.1 |  |    | $ | 216.8 |  |    | $ | 246.4 | 
|                        |  | Percentage of revenues |       |                    | 38 | %                |       |               | 24 | %             |      |  | 15 | % |       |  | 31 | % |       |  | 28 | %
|Storage Systems segment |  | $                      | 30.0  |                    |    | $                | 22.4  |               |    | $             | 10.3 |  |    | $ | 52.4  |  |    | $ | 32.1  | 
|                        |  | Percentage of revenues |       |                    | 36 | %                |       |               | 37 | %             |      |  | 20 | % |       |  | 37 | % |       |  | 28 | %
|                        |  |                        |       |                    |    |                  |       |               |    |               |      |  |    |   |       |  |    |   |       | 
|Consolidated            |  | $                      | 163.4 |                    |    | $                | 105.8 |               |    | $             | 72.4 |  |    | $ | 269.2 |  |    | $ | 278.5 | 
|                        |  |                        |       |                    |    |                  |       |               |    |               |      |  |    |   |       |  |    |   |       | 
|                        |  | Percentage of revenues |       |                    | 37 | %                |       |               | 26 | %             |      |  | 16 | % |       |  | 32 | % |       |  | 28 | %

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We have advanced wafer manufacturing operations in Oregon, which is our
primary manufacturing site, and Japan. We also acquire wafers from foundries in
other locations. 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 location.

Second Quarter of 2002 compared to the First Quarter of 2002

The consolidated gross profit margin percentage increased to 37% in the
second quarter of 2002 from 26% in the first quarter of 2002. The gross profit
margin percentage for the Semiconductor segment increased to 38% in the second
quarter of 2002 from 24% in the first quarter of 2002, while the gross profit
margin percentage for the Storage Systems segment declined slightly to 36% from
37% over the same period.

The increase in consolidated gross profit margins for the second quarter
of 2002 compared to the first quarter of 2002 are a result of the following
factors:

  Higher revenues accompanied by lower manufacturing variances and
period costs in the second quarter of 2002;

  Lower compensation expenses reflecting lower average headcount, which
is primarily a result of the restructuring actions taken in the second and
third quarters of 2001 and the first quarter of 2002;

  Lower additional excess inventory and related charges in the second
quarter as compared to the first quarter of 2002. Additional excess inventory
and related charges were $4.8 million for the three months ended June 30, 2002
as compared to $40.8 million for the three months ended March 31, 2002. These
charges impacted the Semiconductor segment and were primarily associated with
underutilization charges related to a partial idling of our fabrication
facilities due to decreased demand. The decline in the charge in the second
quarter compared to the first quarter of 2002 reflects improving capacity
utilization in our manufacturing facilities in May and June of 2002. Overall
factory capacity was reduced as part of the restructuring actions taken in 2001
and early 2002, which has contributed in part to the improvement in capacity
utilization in the second quarter of 2002 along with increased demand. We do
not expect to incur this charge in the second half of 2002; and

  The gross profit margin percentage for the Storage Systems segment
declined slightly as a result of increased inventory reserves.

The above favorable factors were offset slightly by a shift in product mix
in the second quarter of 2002.

Second Quarter and First Half of 2002 compared to the same periods of 2001

The consolidated gross profit margin percentage increased to 37% in the
second quarter of 2002 from 16% in the same period of 2001. The gross profit
margin percentage for the Semiconductor segment increased to 38% from 15% over
the same period, while the margin percentage for the Storage Systems segment
increased to 36% in the current quarter from 20% in the same period of 2001.

