##### 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 PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 28, 2003

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

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

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



---

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

YES [X]  NO [  ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act) YES [X]  NO [  ]

As of November 7, 2003, there were 379,055,880 shares of the registrants
Common Stock, $.01 par value, outstanding.





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TABLE OF CONTENTS



|                               |                                                                                               |                                                      |  |  |  |  |  | 
|------------------------------ | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION
|                               | 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                           
|                               | Item 4. Controls and Procedures                                                              
|PART II  OTHER INFORMATION   
|                               | Item 1. Legal Proceedings                                                                    
|                               | Item 2. Changes in Securities and Use of Proceeds                                            
|                               | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                    
|INDEX TO EXHIBITS             
|EXHIBIT 31.1                  
|EXHIBIT 31.2                  
|EXHIBIT 32.1                  
|EXHIBIT 32.2                  



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##### Table of Contents



LSI LOGIC CORPORATION
Form 10-Q
For the Quarter Ended September 30, 2003
INDEX

|       |                                                                                       |  |                                                                                                             |    |      |    | 
|------ | ------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|       |                                                                                       |  |                                                                                                             |    | Page
|       |                                                                                       |  |                                                                                                             |    | No. 
|       |                                                                                       |  |                                                                                                             |    |     
|       |                                                                                       |  | PART I. FINANCIAL INFORMATION                                                                               |    |      |    | 
|Item 1 | Financial Statements                                                                  |  |                                                                                                             |    |     
|       |                                                                                       |  | Consolidated Balance Sheets  September 30, 2003 (unaudited) and December 31, 2002                          |    |      | 3  | 
|       |                                                                                       |  | Consolidated Statements of Operations  Three and Nine Months Ended September 30, 2003 and 2002 (unaudited) |    |      | 4  | 
|       |                                                                                       |  | Consolidated Statements of Cash Flows  Nine Months Ended September 30, 2003 and 2002 (unaudited)           |    |      | 5  | 
|       |                                                                                       |  | Notes to Unaudited Consolidated Financial Statements                                                        |    |      | 6  | 
|Item 2 | Managements Discussion and Analysis of Financial Condition and Results of Operations |  |                                                                                                             | 19 |     
|Item 3 | Quantitative and Qualitative Disclosures About Market Risk                            |  |                                                                                                             | 35 |     
|Item 4 | Controls and Procedures                                                               |  |                                                                                                             | 36 |     
|       |                                                                                       |  | PART II. OTHER INFORMATION                                                                                  |    |      |    | 
|Item 1 | Legal Proceedings                                                                     |  |                                                                                                             | 36 |     
|Item 2 | Changes in Securities and Use of Proceeds                                             |  |                                                                                                             | 36 |     
|Item 6 | Exhibits and Reports on Form 8-K                                                      |  |                                                                                                             | 36 |     
|       |                                                                                       |  | Signatures                                                                                                  |    |      | 38 | 
|       |                                                                                       |  | Index to Exhibits                                                                                           |    |      | 39 | 

2



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##### Table of Contents












PART I  FINANCIAL INFORMATION

Item 1. Financial Statements

LSI LOGIC CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

|                                                                                                  |                                                          |   |                                 |           |              |   |           |           | 
|------------------------------------------------------------------------------------------------- | -------------------------------------------------------- | - | ------------------------------- | --------- | ------------ | - | --------- | --------- | 
|                                                                                                  |                                                          |   | September 30,                   |           | December 31,
|                                                                                                  |                                                          |   | 2003                            |           | 2002        
|                                                                                                  |                                                          |   |                                 |           |             
|                                                                                                  |                                                          |   | (In thousands, except per-share
|                                                                                                  |                                                          |   | amounts)                       
|Assets                                                                                            |                                                          |   |                                 |           |              |   |           |          
|Cash and cash equivalents                                                                         |                                                          | $ | 349,753                         |           |              | $ | 448,847   |          
|Short-term investments                                                                            |                                                          |   | 637,225                         |           |              |   | 541,129   |          
|Accounts receivable, less allowances of $6,898 and $7,033                                         |                                                          |   | 264,276                         |           |              |   | 248,621   |          
|Inventories                                                                                       |                                                          |   | 203,226                         |           |              |   | 194,466   |          
|Deferred tax assets                                                                               |                                                          |   | 11,466                          |           |              |   | 11,380    |          
|Prepaid expenses and other current assets                                                         |                                                          |   | 178,493                         |           |              |   | 181,610   |          
|                                                                                                  |                                                          |   |                                 |           |              |   |           |          
|                                                                                                  | Total current assets                                     |   |                                 | 1,644,439 |              |   |           | 1,626,053 | 
|Property and equipment, net                                                                       |                                                          |   | 485,276                         |           |              |   | 746,964   |          
|Goodwill                                                                                          |                                                          |   | 969,222                         |           |              |   | 968,464   |          
|Amortized intangible assets, net                                                                  |                                                          |   | 178,865                         |           |              |   | 282,579   |          
|Deferred tax assets                                                                               |                                                          |   | 137,522                         |           |              |   | 137,152   |          
|Other assets                                                                                      |                                                          |   | 442,186                         |           |              |   | 381,525   |          
|                                                                                                  |                                                          |   |                                 |           |              |   |           |          
|                                                                                                  | Total assets                                             |   | $                               | 3,857,510 |              |   | $         | 4,142,737 | 
|                                                                                                  |                                                          |   |                                 |           |              |   |           |          
|Liabilities and Stockholders Equity                                                              |                                                          |   |                                 |           |              |   |           |          
|Accounts payable                                                                                  |                                                          | $ | 99,154                          |           |              | $ | 100,856   |          
|Accrued salaries, wages and benefits                                                              |                                                          |   | 82,930                          |           |              |   | 71,499    |          
|Other accrued liabilities                                                                         |                                                          |   | 203,128                         |           |              |   | 184,837   |          
|Income tax payable                                                                                |                                                          |   | 48,780                          |           |              |   | 30,066    |          
|Deferred tax liabilities                                                                          |                                                          |   | 10,192                          |           |              |   | 10,192    |          
|Current portion of long-term obligations                                                          |                                                          |   | 363                             |           |              |   | 361       |          
|                                                                                                  |                                                          |   |                                 |           |              |   |           |          
|                                                                                                  | Total current liabilities                                |   |                                 | 444,547   |              |   |           | 397,811   | 
|Deferred tax liabilities                                                                          |                                                          |   | 123,744                         |           |              |   | 123,365   |          
|Long-term debt and capital lease obligations                                                      |                                                          |   | 1,126,491                       |           |              |   | 1,241,217 |          
|Other non-current liabilities                                                                     |                                                          |   | 140,009                         |           |              |   | 73,483    |          
|                                                                                                  |                                                          |   |                                 |           |              |   |           |          
|                                                                                                  | Total long-term obligations and deferred tax liabilities |   |                                 | 1,390,244 |              |   |           | 1,438,065 | 
|                                                                                                  |                                                          |   |                                 |           |              |   |           |          
|Commitments and contingencies (Notes 12 and 13)                                                   |                                                          |   |                                 |           |              |   |           |          
|Minority interest in subsidiary                                                                   |                                                          |   | 7,083                           |           |              |   | 6,506     |          
|                                                                                                  |                                                          |   |                                 |           |              |   |           |          
|Stockholders equity:                                                                             |                                                          |   |                                 |           |              |   |           |          
|Preferred shares; $.01 par value; 2,000 shares authorized, none outstanding                       |                                                          |   |                                |           |              |   |          |          
|Common stock; $.01 par value; 1,300,000 shares authorized; 378,998 and
375,096 shares outstanding |                                                          |   | 3,790                           |           |              |   | 3,751     |          
|Additional paid-in capital                                                                        |                                                          |   | 2,937,533                       |           |              |   | 2,954,282 |          
|Deferred stock compensation                                                                       |                                                          |   | (28,035                         | )         |              |   | (51,161   | )        
|Accumulated deficit                                                                               |                                                          |   | (928,404                        | )         |              |   | (612,243  | )        
|Accumulated other comprehensive income                                                            |                                                          |   | 30,752                          |           |              |   | 5,726     |          
|                                                                                                  |                                                          |   |                                 |           |              |   |           |          
|                                                                                                  | Total stockholders equity                               |   |                                 | 2,015,636 |              |   |           | 2,300,355 | 
|                                                                                                  |                                                          |   |                                 |           |              |   |           |          
|                                                                                                  | Total liabilities and stockholders equity               |   | $                               | 3,857,510 |              |   | $         | 4,142,737 | 
|                                                                                                  |                                                          |   |                                 |           |              |   |           |          



See notes to unaudited consolidated financial statements.