The consolidated gross profit margin percentage increased to 32% in the
first half of 2002 from 28% in the same period of 2001. The gross profit margin
percentage for the Semiconductor segment increased to 31% from 28% in the same
period of 2001, while the margin percentage for the Storage Systems segment
increased to 37% in the first half of 2002 from 28% in the same period of 2001.
The following factors were primarily responsible for these changes in gross
profit margins over the above noted periods:

  Lower manufacturing variances and period costs in the current period;
and

  Lower additional excess inventory and related charges of $4.8 million
and $45.5 million for the three and six months ended June 30, 2002,
respectively, as compared to $108.0 million for the same periods in 2001. The
charges in 2002 impacted the Semiconductor segment and were primarily
associated with underutilization charges associated with a partial idling of
our fabrication facilities due to decreased demand. The charges of $108.0
million for the quarter ended June 30, 2001, including a charge of $6.0 million
for the Storage Systems segment, were due to:

  A sudden and significant decrease in forecasted revenue and was
calculated in accordance with our policy, which is primarily based on
inventory levels in excess of 12-month demand for each specific product and
use of management judgment; and

  Impairment charges recorded in costs of sales associated with the
closure of the Colorado Springs facility.

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The above favorable factors were partially offset by a decrease in
Semiconductor revenues in the current period as compared to 2001.

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 relative to the U.S. dollar (the average yen
exchange rate for the second quarter of 2002 depreciated 2% from the same
period of 2001), the effect on gross profit margin and net income was not
significant because yen-denominated sales were offset partially by
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:

|                        |                        |               |       |                    |   |                  |       |               |   |               |       |    |   |   |       |    |   |   |       |    |   | 
|----------------------- | ---------------------- | ------------- | ----- | ------------------ | - | ---------------- | ----- | ------------- | - | ------------- | ----- | -- | - | - | ----- | -- | - | - | ----- | -- | - | 
|                        |                        |               |       | Three months ended |   | Six months ended
|                        |                        |               |       |                    |   |                 
|(in millions)           |                        | June 30, 2002 |       | March 31, 2002     |   | June 30, 2001    |       | June 30, 2002 |   | June 30, 2001
|                        |                        |               |       |                    |   |                  |       |               |   |              
|Semiconductor segment   |                        | $             | 105.5 |                    |   | $                | 106.4 |               |   | $             | 120.0 |    |   | $ | 211.9 |    |   | $ | 230.6 |   
|                        | Percentage of revenues |               |       | 30                 | % |                  |       | 30            | % |               |       | 29 | % |   |       | 30 | % |   |       | 27 | %
|Storage Systems segment |                        | $             | 7.3   |                    |   | $                | 7.9   |               |   | $             | 7.4   |    |   | $ | 15.3  |    |   | $ | 15.6  |   
|                        | Percentage of revenues |               |       | 9                  | % |                  |       | 13            | % |               |       | 14 | % |   |       | 11 | % |   |       | 14 | %
|                        |                        |               |       |                    |   |                  |       |               |   |               |       |    |   |   |       |    |   |   |       |   
|Consolidated            |                        | $             | 112.8 |                    |   | $                | 114.3 |               |   | $             | 127.4 |    |   | $ | 227.2 |    |   | $ | 246.2 |   
|                        |                        |               |       |                    |   |                  |       |               |   |               |       |    |   |   |       |    |   |   |       |   
|                        | Percentage of revenues |               |       | 26                 | % |                  |       | 28            | % |               |       | 27 | % |   |       | 27 | % |   |       | 25 | %

Second Quarter of 2002 compared to the First Quarter of 2002

Research and development (R&D) expenses decreased $1.5 million or 1%
during the second quarter of 2002 from the first quarter of 2002. The
decrease reflects a full quarter of savings in R&D spending after the reduction
in force in January 2002 undertaken as part of the restructuring actions. (See
Note 3 of the Notes.) This decrease was partially offset by a lower benefit
associated with the technology transfer agreement entered into with Silterra in
Malaysia during 1999. (See Note 4 of the Notes.) We recorded a benefit of $2.0
million in the second quarter of 2002 as compared to $4.0 million in the first
quarter of 2002 associated with the agreement with Silterra.