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##### Table of Contents






LSI LOGIC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

|                                            |                                                          |                          |         |                                          |         |                   |         |         |         |      |           |         |           |   |           |         |           | 
|------------------------------------------- | -------------------------------------------------------- | ------------------------ | ------- | ---------------------------------------- | ------- | ----------------- | ------- | ------- | ------- | ---- | --------- | ------- | --------- | - | --------- | ------- | --------- | 
|                                            |                                                          |                          |         | Three Months Ended                       |         | Nine Months Ended
|                                            |                                                          |                          |         | September 30,                            |         | September 30,    
|                                            |                                                          |                          |         | 2003                                     |         | 2002              |         | 2003    |         | 2002
|                                            |                                                          |                          |         |                                          |         |                   |         |         |         |     
|                                            |                                                          |                          |         | (In thousands, except per share amounts)
|Revenues                                    |                                                          | $                        | 450,227 |                                          |         | $                 | 486,964 |         |         | $    | 1,230,225 |         |           | $ | 1,337,241 |        
|                                            |                                                          |                          |         |                                          |         |                   |         |         |         |      |           |         |           |   |           |        
|Costs and expenses:                         |                                                          |                          |         |                                          |         |                   |         |         |         |      |           |         |           |   |           |        
|                                            | Cost of revenues                                         |                          |         | 265,243                                  |         |                   |         | 288,433 |         |      |           | 751,780 |           |   |           | 869,500 |          
|                                            | Research and development                                 |                          |         | 103,803                                  |         |                   |         | 114,423 |         |      |           | 330,256 |           |   |           | 341,599 |          
|                                            | Selling, general and administrative                      |                          |         | 57,715                                   |         |                   |         | 59,054  |         |      |           | 172,214 |           |   |           | 174,600 |          
|                                            | Acquired in-process research and development             |                          |         |                                         |         |                   |         | 1,922   |         |      |           |        |           |   |           | 1,922   |          
|                                            | Restructuring of operations and other items, net         |                          |         | 24,516                                   |         |                   |         | 12,985  |         |      |           | 184,709 |           |   |           | 71,640  |          
|                                            | Amortization of non-cash deferred stock compensation (*) |                          |         | 3,398                                    |         |                   |         | 14,204  |         |      |           | 22,825  |           |   |           | 64,974  |          
|                                            | Amortization of intangibles                              |                          |         | 19,200                                   |         |                   |         | 19,673  |         |      |           | 58,592  |           |   |           | 57,977  |          
|                                            |                                                          |                          |         |                                          |         |                   |         |         |         |      |           |         |           |   |           |        
|                                            |                                                          | Total costs and expenses |         |                                          | 473,875 |                   |         |         | 510,694 |      |           |         | 1,520,376 |   |           |         | 1,582,212 | 
|                                            |                                                          |                          |         |                                          |         |                   |         |         |         |      |           |         |           |   |           |        
|Loss from operations                        |                                                          |                          | (23,648 | )                                        |         |                   | (23,730 | )       |         |      | (290,151  | )       |           |   | (244,971  | )      
|Interest expense                            |                                                          |                          | (6,971  | )                                        |         |                   | (10,079 | )       |         |      | (23,116   | )       |           |   | (41,399   | )      
|Interest income and other, net              |                                                          |                          | 4,967   |                                          |         |                   | 14,121  |         |         |      | 15,106    |         |           |   | 20,388    |        
|                                            |                                                          |                          |         |                                          |         |                   |         |         |         |      |           |         |           |   |           |        
|Loss before income taxes                    |                                                          |                          | (25,652 | )                                        |         |                   | (19,688 | )       |         |      | (298,161  | )       |           |   | (265,982  | )      
|Provision/ (benefit) for income taxes       |                                                          |                          | 6,000   |                                          |         |                   | 7,938   |         |         |      | 18,000    |         |           |   | (4,312    | )      
|                                            |                                                          |                          |         |                                          |         |                   |         |         |         |      |           |         |           |   |           |        
|Net loss                                    |                                                          | $                        | (31,652 | )                                        |         | $                 | (27,626 | )       |         | $    | (316,161  | )       |           | $ | (261,670  | )      
|                                            |                                                          |                          |         |                                          |         |                   |         |         |         |      |           |         |           |   |           |        
|Loss per share:                             |                                                          |                          |         |                                          |         |                   |         |         |         |      |           |         |           |   |           |        
|                                            | Basic                                                    |                          | $       | (0.08                                    | )       |                   | $       | (0.07   | )       |      | $         | (0.84   | )         |   | $         | (0.71   | )        
|                                            |                                                          |                          |         |                                          |         |                   |         |         |         |      |           |         |           |   |           |        
|                                            | Dilutive                                                 |                          | $       | (0.08                                    | )       |                   | $       | (0.07   | )       |      | $         | (0.84   | )         |   | $         | (0.71   | )        
|                                            |                                                          |                          |         |                                          |         |                   |         |         |         |      |           |         |           |   |           |        
|Shares used in computing per share amounts: |                                                          |                          |         |                                          |         |                   |         |         |         |      |           |         |           |   |           |        
|                                            | Basic                                                    |                          |         | 378,749                                  |         |                   |         | 370,948 |         |      |           | 376,931 |           |   |           | 369,707 |          
|                                            |                                                          |                          |         |                                          |         |                   |         |         |         |      |           |         |           |   |           |        
|                                            | Dilutive                                                 |                          |         | 378,749                                  |         |                   |         | 370,948 |         |      |           | 376,931 |           |   |           | 369,707 |          
|                                            |                                                          |                          |         |                                          |         |                   |         |         |         |      |           |         |           |   |           |        



|(*) |  | Amortization of non-cash deferred stock compensation recorded in
connection with acquisitions, 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 September 30, |       | Nine months ended September 30,
|                                    |  |                                  |       |                                
|                                    |  | 2003                             |       | 2002                            |  | 2003 |        | 2002
|                                    |  |                                  |       |                                 |  |      |        |     
|                                    |  | (In thousands)                  
|Cost of revenues                    |  | $                                | 122   |                                 |  | $    | 310    |      |  | $ | 392    |  |  | $ | 1,304  | 
|Research and development            |  |                                  | 2,469 |                                 |  |      | 10,286 |      |  |   | 18,010 |  |  |   | 49,185 | 
|Selling, general and administrative |  |                                  | 807   |                                 |  |      | 3,608  |      |  |   | 4,423  |  |  |   | 14,485 | 

See notes to unaudited consolidated financial statements.