As a percentage of revenues, R&D expenses decreased to 26% in the second
quarter of 2002 from 28% in the first quarter of 2002 on a consolidated basis.
For the Semiconductor segment, R&D as a percentage of revenues was flat in the
first and second quarters of 2002 while for the Storage Systems segment, R&D
expenses as a percentage of revenues decreased to 9% in the second quarter of
2002 from 13% in the prior quarter. The decrease in R&D expenses as a
percentage of revenues for both segments is primarily a result of higher
revenues and lower R&D expenses in the current quarter as compared to the first
quarter due to the effects of R&D spending changes as discussed above.

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##### Table of Contents



Second Quarter and First Half of 2002 compared to the same periods of 2001

R&D expenses decreased $14.6 million or 11% during the second quarter of
2002 as compared to the same period of 2001 on a consolidated basis. R&D
expenses for the Semiconductor segment decreased $14.5 million or 12% in the
second quarter of 2002 from the same period of 2001. R&D expenses for the
Storage Systems segment remained relatively flat with a decrease of $0.1
million or 1% over the second quarter of 2001. The decrease in R&D expenses for
the Semiconductor segment for the three months ending June 30, 2002 as compared
to the same period of the prior year was primarily attributable to the
restructuring actions of 2001 and 2002. (See Note 3 of the Notes.) The
decrease was offset in part by the following:



| |  |  | A lower benefit associated with the technology transfer agreement
entered into with Silterra in Malaysia during 1999 (See Note 4 of the
Notes.) A benefit of $2 million was recorded in the second quarter of
2002 as compared to $6 million in the same period of 2001.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Continued R&D expenses for the
former C-Cube and AMI RAID businesses,
which are part of the Semiconductor segment and are included in our
consolidated financial statements from May 11, 2001 and August 31, 2001,
respectively,                                        

As a percentage of revenues, R&D expenses decreased slightly in the second
quarter of 2002 from the same period of 2001 on a consolidated basis. For the
Semiconductor segment, R&D as a percentage of revenue increased to 30% in the
second quarter of 2002 from 29% in the same period of 2001 primarily as a
result of lower revenues and the effects of R&D spending changes as discussed
above. R&D expenses as a percentage of revenues for the Storage Systems segment
decreased to 9% in the second quarter of 2002 from 14% in the same quarter of
2001 as a result of a decrease in R&D expenses combined with an increase in
revenues in the current period.

R&D expenses decreased $19.0 million or 8% during the first six months of
2002 as compared to the same period of 2001 on a consolidated basis. During the
same period, R&D expenses for the Semiconductor segment decreased $18.7 million
or 8%. The decrease in R&D expenses for the Semiconductor segment for the six
months ending June 30, 2002 as compared to the same period of the prior year
was primarily attributable to the cost cutting measures implemented as part of
the restructuring actions in 2001 and 2002. (See Note 3 of the Notes.) The
decrease was offset in part by the following:



| |  |  | A benefit of $6 million was recorded during the six months ended June
30, 2002 as compared to $12 million recorded during the six months ended
June 30, 2001. This benefit is 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 businesses,
which are part of the Semiconductor segment and are included in our
consolidated financial statements from May 11, 2001 and August 31, 2001,
respectively,                                                                           

R&D expenses for the Storage Systems segment decreased $0.3 million or 2%
in the first half of 2002 from the same period of 2001. The decrease reflects
lower compensation related expenses due to a decrease in average headcount in
2002 as 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 27% in the first
half of 2002 from 25% 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% from 27% in the same period. The increase as a percentage of revenues is a
result of lower revenues for the first half of 2002 compared to the same period
of the prior year offset in part by R&D spending savings from cost cutting
measures discussed above. R&D expenses as a percentage of revenues for the
Storage Systems segment decreased to 11% in the first half of 2002 from 14% in
the same period of 2001 as a result of a decrease in R&D expenses combined with
an increase in revenues in the current period.

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##### Table of Contents



Selling, general and administrative:

|                        |                       |                       |      |                    |    |                  |      |               |    |               |      |    |    |   |       |    |    |   |       |    |    |  
|----------------------- | --------------------- | --------------------- | ---- | ------------------ | -- | ---------------- | ---- | ------------- | -- | ------------- | ---- | -- | -- | - | ----- | -- | -- | - | ----- | -- | -- | -
|                        |                       |                       |      | Three months ended |    | Six months ended
|                        |                       |                       |      |                    |    |                 
|(in millions)           |                       | June
30, 2002         |      | March 31, 2002     |    | June 30, 2001    |      | June 30, 2002 |    | June 30, 2001
|                        |                       |                       |      |                    |    |                  |      |               |    |              
|Semiconductor segment   |                       | $                     | 45.6 |                    |    | $                | 46.8 |               |    | $             | 60.1 |    |    | $ | 92.3  |    |    | $ | 122.9 |   
|                        | Percentage of revenue |                       |      | 13                 | %  |                  |      | 13            | %  |               |      | 15 | %  |   |       | 13 | %  |   |       | 14 | % 
|Storage Systems segment |                       | $                     | 11.8 |                    |    | $                | 11.4 |               |    | $             | 17.4 |    |    | $ | 23.2  |    |    | $ | 33.6  |   
|                        |                       | Percentage of revenue |      |                    | 14 | %                |      |               | 19 | %             |      |    | 34 | % |       |    | 16 | % |       |    | 30 | %
|                        |                       |                       |      |                    |    |                  |      |               |    |               |      |    |    |   |       |    |    |   |       |   
|Consolidated            |                       | $                     | 57.4 |                    |    | $                | 58.2 |               |    | $             | 77.5 |    |    | $ | 115.5 |    |    | $ | 156.5 |   
|                        |                       |                       |      |                    |    |                  |      |               |    |               |      |    |    |   |       |    |    |   |       |   
|                        |                       | Percentage of revenue |      |                    | 13 | %                |      |               | 14 | %             |      |    | 17 | % |       |    | 14 | % |       |    | 16 | %

Second Quarter of 2002 compared to the First Quarter of 2002

Selling, general and administrative (SG&A) expenses decreased $0.8
million or 1% during the second quarter of 2002 from the first quarter of 2002.
The decrease reflects a full quarter of savings in SG&A expenses after the
restructuring actions in January 2002.

As a percentage of revenues, consolidated SG&A expenses decreased to 13%
in the second quarter of 2002 from 14% in the first quarter of 2002. SG&A
expenses, as a percentage of revenues for the Semiconductor segment were flat
in the first and second quarters of 2002. SG&A expenses as a percentage of
revenues for the Storage Systems segment decreased to 14% in the second quarter
of 2002 from 19% in the first quarter as a result of higher revenues during the
current period.

Second Quarter and First Half of 2002 compared to the same periods of 2001

Consolidated SG&A expenses decreased $20.1 million or 26% during the
second quarter of 2002 as compared to the same period of 2001. SG&A expenses
for the Semiconductor segment decreased $14.6 million or 24% in the second
quarter of 2002 from the same period of 2001. SG&A expenses for the Storage
Systems segment decreased $5.6 million or 32% in the second quarter of 2002
from the same period of 2001. Consolidated SG&A expenses decreased $41.0
million or 26% during the first half of 2002 as compared to the same period of
2001. SG&A expenses for the Semiconductor segment decreased $30.6 million or
25% in the first half of 2002 from the same period of 2001. SG&A expenses for
the Storage Systems segment decreased $10.4 million or 31% in the first half of
2002 from the same period of 2001. The decrease on a consolidated basis and by
segment for the above noted periods was primarily attributable to the various
cost cutting measures implemented in 2001 and 2002 (See Note 3 of the Notes).
This decrease was offset in part by continued SG&A expenses for the former
C-Cube and the AMI RAID businesses, which are part of the Semiconductor segment
and are included in our consolidated financial statements from May 11, 2001 and
August 31, 2001, respectively.