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##### Table of Contents






LSI LOGIC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

|                                                             |                                                                                                             |                                   |                                       |                                           |         |                   |          |            |          |          |        | 
|------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------------- | --------------------------------- | ------------------------------------- | ----------------------------------------- | ------- | ----------------- | -------- | ---------- | -------- | -------- | ------ | 
|                                                             |                                                                                                             |                                   |                                       |                                           |         | Nine Months Ended
|                                                             |                                                                                                             |                                   |                                       |                                           |         | September 30,    
|                                                             |                                                                                                             |                                   |                                       |                                           |         |                  
|                                                             |                                                                                                             |                                   |                                       |                                           |         | 2003              |          | 2002      
|                                                             |                                                                                                             |                                   |                                       |                                           |         |                   |          |           
|                                                             |                                                                                                             |                                   |                                       |                                           |         | (In thousands)   
|Operating activities:                                        |                                                                                                             |                                   |                                       |                                           |         |                   |          |           
|Net loss                                                     |                                                                                                             | $                                 | (316,161                              | )                                         |         | $                 | (261,670 | )         
|Adjustments:                                                 |                                                                                                             |                                   |                                       |                                           |         |                   |          |           
|                                                             | Depreciation and amortization                                                                               |                                   |                                       | 208,615                                   |         |                   |          | 259,755    |         
|                                                             | Amortization of non-cash deferred stock compensation                                                        |                                   |                                       | 22,825                                    |         |                   |          | 64,973     |         
|                                                             | Acquired in-process research and development                                                                |                                   |                                       |                                          |         |                   |          | 1,922      |         
|                                                             | Non-cash
restructuring and other items                                                                      |                                   |                                       | 145,828                                   |         |                   |          | 56,473     |         
|                                                             | Loss on write-down of equity securities, net of gain on sales                                               |                                   |                                       | 9,043                                     |         |                   |          | 9,905      |         
|                                                             | Loss/(gain) on redemption/repurchase of Convertible Subordinated Notes                                      |                                   |                                       | 3,191                                     |         |                   |          | (11,574    | )       
|                                                             | (Gain)/loss on sale of property and equipment                                                               |                                   |                                       | (2,150                                    | )       |                   |          | 3,955      |         
|                                                             | Changes in deferred tax assets and liabilities                                                              |                                   |                                       | (94                                       | )       |                   |          | (2,779     | )       
|                                                             | Changes in assets and liabilities, net of assets acquired and liabilities
assumed in business combinations: |                                   |                                       |                                           |         |                   |          |            |         
|                                                             |                                                                                                             | Accounts receivable               |                                       |                                           | (14,773 | )                 |          |            | (106,573 | )       
|                                                             |                                                                                                             | Inventories                       |                                       |                                           | (7,050  | )                 |          |            | 46,099   |         
|                                                             |                                                                                                             | Prepaid expenses and other assets |                                       |                                           | 63,149  |                   |          |            | 11,347   |         
|                                                             |                                                                                                             | Accounts payable                  |                                       |                                           | (1,338  | )                 |          |            | (20,860  | )       
|                                                             |                                                                                                             | Accrued and other liabilities     |                                       |                                           | 27,319  |                   |          |            | (3,300   | )       
|                                                             |                                                                                                             |                                   |                                       |                                           |         |                   |          |           
|                                                             |                                                                                                             |                                   |                                       | Net cash provided by operating activities |         |                   | 138,404  |            |          |          | 47,673 | 
|                                                             |                                                                                                             |                                   |                                       |                                           |         |                   |          |           
|Investing activities:                                        |                                                                                                             |                                   |                                       |                                           |         |                   |          |           
|                                                             | Purchase of debt securities available-for-sale                                                              |                                   |                                       | (1,995,322                                | )       |                   |          | (1,283,235 | )       
|                                                             | Maturities and sales of debt securities available-for-sale                                                  |                                   |                                       | 1,890,065                                 |         |                   |          | 1,061,153  |         
|                                                             | Purchases of equity securities                                                                              |                                   |                                       |                                          |         |                   |          | (10,894    | )       
|                                                             | Purchases of property and equipment                                                                         |                                   |                                       | (48,775                                   | )       |                   |          | (30,112    | )       
|                                                             | Proceeds from sale of property and equipment                                                                |                                   |                                       | 13,677                                    |         |                   |          | 2,927      |         
|                                                             | Proceeds from the sale-lease back of equipment                                                              |                                   |                                       | 160,000                                   |         |                   |          |           |         
|                                                             | Deposit
received toward the expected sale of the Japan manufacturing facility                               |                                   |                                       | 4,869                                     |         |                   |          |           |         
|                                                             | Increase in non-current assets and deposits                                                                 |                                   |                                       | (390,135                                  | )       |                   |          | (8,920     | )       
|                                                             | Decrease in non-current assets and deposits                                                                 |                                   |                                       | 256,606                                   |         |                   |          | 9,156      |         
|                                                             | Acquisition of companies, net of cash acquired                                                              |                                   |                                       |                                          |         |                   |          | (50,472    | )       
|                                                             |                                                                                                             |                                   |                                       |                                           |         |                   |          |           
|                                                             |                                                                                                             |                                   | Net cash used in investing activities |                                           |         | (109,015          | )        |            |          | (310,397 | )     
|                                                             |                                                                                                             |                                   |                                       |                                           |         |                   |          |           
|Financing activities:                                        |                                                                                                             |                                   |                                       |                                           |         |                   |          |           
|                                                             | Proceeds from borrowings                                                                                    |                                   |                                       | 350,000                                   |         |                   |          |           |         
|                                                             | Redemption/repurchase of Convertible Subordinated Notes                                                     |                                   |                                       | (461,983                                  | )       |                   |          | (50,626    | )       
|                                                             | Cash paid for call spread options                                                                           |                                   |                                       | (28,000                                   | )       |                   |          |           |         
|                                                             | Debt issuance costs                                                                                         |                                   |                                       | (10,936                                   | )       |                   |          |           |         
|                                                             | Repayment of debt obligations                                                                               |                                   |                                       | (264                                      | )       |                   |          | (247       | )       
|                                                             | Issuance of common stock                                                                                    |                                   |                                       | 17,763                                    |         |                   |          | 26,249     |         
|                                                             |                                                                                                             |                                   |                                       |                                           |         |                   |          |           
|                                                             |                                                                                                             |                                   | Net cash used in financing activities |                                           |         | (133,420          | )        |            |          | (24,624  | )     
|                                                             |                                                                                                             |                                   |                                       |                                           |         |                   |          |           
|Effect of exchange rate changes on cash and cash equivalents |                                                                                                             |                                   | 4,937                                 |                                           |         |                   | 1,600    |           
|                                                             |                                                                                                             |                                   |                                       |                                           |         |                   |          |           
|Decrease in cash and cash equivalents                        |                                                                                                             |                                   | (99,094                               | )                                         |         |                   | (285,748 | )         
|                                                             |                                                                                                             |                                   |                                       |                                           |         |                   |          |           
|Cash and cash equivalents at beginning of period             |                                                                                                             |                                   | 448,847                               |                                           |         |                   | 757,138  |           
|                                                             |                                                                                                             |                                   |                                       |                                           |         |                   |          |           
|Cash and cash equivalents at end of period                   |                                                                                                             | $                                 | 349,753                               |                                           |         | $                 | 471,390  |           
|                                                             |                                                                                                             |                                   |                                       |                                           |         |                   |          |           



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, in-process research and development and
restructuring and other items, net as discussed in Note 3 to the Unaudited
Consolidated Financial Statements, hereafter referred to as the Notes),
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, 2002.

For financial reporting purposes, the Company reports on a 13 or 14-week
quarter with a year ending December 31. The current quarter ended September
28, 2003. 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 September 30, 2003, 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.

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

Recent Accounting Pronouncements

In January 2003, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51. FIN 46 requires certain variable
interest entities to be consolidated by the primary beneficiary of the entity
if the equity investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. FIN 46 is effective immediately for all new
variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 were to be applied for the first interim or annual period
beginning after June 15, 2003. In October 2003, the FASB released a FASB Staff
Position (FSP) deferring the effective date for applying the provisions of FIN
46. A public entity need not apply the provisions of FIN 46 to an interest held
in a variable interest entity or potential variable interest entity until the
end of the first interim or annual period ending December 15, 2003 (as of
December 31, 2003, for an entity with a calendar year-end or quarter-end of
December 31). On March 28, 2003, the Company entered into new operating leases
to refinance the old leases. See Note 12 of the Notes. The Company refinanced
these leases in a manner that best met the Companys capital financing
strategy, and cost of capital objectives and the new leases are not subject to
the consolidation provisions of FIN 46. The Company believes that the adoption
of this standard will not have a material impact on its consolidated balance
sheet or statement of operations.

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

In May 2003, the EITF reached a consensus on Issue No. 03-05,
Applicability of AICPA Statement of Position 97-2 to Non-Software Deliverables
in an Arrangement Containing More-Than-Incidental Software. EITF Issue No.
03-05 provides guidance on whether non-software deliverables included in
arrangements that contain more-than-incidental software are included within the
scope of SOP 97-2. This issue does not address the allocation of the overall
fee to the software and the non-software elements of the arrangement. This
Issue does not address the determination of whether the software is more than
incidental but assumes that an arrangement includes software that is more than
incidental to the products or services as a whole.

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The provisions of EITF Issue No. 00-21 will apply to new revenue arrangements entered into after the
beginning of an entity reporting period beginning after
August 13, 2003. The adoption of this standard is not expected to have a material impact
on the Companys consolidated balance sheet or statement of operations.

In April 2003, the FASB issued Statement No. 149 (SFAS No. 149),
Amendment of Statement 133 on Derivative Instruments and Hedging Activities.
SFAS No. 149 amends and clarifies financial accounting and reporting for
derivative instruments by requiring that contracts with comparable
characteristics be accounted for similarly. In particular, this statement
clarifies the circumstances under which a contract with an initial net
investment meets the characteristics of a derivative, clarifies when a
derivative contains a financing component, amends the definition of an
underlying to conform it to the language used in FIN 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, and amends certain other existing
pronouncements. The provisions of SFAS No. 149, which were not already applied
under an Implementation Issue, are effective for contracts entered into or
modified after June 30, 2003. The adoption of this standard did not have a
material impact on the Companys consolidated balance sheet or statement of
operations.

In May 2003, the FASB issued Statement No. 150 (SFAS No. 150),
Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity. SFAS No. 150 establishes standards for classification
and measurement of certain financial instruments with characteristics of both
liabilities and equity. It requires financial instruments within its scope be
classified as a liability (or an asset in some circumstances). Many of those
financial instruments were previously classified as equity. SFAS No. 150 is
effective for financial instruments entered into or modified after May 31,
2003. For financial instruments created before and still existing as of the
issuance of this statement, a cumulative effect of change in accounting
principle shall be reported upon implementation in the first interim period
beginning after June 15, 2003. The adoption of this standard did not have a
material impact on the Companys consolidated balance sheet or statement of
operations.

In
August 2003, the EITF reached a consensus on
Issue No. 03-11, Reporting Realized Gains and Losses
on Derivative Instruments That are Subject to FASB Statement
No. 133, Accounting for Derivative Instruments and Hedging
Activities, and Not Held for Trading Purposes as Defined
in EITF Issue No. 02-03, Issues Involved in Accounting for
Derivative Contracts Held for Trading Purposes and Contracts Involved
in Energy Trading and Risk Management Activities. This issue
addresses whether realized gains and losses should be shown gross or
net in the income statement for contracts that are not held for
trading purposes, but are derivatives subject to FASB Statement
No. 133 (whether or not the derivative is designated as a
hedging instrument). The provisions of EITF Issue No. 03-11 will
be applied to derivative instruments entered into during reporting
periods beginning after August 13, 2003. The adoption of this
standard is not expected to have a material impact on the
Companys consolidated balance sheet or statements of operations.

NOTE 2  STOCK-BASED COMPENSATION

The Company adopted the disclosure requirements of Statement of Financial
Accounting Standards No. 148 (SFAS No. 148) as of December 31, 2002. These
disclosure requirements include more prominent presentation, in a tabular
format, of the pro forma effect of using the fair value method of accounting
for stock-based employee compensation in interim and annual financial
statements. The following table provides pro forma disclosures as if the
Company had recorded compensation costs based on the estimated grant date fair
value, as defined by SFAS No. 123, for awards granted under its stock option
and stock purchase plans. The estimated weighted-average grant date fair
value, as defined by SFAS No. 123, was calculated using the Black-Scholes
model. The Black-Scholes model was developed to estimate the fair value of
freely tradable, fully transferable options without vesting restrictions, which
significantly differ from the Companys stock option awards. These models also
require highly subjective assumptions, including future stock price volatility
and expected time until exercise, which greatly affect the calculated grant
date fair value.

|                                                                                                                                                                    |                     |   |                                          |       |                   |   |         |       |      |   |          |       |   |   |          |       |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------- | - | ---------------------------------------- | ----- | ----------------- | - | ------- | ----- | ---- | - | -------- | ----- | - | - | -------- | ----- | -
|                                                                                                                                                                    |                     |   | Three months ended                       |       | Nine months ended
|                                                                                                                                                                    |                     |   | September 30,                            |       | September 30,    
|                                                                                                                                                                    |                     |   |                                          |       |                  
|                                                                                                                                                                    |                     |   | 2003                                     |       | 2002              |   | 2003    |       | 2002
|                                                                                                                                                                    |                     |   |                                          |       |                   |   |         |       |     
|                                                                                                                                                                    |                     |   | (In thousands, except per share amounts)
|Net loss, as reported                                                                                                                                               |                     | $ | (31,652                                  | )     |                   | $ | (27,626 | )     |      | $ | (316,161 | )     |   | $ | (261,670 | )    
|Add: Amortization of
non-cash deferred
stock compensation
expense determined
under the intrinsic
value method as
reported in net loss,
net of related tax
effects * |                     |   | 1,476                                    |       |                   |   | 6,909   |       |      |   | 7,605    |       |   |   | 25,652   |      
|Deduct: Total
stock-based employee
compensation expense
determined under fair
value method for all
awards, net of related
tax effects                               |                     |   | (45,505                                  | )     |                   |   | (69,663 | )     |      |   | (148,510 | )     |   |   | (189,262 | )    
|                                                                                                                                                                    |                     |   |                                          |       |                   |   |         |       |      |   |          |       |   |   |          |      
|Pro forma net loss                                                                                                                                                  |                     | $ | (75,681                                  | )     |                   | $ | (90,380 | )     |      | $ | (457,066 | )     |   | $ | (425,280 | )    
|                                                                                                                                                                    |                     |   |                                          |       |                   |   |         |       |      |   |          |       |   |   |          |      
|Loss per share:                                                                                                                                                     |                     |   |                                          |       |                   |   |         |       |      |   |          |       |   |   |          |      
|                                                                                                                                                                    | Basic-as reported   |   | $                                        | (0.08 | )                 |   | $       | (0.07 | )    |   | $        | (0.84 | ) |   | $        | (0.71 | )
|                                                                                                                                                                    | Basic-pro forma     |   | $                                        | (0.20 | )                 |   | $       | (0.24 | )    |   | $        | (1.22 | ) |   | $        | (1.15 | )
|                                                                                                                                                                    | Diluted-as reported |   | $                                        | (0.08 | )                 |   | $       | (0.07 | )    |   | $        | (0.84 | ) |   | $        | (0.71 | )
|                                                                                                                                                                    | Diluted-pro forma   |   | $                                        | (0.20 | )                 |   | $       | (0.24 | )    |   | $        | (1.22 | ) |   | $        | (1.15 | )

*     This amount excludes amortization of non-cash deferred stock compensation on
restricted stock awards.

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For the three and nine months ended September 30, 2003, common stock
equivalents of approximately 110.4 million and 90.2 million shares,
respectively, were excluded from the computation of pro forma diluted loss per
share as a result of their antidilutive effect. For the three and nine months
ended September 30, 2002, common stock equivalents of approximately 59.6
million and 76.1 million shares, respectively, were excluded from the
computation of pro forma diluted loss per share as a result of their
antidilutive effect.

NOTE 3  RESTRUCTURING AND OTHER ITEMS

The Company recorded charges of $25 million and $185 million for
restructuring of operations and other items for the three and nine months ended
September 30, 2003, respectively. The Company recorded charges of $13 million
and $72 million for restructuring of operations and other items for the three
and nine months ended September 30, 2002, respectively. For a complete
discussion of the 2002 restructuring actions, please refer to the Companys
Annual Report on Form 10-K.

Restructuring and impairment of long-lived assets:

On January 1, 2003, the Company adopted SFAS No. 146, Accounting for Exit
or Disposal Activities. SFAS No. 146 has been applied to restructuring
activities initiated after December 31, 2002 and changes the timing of when
restructuring charges are recorded to the date when the liabilities are
incurred. The adoption of SFAS No. 146 did not affect restructuring reserves
recorded prior to December 31, 2002.

First quarter of 2003:

In February 2003, the Company downsized operations and recorded $36
million in charges for restructuring of operations and other items. Of this
charge, $21 million was associated with the Semiconductor segment and $15
million was attributable to the Storage Systems segment. The charges consisted
of severance and termination benefits for approximately 210 employees primarily
involved in manufacturing operations, research and development and marketing
and sales; costs associated with exiting certain operating leases primarily for
real estate; and a write-down of certain acquired intangibles and other
long-lived assets. During the nine months ended September 30, 2003, payments
related to the February 2003 restructuring actions consisted of approximately
$4 million for severance and termination benefits and $0.5 million for lease
and contract terminations.

Second quarter of 2003:

In April 2003, the Company announced a restructuring of its operations
that included a reduction in workforce and the consolidation of certain
non-manufacturing facilities. A charge of $33 million was recorded in the
Semiconductor segment consisting of severance and termination benefits for
approximately 325 employees involved in manufacturing operations, research and
development, marketing, sales and administration; costs associated with exiting
certain operating leases primarily for real estate; other exit costs; and a
write-down of fixed assets due to impairment. During the nine months ended
September 30, 2003, payments related to the April 2003 restructuring actions
consisted of approximately $8 million for severance and termination benefits
and $2 million for lease and contract terminations.

In June 2003, the Company announced the decision to sell the Tsukuba,
Japan manufacturing facility. During the second quarter, a charge of $73
million was recorded in the Semiconductor segment to write down fixed assets to
their fair market value, and reclassify the fair value from property, plant and
equipment to other current assets to reflect the intention to dispose of the
facility within the next twelve months. In addition, approximately $2 million
in restructuring charges were recorded in the second quarter for severance and
other exit costs. See further discussion in the third quarter below.

In June 2003, the Company also recorded $19 million of additional fixed
asset write-downs to reflect the decrease in fair market value of the assets
during the period. This write-down included a reduction in the value of the
Colorado Springs fabrication facility of $16 million to reflect continued and
accelerated efforts to sell the facility.

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Third quarter of 2003:

Agreement to sell Japan fabrication facility:

In September 2003, the Company entered into a definitive agreement to sell
the Tsukuba, Japan facility to Rohm Company Ltd. (Rohm), a Japanese company,
for 2.65 billion yen ($23.7 million as of September 30, 2003). The transaction
is scheduled to close in the fourth quarter of 2003. As part of the definitive
agreement, the Company agreed to purchase a minimum amount of production wafers
from Rohm for a period of 15 months following the close of the transaction. As
a result, a charge of approximately $4 million was recorded in cost of revenues
during the third quarter of 2003. This charge is a result of the
application of
our policy to accrue for non-cancelable inventory purchase commitments in
excess of 12 months of judged demand. Included in the $4 million charge to
cost of revenues is a reclassification of $3 million from restructuring expense
originally recorded in the second quarter of 2003 to better reflect the terms
of the definitive agreement. Also in the quarter, $2 million was recorded for
additional severance benefits to be paid and for contract termination and other
exit costs associated with the definitive agreement. During the nine months
ended September 30, 2003, there were no payments related to the amounts accrued
for severance and other exit costs for the Japan restructuring actions.

Other third quarter 2003 restructuring actions:

In the third quarter of 2003, the Company continued to consolidate
non-manufacturing facilities and recorded $2 million for costs associated with
exiting certain operating leases for real estate as the facilities ceased being
used.

In September 2003, the Company decided to discontinue development programs
and to refocus sales and marketing efforts for certain product lines in the
Semiconductor segment. As a result of an analysis of future net cash flows
related to the affected product lines, it was determined that certain acquired
intangible assets were impaired. An impairment charge of $21 million related
to the write-down of the acquired intangible assets to fair market value was
recorded in the third quarter of 2003. These intangible assets were originally
acquired in connection with the acquisition of C-Cube Microsystems in the
second quarter of 2001. In addition, $2 million in restructuring charges were
recorded in the third quarter of 2003. These charges related to severance and
termination benefits for approximately 97 employees primarily involved in
research and development and for certain contract termination costs. The
severance benefits were paid during the third quarter of 2003.

The fair value of equipment, facilities and intangible assets determined
to be impaired was the result of the use of management estimates. Given that current market conditions for the sale of older
fabrication facilities and related equipment may fluctuate, there can be no
assurance that the Company will realize the current net carrying value of the
assets held for sale. The Company reassesses the realizability of the carrying
value of these assets at the end of each quarter until the assets are sold or
otherwise disposed of and additional adjustments may be necessary. Assets held
for sale of $59 million and $74 million were included as a component of prepaid
expenses and other current assets as of September 30, 2003 and December 31,
2002, respectively. Assets classified as held for sale are not depreciated.