As a percentage of revenues, SG&A expenses decreased to 13% in the second
quarter of 2002 from 17% 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 second quarter of 2002 from 15% in the same period of
2001. As a percentage of revenues, SG&A expenses decreased to 14% in the first
half of 2002 from 16% 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 half of 2002 from 14% in the same period of 2001. The
decrease is a result of savings from SG&A cost cutting measures discussed
above, offset in part by lower revenues for the second quarter and first half
of 2002 as compared to the same periods of the prior year. SG&A expenses as a
percentage of revenues for the Storage Systems segment decreased to 14% in the
second quarter of 2002 from 34% in the same period of 2001. SG&A expenses as a
percentage of revenues for the Storage Systems segment decreased to 16% in the
first half of 2002 from 30% in the same period of 2001. The decrease for both
periods presented is a result of savings from SG&A cost cutting measures
discussed above and higher revenues for the second quarter and first half of
2002 as compared to the same periods of the prior year.

Restructuring of operations and other non-recurring items:We recorded a
gain of approximately $6 million and a charge of approximately $59 million in
restructuring and other non-recurring items for the three and six months ended
June 30, 2002, respectively. The details of the restructuring and
non-recurring items are discussed further below. We recorded restructuring and
non-recurring charges of approximately $60 million for the second quarter and
first half of 2001. For a discussion of 2001 restructuring actions, please
refer to our Annual Report on Form 10-K.

20



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##### Table of Contents



Restructuring:

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 second
quarter of 2002, we completed the sale of the CDMA handset product line to a
third party, recognizing a net gain of approximately $6 million. 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.

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

Assets held for sale of $98 million and $89 million were included as a
component of prepaid expenses and other current assets as of June 30, 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 of the carrying value of these assets at the
end of each quarter until the assets are sold or otherwise disposed of and
additional adjustments may be necessary.

The following table sets forth our restructuring reserves as of June 30,
2002:

|                                                |  |                   |        |                 |  |                  |        |                  |  |               |         |   |  |            |         |   |  |   |        | 
|----------------------------------------------- |  | ----------------- | ------ | --------------- |  | ---------------- | ------ | ---------------- |  | ------------- | ------- | - |  | ---------- | ------- | - |  | - | ------ | 
|                                                |  | Balance at        |        | Restructuring   |  |                  |        |                  |  |               |         |   |  | Balance at
|(In thousands)                                  |  | December 31, 2001 |        | Expense Q1 2002 |  | Utilized Q1 2002 |        | Utilized Q2 2002 |  | June 30, 2002
|                                                |  |                   |        |                 |  |                  |        |                  |  |              
|Write-down of excess assets(a)                  |  | $                 | 3,762  |                 |  | $                | 25,933 |                  |  | $             | (27,623 | ) |  | $          | (765    | ) |  | $ | 1,307  | 
|Lease terminations and maintenance
contracts(c) |  |                   | 10,695 |                 |  |                  | 12,871 |                  |  |               | (1,623  | ) |  |            | (1,066  | ) |  |   | 20,877 | 
|Facility closure and other exit costs(c)        |  |                   | 14,153 |                 |  |                  | 415    |                  |  |               | (3,142  | ) |  |            | (2,723  | ) |  |   | 8,703  | 
|Payments to employees for severance(b)          |  |                   | 724    |                 |  |                  | 27,490 |                  |  |               | (10,352 | ) |  |            | (9,932  | ) |  |   | 7,930  | 
|                                                |  |                   |        |                 |  |                  |        |                  |  |               |         |   |  |            |         |   |  |   |        | 
|Total                                           |  | $                 | 29,334 |                 |  | $                | 66,709 |                  |  | $             | (42,740 | ) |  | $          | (14,486 | ) |  | $ | 38,817 | 
|                                                |  |                   |        |                 |  |                  |        |                  |  |               |         |   |  |            |         |   |  |   |        | 