The following table sets forth the Companys restructuring reserves as of
September 30, 2003, which are included in other accrued liabilities on the
balance sheet:

|                                                 |  |                |        |               |  |           |        |               |  |           |         |               |  |          |         |               |  |   |          |   |  |   |        |  |  |   |         |   |  |   |        | 
|------------------------------------------------ |  | -------------- | ------ | ------------- |  | --------- | ------ | ------------- |  | --------- | ------- | ------------- |  | -------- | ------- | ------------- |  | - | -------- | - |  | - | ------ |  |  | - | ------- | - |  | - | ------ | 
|                                                 |  | Balance at     |        | Restructuring |  | Utilized  |        | Restructuring |  | Utilized  |         | Restructuring |  | Utilized |         | Balance at   
|                                                 |  | December       |        | Expense       |  | during Q1 |        | Expense       |  | during Q2 |         | Expense       |  | during   |         | September 30,
|                                                 |  | 31, 2002       |        | Q1 2003       |  | 2003      |        | Q2 2003       |  | 2003      |         | Q3 2003       |  | Q3 2003  |         | 2003         
|                                                 |  |                |        |               |  |           |        |               |  |           |         |               |  |          |         |              
|                                                 |  | (In thousands)
|Write-down of
excess assets (a)                  |  | $              | 6,008  |               |  | $         | 29,754 |               |  | $         | (30,021 | )             |  | $        | 96,805  |               |  | $ | (97,917  | ) |  | $ | 18,505 |  |  | $ | (18,804 | ) |  | $ | 4,330  | 
|Lease terminations
and maintenance
contracts (b) |  |                | 6,757  |               |  |           | 1,396  |               |  |           | (1,172  | )             |  |          | 18,762  |               |  |   | (1,425   | ) |  |   | 2,795  |  |  |   | (2,220  | ) |  |   | 24,893 | 
|Facility closure
and other exit
costs (c)        |  |                | 8,129  |               |  |           |       |               |  |           | (2,520  | )             |  |          | 498     |               |  |   | (2,040   | ) |  |   | 274    |  |  |   | (2,378  | ) |  |   | 1,963  | 
|Payments to
employees for
severance (d)          |  |                | 1,391  |               |  |           | 4,516  |               |  |           | (4,493  | )             |  |          | 10,637  |               |  |   | (7,116   | ) |  |   | 2,942  |  |  |   | (3,471  | ) |  |   | 4,406  | 
|                                                 |  |                |        |               |  |           |        |               |  |           |         |               |  |          |         |               |  |   |          |   |  |   |        |  |  |   |         |   |  |   |        | 
|Total                                            |  | $              | 22,285 |               |  | $         | 35,666 |               |  | $         | (38,206 | )             |  | $        | 126,702 |               |  | $ | (108,498 | ) |  | $ | 24,516 |  |  | $ | (26,873 | ) |  | $ | 35,592 | 
|                                                 |  |                |        |               |  |           |        |               |  |           |         |               |  |          |         |               |  |   |          |   |  |   |        |  |  |   |         |   |  |   |        | 

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|(a) |  | The amounts utilized in 2003 reflect $145.1 million of non-cash
write-downs of amortizable intangible and other long-lived assets in the
U.S and Japan due to impairment, and $1.7 million in cash payments to
decommission and sell assets. The write-downs of the intangible and other
long-lived assets were accounted for as a reduction of the assets and did
not result in a liability. The $4.3 million balance as of September 30,
2003, relates to machinery and equipment decommissioning costs in the U.S
and estimates of selling costs for assets held for sale and is expected to
be utilized during 2003.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | Amounts utilized represent cash payments. The balance remaining for
primarily real estate lease terminations and maintenance contracts will be
paid during the remaining terms of these contracts, which extend through
2011.                                                                                                                                                                                                                                                                                                                                                                                           
|   
|(c) |  | Amounts utilized represent cash payments. The balance remaining for
facility closure and other exit costs will be paid during 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|(d) |  | Amounts utilized represent cash severance payments to approximately 604
employees during the nine months ended September 30, 2003. The balance
remaining for severance is expected to be paid by the end of the first
quarter of 2004.                                                                                                                                                                                                                                                                                                                                                                                  

Other items:

A gain of approximately $2 million was recorded in restructuring and other
items, net during the second quarter of 2003 associated with additional sales
of intellectual property associated with the CDMA handset product line.

NOTE 4 INVESTMENTS

|                                          |                              |   |                |         |              |   |         |         | 
|----------------------------------------- | ---------------------------- | - | -------------- | ------- | ------------ | - | ------- | ------- | 
|                                          |                              |   | September 30,  |         | December 31,
|                                          |                              |   | 2003           |         | 2002        
|                                          |                              |   |                |         |             
|                                          |                              |   | (In thousands)
|Available-for-sale debt securities        |                              |   |                |         |              |   |         |        
|Asset and mortgage-backed securities      |                              | $ | 386,745        |         |              | $ | 102,083 |        
|U.S. government and agency securities     |                              |   | 131,925        |         |              |   | 202,613 |        
|Corporate and municipal debt securities   |                              |   | 89,533         |         |              |   | 180,843 |        
|Commercial paper                          |                              |   | 24,994         |         |              |   |        |        
|Auction rate preferred stock              |                              |   | 3,701          |         |              |   | 55,590  |        
|Foreign debt securities                   |                              |   | 327            |         |              |   |        |        
|                                          |                              |   |                |         |              |   |         |        
|                                          | Total short-term investments |   | $              | 637,225 |              |   | $       | 541,129 | 
|                                          |                              |   |                |         |              |   |         |        
|Long-term investment in equity securities |                              | $ | 34,121         |         |              | $ | 37,655  |        
|                                          |                              |   |                |         |              |   |         |        

An unrealized gain on available-for-sale securities of $7 million, net of
the related tax effect of $4 million, and $3 million, net of the related tax
effect of $1 million, was included in accumulated other comprehensive income as
of September 30, 2003 and December 31, 2002, respectively. Net realized gains
on sales of available-for-sale debt securities were $0.1 million and $9 million
for the three and nine months ended September 30, 2003, respectively. Net
realized gains on available-for-sale debt securities were $5 million and $6
million for the three and nine months ended September 30, 2002, respectively.

During the three months ended
September 30, 2003, the Company realized a pre-tax loss of
$0.4 million associated with certain investments in equity
securities because management believed the decline in value was other
than temporary. All of this pre-tax loss is related to losses from
non-marketable equity securities accounted for under the cost method.
During the nine months ended September 30, 2003, the Company
realized a pre-tax loss of $10.5 million associated with certain
investments in equity securities because management believed the
decline in value was other than temporary. Of this pre-tax loss,
approximately, $2.7 million related to marketable equity
securities accounted for as available-for-sale and approximately
$7.8 million related to losses from non-marketable equity
securities accounted for under the cost method.

During the three months ended
September 30, 2002, the Company realized a pre-tax loss of
$9.9 million associated with certain investments in equity
securities because management believed the decline in value was other
than temporary. Of this pre-tax loss, approximately,
$5.5 million related to marketable equity securities accounted
for as available-for-sale securities and approximately,
$4.4 million related to losses from non-marketable equity
securities accounted for under the cost method. During the nine
months ended September 30, 2002, the Company realized a pre-tax
loss of $12.0 million associated with certain investments in
equity securities because management believed the decline in value
was other than temporary. Of this pre-tax loss, approximately,
$5.5 million related to marketable equity securities accounted
for as available-for-sale securities and approximately
$6.5 million related to losses from non-marketable equity
securities accounted for under the cost method.

For marketable equity securities, the
impairment losses were measured using the closing market price of the
marketable securities on the date management determined that the investments were
impaired. For non-marketable equity securities, the impairment losses
were measured using the down financing pricing.

In order to determine if an impairment
has occurred, the Company reviews the financial performance of each
investee, industry performance and outlooks for each investee, the
trading prices of marketable securities and the down
financing pricing for non-marketable equity securities.

The carrying value of the above noted
impaired marketable and non-marketable equity investments, as of
September 30, 2003 was $3.7 million and $6.2 million,
respectively.

NOTE 5  DERIVATIVE FINANCIAL INSTRUMENTS

Foreign currency risk

The Company enters into purchased currency option contracts that are
designated as foreign currency cash-flow hedges of third-party yen revenue
exposures. Changes in the fair value of currency option contracts due to
changes in time value are excluded from the assessment of effectiveness and are
recognized in interest income and other, net. During the second quarter of
2003, the Company terminated all outstanding purchased currency options hedging
previously forecasted yen revenues because the underlying revenue agreements
were modified to be denominated in U.S. dollars. At the time the options were
terminated, there were no unrealized gains

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or losses in accumulated other comprehensive income. The change in option
time value was approximately $1 million for the nine months ended September 30,
2003. For the nine months ended September 30, 2002, the change in option time
value was not significant. During the nine months ended September 30, 2003 and
2002, amounts reclassified to revenue were not significant. The Company did
not record any gains or losses due to hedge ineffectiveness for the nine months
ended September 30, 2003 and 2002. There were no option contracts outstanding
as of December 31, 2002. There were no unrealized gains or losses included in
accumulated other comprehensive income as of September 30, 2003 or December 31,
2002.

The Company enters into forward contracts that are designated as foreign
currency cash-flow hedges of forecasted payments in euros. Changes in the fair
value of the forward contracts due to changes in time value are excluded from
the assessment of effectiveness and are recognized in interest income and
other, net. As of September 30, 2003, the Company held forward contracts
designated as foreign currency cash flow hedges of forecasted euro payment
transactions that were set to expire over a three month period. There were no
such hedges outstanding as of December 31, 2002. For the three and nine months
ended September 30, 2003, the change in time value of these forward contracts
was not significant. The unrealized gains included in accumulated other
comprehensive income as of September 30, 2003, which will be reclassified to
interest income and other, net over the next three months, were not
significant. The amounts reclassified to the income statement for the three
and nine months ended September 30, 2003 were not significant. The Company did
not record any gains or losses due to hedge ineffectiveness for the nine months
ended September 30, 2003.

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 interest income and other, net were not
significant.

In October 2003, the Company entered into a forward contract to protect
the U.S. dollar value of a portion of the net investment in the Companys
wholly owned Japanese subsidiary denominated in yen. The derivative has been
designated as and qualifies as a net investment hedge and will be recorded as
an asset or liability in the statement of financial position. Effective
changes in the value of the derivative will be recorded to the accumulated
other comprehensive income until the substantial liquidation of the subsidiary.
The time value of the forward contract is excluded from the assessment of
hedge effectiveness.

Interest rate risk

With the objective of protecting cash flows and earnings of the Company
from the impact of fluctuations in interest rates, while minimizing the cost of
capital, the Company may enter into or terminate interest rate swaps, such as
the below mentioned transactions.

In the second quarter of 2003, the Company terminated interest rate swaps
(the Swaps) with a notional amount of $740 million. The unrecognized gain of
$44 million from the termination of these Swaps was included as a component of
the Convertible Notes and is being amortized as an adjustment to interest
expense over the remaining term of the hedged Convertible Notes (see Note 7).
The Swaps had effectively converted fixed interest payments on a portion of the
Companys 4% and 4.25% Convertible Subordinated Notes (Convertible Notes) to
LIBOR-based floating rates. Under the terms of the Swaps, the Company provided
collateral to match any mark-to-market exposure on the Swaps. The Swaps
qualified for hedge accounting as fair value hedges, with changes in the fair
value of the interest rate risk on the Convertible Notes being offset by
changes in the fair values of the Swaps recorded as a component of interest
expense. The difference between the changes in the fair values of the
derivative and the hedged risk resulted in a benefit to interest expense of $1
million for the nine months ended September 30, 2003. For the nine months
ended September 30, 2002, a charge to interest expense for the difference
between the changes in the fair values of the derivative and the hedged risk
was not significant. Collateral of approximately $7 million included in other
long-term assets as of December 31, 2002, was returned to the Company upon
termination of the Swaps.

In the second quarter of 2003, the Company entered into an interest rate
swap transaction to effectively convert the LIBOR-based floating rate interest
payments on the equipment operating leases discussed in Note 12, with an
initial notional amount of $395 million, to a fixed interest rate (the Lease
Swap). The Lease Swap qualifies to be accounted for as a cash flow hedge of
the forecasted interest payments attributable to the benchmark interest rate on
the equipment operating leases through September 2006. The unrealized gains or
losses included in accumulated other comprehensive income will be reclassified
to cost of revenues on a quarterly basis as lease payments are made. A loss of
approximately $2 million, net of tax of $1 million included in accumulated
other comprehensive income as of September 30, 2003, is expected to be
reclassified to cost of revenues within the next 12 months. The loss due to
ineffectiveness recorded in interest income and other, net during the three and
nine months ended September 30, 2003
was not significant. Under the terms of the Lease Swap, the Company must
provide collateral to match any mark-to-market exposure on the swap. As of
September 30, 2003, collateral of approximately $8 million was included in
other long-term assets.

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NOTE 6  BALANCE SHEET DETAIL

|                                                              |                                 |                                           |           |                |          |              |           |         |            |  
|------------------------------------------------------------- | ------------------------------- | ----------------------------------------- | --------- | -------------- | -------- | ------------ | --------- | ------- | ---------- | -
|                                                              |                                 |                                           |           | September 30,  |          | December 31,
|                                                              |                                 |                                           |           | 2003           |          | 2002        
|                                                              |                                 |                                           |           |                |          |             
|                                                              |                                 |                                           |           | (In thousands)
|Cash and cash equivalents:                                    |                                 |                                           |           |                |          |              |           |        
|                                                              | Cash                            |                                           | $         | 78,455         |          |              | $         | 279,620 |           
|                                                              | Cash equivalents                |                                           |           | 271,298        |          |              |           | 169,227 |           
|                                                              |                                 |                                           |           |                |          |              |           |        
|                                                              |                                 | $                                         | 349,753   |                |          | $            | 448,847   |        
|                                                              |                                 |                                           |           |                |          |              |           |        
|Inventories:                                                  |                                 |                                           |           |                |          |              |           |        
|                                                              | Raw materials                   |                                           | $         | 15,760         |          |              | $         | 18,152  |           
|                                                              | Work-in-process                 |                                           |           | 113,516        |          |              |           | 65,052  |           
|                                                              | Finished goods                  |                                           |           | 73,950         |          |              |           | 111,262 |           
|                                                              |                                 |                                           |           |                |          |              |           |        
|                                                              |                                 | $                                         | 203,226   |                |          | $            | 194,466   |        
|                                                              |                                 |                                           |           |                |          |              |           |        
|Property and equipment:                                       |                                 |                                           |           |                |          |              |           |        
|                                                              |                                 | Land                                      |           | $              | 38,269   |              |           | $       | 53,013     |  
|                                                              |                                 | Buildings and improvements                |           |                | 358,584  |              |           |         | 470,028    |  
|                                                              |                                 | Equipment                                 |           |                | 708,998  |              |           |         | 1,253,061  |  
|                                                              |                                 | Furniture and fixtures                    |           |                | 36,098   |              |           |         | 46,783     |  
|                                                              |                                 | Leasehold improvements                    |           |                | 36,407   |              |           |         | 37,151     |  
|                                                              |                                 | Construction in progress                  |           |                | 19,902   |              |           |         | 18,747     |  
|                                                              |                                 |                                           |           |                |          |              |           |        
|                                                              |                                 |                                           | 1,198,258 |                |          |              | 1,878,783 |        
|                                                              |                                 | Accumulated depreciation and amortization |           |                | (712,982 | )            |           |         | (1,131,819 | )
|                                                              |                                 |                                           |           |                |          |              |           |        
|                                                              |                                 | $                                         | 485,276   |                |          | $            | 746,964   |        
|                                                              |                                 |                                           |           |                |          |              |           |        
|Other long-term assets:                                       |                                 |                                           |           |                |          |              |           |        
|                                                              | Non-current assets and deposits |                                           | $         | 329,388        |          |              | $         | 211,248 |           
|                                                              | Investment in equity securities |                                           |           | 34,121         |          |              |           | 37,655  |           
|                                                              | Other assets                    |                                           |           | 78,677         |          |              |           | 132,622 |           
|                                                              |                                 |                                           |           |                |          |              |           |        
|                                                              |                                 | $                                         | 442,186   |                |          | $            | 381,525   |        
|                                                              |                                 |                                           |           |                |          |              |           |        
|Goodwill:                                                     |                                 |                                           |           |                |          |              |           |        
|                                                              |                                 | Semiconductor segment                     |           | $              | 887,990  |              |           | $       | 887,990    |  
|                                                              |                                 | Storage systems segment                   |           |                | 81,232   |              |           |         | 80,474     |  
|                                                              |                                 |                                           |           |                |          |              |           |        
|                                                              |                                 | $                                         | 969,222   |                |          | $            | 968,464   |        
|                                                              |                                 |                                           |           |                |          |              |           |        
|Amortized intangible assets, net of
accumulated amortization: |                                 |                                           |           |                |          |              |           |        
|                                                              |                                 | Semiconductor segment                     |           | $              | 151,754  |              |           | $       | 236,723    |  
|                                                              |                                 | Storage systems segment                   |           |                | 27,111   |              |           |         | 45,856     |  
|                                                              |                                 |                                           |           |                |          |              |           |        
|                                                              |                                 | $                                         | 178,865   |                |          | $            | 282,579   |        
|                                                              |                                 |                                           |           |                |          |              |           |        

The Company monitors the recoverability of goodwill recorded in connection
with acquisitions annually, or sooner if events or changes in circumstances
indicate that the carrying amount may not be recoverable. An impairment, if
any, would be determined in accordance with SFAS No. 142, which uses a fair
value model for determining the carrying value of goodwill. See the Companys
Annual Report on Form 10-K for further discussion.