---

|(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 $3.1 million. The
fixed asset write-downs were accounted for as a reduction of the assets
and did not result in a liability. The $1.3 million balance as of June 30,
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 and 400 employees during the three months ended March
31, 2002 and June 30, 2002, respectively. The $7.9 million balance as of
June 30, 2002 will be paid during 2002.                                                                                                                                                                                        
|   
|(c) |  | Amounts utilized represent cash payments.                                                                                                                                                                                                                                                                                                                                                                                                            

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

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
CDMA handset product line held for sale.

Acquired in-process research and development:No charges were recorded for
in-process research and development (IPR&D) in the first and second quarters
of 2002. In the second quarter of 2001, in connection with the acquisition of
C-Cube, we recorded a $77.5 million charge associated with IPR&D. The amount
of IPR&D was determined by identifying research projects for which
technological feasibility had not been established and no alternative future
uses existed as of the acquisition date. For further discussion, please refer
to our Annual Report on Form 10-K.

21



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##### Table of Contents



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 $19.1 million for each of the
quarters in the first half of 2002. Amortization of goodwill and other
intangibles was $43.5 million for the three months ended June 30, 2001.
Amortization of intangible assets was $38.3 million for the first half of 2002
as compared to $70.6 million for the same period of 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 $307.1
million of intangible assets, net of accumulated amortization that will
continue to amortize as of June 30, 2002.

Amortization of non-cash deferred stock compensation:Amortization of
non-cash deferred stock compensation of $23.8 million and $50.8 million for the
three and six months ended June 30, 2002, respectively, is a result 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. The expense due to amortization of non-cash deferred stock
compensation was $27.8 million and $49.1 million for the three and six months
ended June 30, 2001, respectively.

Interest expense:Interest expense was relatively flat at $15.5 million
in the second quarter of 2002 as compared to $15.8 million in the first quarter
of 2002. Interest expense increased $5.6 million to $15.5 million in the
second quarter of 2002 from $9.9 million in the same period of 2001. Interest
expense increased $11.5 million to $31.3 million in the first half of 2002 from
$19.8 million in the same period of 2001. The increases in the second quarter
and first half of 2002 as compared to the same periods of the previous year are
primarily attributable to higher debt outstanding as of June 30, 2002
associated with the issuance of the 4% Convertible Subordinated Notes for $490
million (the 2001 Convertible Notes) in October 2001.

We entered into interest rate swap transactions (the swaps) with various
investment banks in June 2002. The swaps effectively convert fixed interest
payments on $1.085 billion Convertible Subordinated Notes to LIBOR based
floating rates. The swaps are intended to better manage interest rate risk
between our investment portfolio (See Note 5 of the Notes), which generates
interest income at floating rates, and our debt, which bears a fixed interest
payment. See our Annual Report on Form 10-K for a discussion of the Convertible
Subordinated Notes. The swaps qualify for hedge accounting treatment under SFAS
No. 133 (See Note 6 of the Notes). The swaps did not have a significant impact
on our results of operations for the second quarter of 2002.

Interest income and other, net:Interest income and other was $2.6 million in
the second quarter of 2002 as compared to $3.6 million in the first quarter of
2002. Interest income increased to $6.4 million in the current quarter of 2002
from $5.5 million in the first quarter of 2002. The increase in interest
income is mainly due to an increase in average cash balances in the current
quarter as compared to the first quarter of 2002. Other expenses of
approximately $3.8 million include option premium expense (See
Note 6 of the Notes) and other miscellaneous expenses, which are individually
insignificant.