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NOTE 7  DEBT

|                                                                                        |                                              |  |                |  |        |  |          |   |            |   |               |  |              |   |           |           |  |   |           |           | 
|--------------------------------------------------------------------------------------- | -------------------------------------------- |  | -------------- |  | ------ |  | -------- | - | ---------- | - | ------------- |  | ------------ | - | --------- | --------- |  | - | --------- | --------- | 
|                                                                                        |                                              |  |                |  |        |  | Interest |   | Conversion |   | September 30, |  | December 31,
|                                                                                        |                                              |  | Maturity       |  | Rate * |  | Price    |   | 2003       |   | 2002         
|                                                                                        |                                              |  |                |  |        |  |          |   |            |   |              
|                                                                                        |                                              |  | (In thousands)
|2003 Convertible Subordinated Notes                                                     |                                              |  | 2010           |  |        |  | 4        | % |            | $ | 13.4200       |  |              | $ | 350,000   |           |  | $ |          |          
|2001 Convertible Subordinated Notes                                                     |                                              |  | 2006           |  |        |  | 4        | % |            | $ | 26.3390       |  |              |   | 490,000   |           |  |   | 490,000   |          
|2000 Convertible Subordinated Notes                                                     |                                              |  | 2005           |  |        |  | 4        | % |            | $ | 70.2845       |  |              |   | 250,000   |           |  |   | 385,000   |          
|1999 Convertible Subordinated Notes                                                     |                                              |  | 2004           |  |        |  | 4.25     | % |            | $ | 15.6765       |  |              |   |          |           |  |   | 324,935   |          
|Change in fair value of the hedged
interest rate risk on Convertible
Subordinated Notes |                                              |  |                |  |        |  |          |   |            |   |               |  |              |   |          |           |  |   | 36,724    |          
|Deferred gain on terminated swaps                                                       |                                              |  |                |  |        |  |          |   |            |   |               |  |              |   | 36,224    |           |  |   | 4,025     |          
|Capital lease obligations                                                               |                                              |  |                |  |        |  |          |   |            |   |               |  |              |   | 630       |           |  |   | 894       |          
|                                                                                        |                                              |  |                |  |        |  |          |   |            |   |               |  |              |   |           |           |  |   |           |          
|                                                                                        |                                              |  |                |  |        |  |          |   |            |   |               |  |              |   | 1,126,854 |           |  |   | 1,241,578 |          
|Current portion of long-term debt
and capital lease obligations                         |                                              |  |                |  |        |  |          |   |            |   |               |  |              |   | (363      | )         |  |   | (361      | )        
|                                                                                        |                                              |  |                |  |        |  |          |   |            |   |               |  |              |   |           |           |  |   |           |          
|                                                                                        | Long-term debt and capital lease obligations |  |                |  |        |  |          |   |            |   |               |  |              |   | $         | 1,126,491 |  |   | $         | 1,241,217 | 
|                                                                                        |                                              |  |                |  |        |  |          |   |            |   |               |  |              |   |           |           |  |   |           |          



| | * |  | The interest rate payable on a portion of the Convertible Subordinated
Notes was converted to floating rates through interest rate swaps.
Interest rate swaps with a notional amount of $740 million were
terminated in the second quarter of 2003 (see Note 5). The weighted
average interest rate payable on the Convertible Subordinated Notes,
after adjusting for the impact of the interest rate swaps was 4.02% and
2.16% for the three months ended September 30, 2003 and 2002,
respectively, and 4.55% and 3.38% for the nine months ended September 30,
2003 and 2002, respectively.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

On September 18, 2003, the Company redeemed the balance of the 1999
Convertible Subordinated Notes (the 1999 Convertible Notes) that were
outstanding on that date. Cash of $173 million was paid to redeem the
remaining 1999 Convertible Notes at a total redemption price of $1,008.86 per
$1,000 principal amount of the notes consisting of $1,008.50 principal amount
plus accrued interest of $0.36. A net pre-tax loss of $1 million was
recognized, in interest income and other, net, on the redemption of the 1999
Convertible Notes. The pre-tax loss is net of the write-off of debt issuance
costs and the remaining deferred gain on the terminated Swap (see Note 5).

On May 12, 2003, the Company issued $350 million of 4% Convertible
Subordinated Notes (the 2003 Convertible Notes) due in 2010. The 2003
Convertible Notes are subordinated to all existing and future senior debt, are
convertible at the holders option at any time prior to the maturity date of
such notes, into shares of the Companys common stock at a conversion price of
$13.42 per share. The Company cannot elect to redeem the 2003 Convertible
Notes prior to maturity. However, each holder of the 2003 Convertible Notes has
the right to cause the Company to repurchase all of such holders convertible
notes at 100% of their principal amount plus accrued interest upon the
occurrence of any fundamental change, which includes a transaction or event
such as an exchange offer, liquidation, tender offer, consolidation, merger or
combination. Interest is payable semiannually. The Company paid approximately
$10.9 million in debt issuance costs that are being amortized using the
interest method.

Approximately $28 million of the proceeds from issuance of the 2003
Convertible Notes were used to purchase call spread options on LSIs common
stock (the Call Spread Options). The Call Spread Options, including fees and
costs, have been accounted for as capital transactions in accordance with
Emerging Issues Task Force No. 00-19, Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Companys Own Stock.
The Call Spread Options cover approximately 26.1 million shares
of Company common
stock, which is the number of shares that are initially issuable upon
conversion of the 2003 Convertible Notes in full.

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The Call Spread Options are
designed to mitigate dilution from conversion of the 2003 Convertible Notes in
the event that the market price per share of the Companys common stock upon exercise of the Call Spread
Options is greater than $13.42 and is less than or equal to $23.875. The Call
Spread Options may be settled at the Companys option in either net shares or
in cash and expire in 2010. Settlement of the Call Spread Options in net
shares on the expiration date would result in the Company receiving a number of
shares, not to exceed 26.1 million shares, of our common stock with a value
equal to the amount otherwise receivable on cash settlement. Should there be
an early unwind of the Call Spread Options, the amount of cash or net shares
potentially received by the Company will be dependent upon then existing
overall market conditions, and on the Companys stock price, the volatility of
the Companys stock and the amount of time remaining on the Call Spread
Options.

The proceeds from the 2003 Convertible Notes were used to repurchase $153
million of the 1999 Convertible Subordinated Notes and $135 million of the 2000
Convertible Subordinated Notes. A net pre-tax loss of $2 million was
recognized, in interest income and other, net, on the repurchases of the 1999
and 2000 Convertible Notes. The pre-tax loss is net of the write-off of debt
issuance costs and a portion of the deferred gain on the terminated Swaps (see
Note 5).

NOTE 8  COMMON STOCK

Stock option plans.In May 2003, the stockholders approved an amendment
to the Amended 1995 Director Option Plan to increase the number of shares of
common stock reserved for issuance there under by one million. As of September
30, 2003, 1.1 million shares were available for future grants under the Amended
1995 Director Option Plan.

In May 2003, the stockholders approved the adoption of the 2003 Equity
Incentive Plan (2003 Plan) under which 11 million shares of common stock were
reserved for issuance. Under the terms of the 2003 Plan, the Company may grant
stock options or restricted stock awards to employees with an exercise price
that is no less than the fair market value of the stock on the date of grant.
No participant shall be granted options covering more than 2 million shares in
any year. The term of each option is determined by the Board of Directors and
is usually ten years. Options generally vest in annual increments of 25% per
year commencing one year from the date of grant. Under the 2003 Plan, the
Company may also grant restricted stock awards. No participant may be granted
more than 0.5 million shares of restricted stock in any year. The vesting
requirements for the restricted stock awards are determined by the Board of
Directors. As of September 30, 2003, there were 11 million shares available
for future grants under the 2003 Plan.

Stock option exchange program.On August 20, 2002, the Company filed with
the Securities Exchange Commission an offer to exchange stock options
outstanding under the 1991 Equity Incentive Plan and the 1999 Nonstatutory
Stock Option Plan for new options. Under the exchange offer, eligible
employees had the opportunity to exchange eligible stock options for the
promise to grant new options under the 1999 Nonstatutory Stock Option Plan.
Directors and executive officers of the Company were not eligible to
participate in this program. The exchange offer expired September 18, 2002,
and the Company accepted options to purchase an aggregate of 16,546,370 shares
for exchange. On March 20, 2003, the Company granted a new option that covered
two shares of LSI Logic common stock for every three shares covered by an
option that an employee had elected to exchange. The exercise price per share
of the new options was equal to the fair market value of the Companys common
stock on the grant date. The Company granted options to purchase 10,691,139
shares at an exercise price of $5.06 per share. The exchange program did not
result in the recording of any compensation expense in the statement of
operations.

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NOTE 9  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 September 30,       
|                                          |                                           |   |                                        
|                                          |                                           |   | 2003                                    |         | 2002   
|                                          |                                           |   |                                         |         |        
|                                          |                                           |   |                                         |         |         |  |         |         |       |   | Per-    |       |        |   |         |         |   |  |         |         | Per- 
|                                          |                                           |   |                                         |         |         |  |         |         |       |   | Share   |       |        |   |         |         |   |  |         |         | Share
|                                          |                                           |   | Loss*                                   |         | Shares+ |  | Amount  |         | Loss* |   | Shares+ |       | Amount
|                                          |                                           |   |                                         |         |         |  |         |         |       |   |         |       |       
|                                          |                                           |   | (In thousands except per share amounts)
|Basic EPS:                                |                                           |   |                                         |         |         |  |         |         |       |   |         |       |        |   |         |         |   |  |         |         |       |   |       |      
|Net loss available to common stockholders |                                           | $ | (31,652                                 | )       |         |  | 378,749 |         |       | $ | (0.08   | )     |        | $ | (27,626 | )       |   |  | 370,948 |         |       | $ | (0.07 | )    
|                                          |                                           |   |                                         |         |         |  |         |         |       |   |         |       |        |   |         |         |   |  |         |         |       |   |       |       |  
|                                          | Effect of dilutive securities:            |   |                                         |        |         |  |         |        |       |   |         |      |        |   |         |        |   |  |         |        |       |   |       |      |  
|Diluted EPS:                              |                                           |   |                                         |         |         |  |         |         |       |   |         |       |        |   |         |         |   |  |         |         |       |   |       |      
|                                          | Net loss available to common stockholders |   | $                                       | (31,652 | )       |  |         | 378,749 |       |   | $       | (0.08 | )      |   | $       | (27,626 | ) |  |         | 370,948 |       |   | $     | (0.07 | )
|                                          |                                           |   |                                         |         |         |  |         |         |       |   |         |       |        |   |         |         |   |  |         |         |       |   |       |       |  