Interest income and other, net, decreased $1.1 million to $2.6 million in
the second quarter of 2002 from $3.7 million in the second quarter of 2001.
Interest income decreased to $6.4 million in the second quarter of 2002 from
$12.7 million in the same period of 2001. Interest income and other, net,
decreased $11.7 million to $6.3 million in the first half of 2002 from $18.0
million in the same period of 2001. Interest income decreased to $11.9 million
in the first half of 2002 from $27.8 million in the same period of 2001. The
decrease in interest income is attributable to lower average cash balances and
lower interest rates during the second quarter and first half of 2002 as
compared to the same periods of 2001.

Provision for income taxes:During the three months ended June 30, 2002,
we recorded an income tax expense of $6 million. The expense relates to income
taxes for certain foreign subsidiaries. For the six months ended June 30,
2002, we recorded an income tax benefit of $12.3 million. The benefit is the
result of changes in the U.S. tax laws, which were enacted in the first quarter
of 2002, reduced by income taxes for certain foreign subsidiaries. The future
benefit of certain operating losses is not currently being recognized. For the
three and six months ended June 30, 2001, an income tax benefit was recorded in
the amount of $34.7 million and $39.2 million, respectively. 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.

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Financial Condition and Liquidity

Cash, cash equivalents and short-term investments remained relatively flat
at $1.0 billion as of both June 30, 2002 and December 31, 2001.

Working capital.Working capital increased by $24.2 million to $1.28
billion at June 30, 2002 from $1.26 billion as of December 31, 2001. Working
capital in the first half of the current year was impacted by the following
activities:



| |  |  | Accounts receivables increased by $53.0 million from $191.7 million
at December 31, 2001 to $244.7 million at June 30, 2002. This increase
is attributable to increased revenues in the second quarter of the
current year as compared to the fourth quarter of 2001, accompanied by
slower collections in the current quarter;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Accounts payable were lower by $41.0 million at June 30, 2002 as
compared to December 31, 2001 due to lower purchases in the current
quarter;                                                                                                                                                                                  
|
| |  |  | Lower accrued salaries, wages and benefits due to lower payroll
costs as a result of the various restructuring actions taken in 2001
and January 2002; and                                                                                                                                                                     
|
| |  |  | Lower income taxes payable due to the net income tax benefit
recorded in the current year.                                                                                                                                                                                                                                     

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



| |  |  | Inventories were lower by $58.8 million due to reduced purchases of raw
materials, increased production through-put and increased sales in the
current quarter as compared to the fourth quarter of 2001; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Higher accrued and other liabilities by $16.6 million primarily due
to changes in restructuring-related accruals.                                                                                            

Cash and cash equivalents generated from operating activities.During the
first half of 2002, we used $9.9 million of cash and cash equivalents from
operating activities compared to $104.0 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 (before depreciation
and amortization; non-cash restructuring and non-recurring items, net;
amortization of non-cash deferred stock compensation, IPR&D and gains on stock
investments) for 2002 when compared to the first half of 2001.

Cash and cash equivalents used in investing activities.Cash and cash
equivalents used in investing activities was $331.7 million in the first half
of 2002, compared to $66.2 million used in the same period in 2001. The primary
investing activities during the current year as compared to the first half of
2001 were as follows:



| |  |  | Higher purchases of debt and equity securities available for sale,
net of maturities and sales, as compared to the same period of 2001;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Lower purchases of property and equipment, net of retirements;                                                                         

Net capital additions were $12.1 million in the current year as compared
to $125.6 million for the same period in 2001. We expect the level of capital
expenditures to be less than $100 million in 2002.

Cash and cash equivalents provided by financing activities. Cash and cash
equivalents provided by financing activities during the six months ended June
30, 2002 was $26.4 million compared to $43.5 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

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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 of our earnings per share, 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 our 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 June 30, 2002, we had operating leases financing certain wafer
fabrication equipment (See Note 12 of the Notes).

The following table summarizes our contractual obligations at June 30,
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    |       |                        | 34.2 |             |  |             | 58.1  |               |  |       | 29.5  |       |  |   |  |   |  |   | 121.8   |        
|Capital lease obligations      |       |                        | 0.3  |             |  |             | 0.8   |               |  |       |      |       |  |   |  |   |  |   | 1.1     |        
|                               |       |                        |      |             |  |             |       |               |  |       |       |       |  |   |   |   |  |   |         |        
|                               | Total |                        | $    | 34.5        |  |             | $     | 903.9         |  |       | $     | 519.5 |  |   | $ |  |  |   | $       | 1,457.9 | 
|                               |       |                        |      |             |  |             |       |               |  |       |       |       |  |   |   |   |  |   |         |        

Recent Accounting Pronouncements

In April 2002, the Financial Accounting Standards Board (FASB) issued
FASB Statement (SFAS) No. 145 Rescission of SFAS Nos. 4, 44, and 64,
Amendment of SFAS No. 13, and Technical Corrections. SFAS No. 145 rescinds SFAS
No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an
amendment of that Statement, SFAS No. 64, Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements, as well as SFAS No. 44, Accounting for
Intangible Assets of Motor Carriers. This Statement amends SFAS No. 13,
Accounting for Leases, to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This Statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. The
provisions of SFAS No. 145 will be adopted during fiscal year 2003. We do not
anticipate that adoption of this statement will have a material impact on our
consolidated balance sheets or consolidated statements of operations.

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




Item 3. Quantitative and Qualitative Disclosures about Market Risk

In the second quarter of 2002, we entered into interest rate swap
transactions (the swaps) with various investment banks. (See Note 6 of the
Notes.) The objective of entering into the swaps was to better manage interest
rate risk between our investment portfolio (See Note 5 of the Notes), which
generates interest income at floating rates and our Convertible Subordinated
Notes, which bears interest at fixed rates. The swaps effectively convert the
fixed interest payments on $1.085 billion of the Convertible Subordinated Notes
to LIBOR based floating rates. The swaps qualify for hedge accounting
treatment under SFAS No. 133 (See Note 6 of the Notes). The swaps did not have
a significant impact on our results of operations for the second quarter of
2002.

There have been no other significant changes in the market risk
disclosures during the six months ended June 30, 2002 as compared to the
discussion in Part II of our Annual Report on Form 10-K for the year ended
December 31, 2001.

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PART II




Item 1. Legal Proceedings

Reference is made to
the Company's most recent Form 10-K with respect to Item 3, Legal
Proceedings and the matter pertaining to the Company's Canadian
subsidiary (LSI Canada). During July 2002, the Company
(including LSI Canada) entered into a negotiated settlement
(Settlement) with those parties who represent a
substantial majority of the dissenting shares. As a result and in
accordance with the provisions of the Settlement, the Court has been
asked by the parties to the Settlement to find and so order that
payment by LSI Canada of the proposed all-inclusive settlement
proceeds will fully satisfy the obligation of LSI Canada to pay fair
value for the dissenting shares, that the parties to the Settlement
may bind all other dissenting shares to such result and to order
certain other actions be taken that will cause a full and final
resolution including all claims that are or may be associated with
the matter. The Company does not expect the resolution of this matter
to have a material adverse effect on the Company.




Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

|     |  |                                                                                                                                                   
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------
|99.1 |  | 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.
|    
|99.2 |  | 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.

(b) Reports on Form 8-K

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

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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: August 7, 2002 |  | By |  | /s/ Bryon Look                                              
|                     |  |    |  |                                                             
|                     |  |    |  | Bryon LookExecutive Vice President &
Chief Financial Officer

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EXHIBIT INDEX



|        |  |                                                                                                                                                    | 
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------- | 
|Exhibit |  |                                                                                                                                                   
|No.     |  | Description                                                                                                                                       
|        |  |                                                                                                                                                   
|99.1    |  | 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.
|       
|99.2    |  | 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.