|                                          |                                           |   |                                         |          |         |  |         |         |       |   |         |       |        |   |          |          |   |  |         |         |       |   |       |       |  
|----------------------------------------- | ----------------------------------------- | - | --------------------------------------- | -------- | ------- |  | ------- | ------- | ----- | - | ------- | ----- | ------ | - | -------- | -------- | - |  | ------- | ------- | ----- | - | ----- | ----- | -
|                                          |                                           |   | Nine Months Ended September 30,        
|                                          |                                           |   |                                        
|                                          |                                           |   | 2003                                    |          | 2002   
|                                          |                                           |   |                                         |          |        
|                                          |                                           |   |                                         |          |         |  |         |         |       |   | Per-    |       |        |   |          |          |   |  |         |         | Per- 
|                                          |                                           |   |                                         |          |         |  |         |         |       |   | Share   |       |        |   |          |          |   |  |         |         | Share
|                                          |                                           |   | Loss*                                   |          | Shares+ |  | Amount  |         | Loss* |   | Shares+ |       | Amount
|                                          |                                           |   |                                         |          |         |  |         |         |       |   |         |       |       
|                                          |                                           |   | (In thousands except per share amounts)
|Basic EPS:                                |                                           |   |                                         |          |         |  |         |         |       |   |         |       |        |   |          |          |   |  |         |         |       |   |       |      
|Net loss available to common stockholders |                                           | $ | (316,161                                | )        |         |  | 376,931 |         |       | $ | (0.84   | )     |        | $ | (261,670 | )        |   |  | 369,707 |         |       | $ | (0.71 | )    
|                                          |                                           |   |                                         |          |         |  |         |         |       |   |         |       |        |   |          |          |   |  |         |         |       |   |       |       |  
|                                          | Effect of dilutive securities:            |   |                                         |         |         |  |         |        |       |   |         |      |        |   |          |         |   |  |         |        |       |   |       |      |  
|Diluted EPS:                              |                                           |   |                                         |          |         |  |         |         |       |   |         |       |        |   |          |          |   |  |         |         |       |   |       |      
|                                          | Net loss available to common stockholders |   | $                                       | (316,161 | )       |  |         | 376,931 |       |   | $       | (0.84 | )      |   | $        | (261,670 | ) |  |         | 369,707 |       |   | $     | (0.71 | )
|                                          |                                           |   |                                         |          |         |  |         |         |       |   |         |       |        |   |          |          |   |  |         |         |       |   |       |       |  

*     Numerator

+     Denominator

Options to purchase approximately 68,664,265 shares and 57,393,575 shares
were outstanding at September 30, 2003 and 2002, respectively, and were
excluded from the computation of diluted shares because of their antidilutive
effect on loss per share for the three and nine months then ended. The
exercise price of these options ranged from $0.06 to $72.25 at September 30,
2003, and from $0.01 to $72.25 at September 30, 2002.

For the three and nine months ended September 30, 2003, common equivalent
shares of 57,882,950 and 52,527,478, respectively, associated with the 2003,
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 nine months ended September 30, 2002, common equivalent shares of
47,599,494 and 47,680,400, respectively, 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.

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NOTE 10  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 |         | Nine Months Ended
|                                                                                                                 |  | September 30,      |         | September 30,    
|                                                                                                                 |  |                    |         |                  
|                                                                                                                 |  | 2003               |         | 2002              |  | 2003 |         | 2002
|                                                                                                                 |  |                    |         |                   |  |      |         |     
|                                                                                                                 |  | (In thousands)    
|Net loss                                                                                                         |  | $                  | (31,652 | )                 |  | $    | (27,626 | )    |  | $ | (316,161 | ) |  | $ | (261,670 | )
|Change in unrealized gain on derivative
instruments designated
as and qualifying as cash-flow hedges, net of tax |  |                    | 1,059   |                   |  |      |        |      |  |   | 1,523    |   |  |   |         |  
|Change in unrealized gain on available for sale
securities, net of
tax                                           |  |                    | 2,735   |                   |  |      | (5,520  | )    |  |   | 4,446    |   |  |   | (21,787  | )
|Change in foreign currency translation adjustments                                                               |  |                    | 10,643  |                   |  |      | (6,572  | )    |  |   | 19,057   |   |  |   | 7,627    |  
|                                                                                                                 |  |                    |         |                   |  |      |         |      |  |   |          |   |  |   |          |  
|Comprehensive loss                                                                                               |  | $                  | (17,215 | )                 |  | $    | (39,718 | )    |  | $ | (291,135 | ) |  | $ | (275,830 | )
|                                                                                                                 |  |                    |         |                   |  |      |         |      |  |   |          |   |  |   |          |  

NOTE 11  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, and application specific standard
products in silicon, or ASSPs. Semiconductor segment product offerings also
include 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 nine
months ended September 30, 2003 and 2002:

|                      |                 |       |   |                    |         |                   |   |         |         |      |   |          |           |   |   |           |           |  
|--------------------- | --------------- | ----- | - | ------------------ | ------- | ----------------- | - | ------- | ------- | ---- | - | -------- | --------- | - | - | --------- | --------- | -
|                      |                 |       |   | Three months ended |         | Nine months ended
|                      |                 |       |   | September 30,      |         | September 30,    
|                      |                 |       |   |                    |         |                  
|                      |                 |       |   | 2003               |         | 2002              |   | 2003    |         | 2002
|                      |                 |       |   |                    |         |                   |   |         |         |     
|                      |                 |       |   | (In thousands)    
|Revenues:             |                 |       |   |                    |         |                   |   |         |         |      |   |          |           |   |   |          
|                      | Semiconductor   |       | $ | 346,447            |         |                   | $ | 400,245 |         |      | $ | 925,661  |           |   | $ | 1,107,596 |          
|                      | Storage Systems |       |   | 103,780            |         |                   |   | 86,719  |         |      |   | 304,564  |           |   |   | 229,645   |          
|                      |                 |       |   |                    |         |                   |   |         |         |      |   |          |           |   |   |          
|                      |                 | Total |   | $                  | 450,227 |                   |   | $       | 486,964 |      |   | $        | 1,230,225 |   |   | $         | 1,337,241 |  
|                      |                 |       |   |                    |         |                   |   |         |         |      |   |          |           |   |   |          
|Loss from operations: |                 |       |   |                    |         |                   |   |         |         |      |   |          |           |   |   |          
|                      | Semiconductor   |       | $ | (33,835            | )       |                   | $ | (29,271 | )       |      | $ | (302,261 | )         |   | $ | (257,863  | )        
|                      | Storage Systems |       |   | 10,187             |         |                   |   | 5,541   |         |      |   | 12,110   |           |   |   | 12,892    |          
|                      |                 |       |   |                    |         |                   |   |         |         |      |   |          |           |   |   |          
|                      |                 | Total |   | $                  | (23,648 | )                 |   | $       | (23,730 | )    |   | $        | (290,151  | ) |   | $         | (244,971  | )
|                      |                 |       |   |                    |         |                   |   |         |         |      |   |          |           |   |   |          

Intersegment revenues for the periods presented above were not significant. For
the three months ended September 30, 2003, charges of $25 million for
restructuring of operations and other items, net primarily impacted the
Semiconductor segment. For the nine months ended September 30, 2003,
restructuring of operations and other items, net of $170 million and $15
million were included in the Semiconductor segment and the Storage Systems
segment, respectively. For the three and nine months ended

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September 30, 2002, restructuring of operations and other items, net of
$13 million and $72 million, respectively, were primarily included in the
Semiconductor segment.

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

|                         |  |                                     |  |                                  |              |                                 |  |      |              |      |  |  |              |   |  |  |              |  
|------------------------ |  | ----------------------------------- |  | -------------------------------- | ------------ | ------------------------------- |  | ---- | ------------ | ---- |  |  | ------------ | - |  |  | ------------ | -
|                         |  |                                     |  | Three months ended September 30, |              | Nine months ended September 30,
|                         |  |                                     |  |                                  |              |                                
|                         |  |                                     |  | 2003                             |              | 2002                            |  | 2003 |              | 2002
|                         |  |                                     |  |                                  |              |                                 |  |      |              |     
|Semiconductor segment:   |  |                                     |  |                                  |              |                                 |  |      |              |      |  |  |              |   |  | 
|                         |  | Number of significant customers     |  |                                  | 1            |                                 |  |      | 1            |      |  |  | 1            |   |  |  | 1            |  
|                         |  | Percentage of segment revenues      |  |                                  | 27           | %                               |  |      | 26           | %    |  |  | 18           | % |  |  | 21           | %
|Storage Systems segment: |  |                                     |  |                                  |              |                                 |  |      |              |      |  |  |              |   |  | 
|                         |  | Number of significant customers     |  |                                  | 3            |                                 |  |      | 3            |      |  |  | 3            |   |  |  | 3            |  
|                         |  | Percentage of segment revenues      |  |                                  | 58%, 12%, 11 | %                               |  |      | 39%, 21%, 16 | %    |  |  | 50%, 14%, 12 | % |  |  | 35%, 19%, 17 | %
|Consolidated:            |  |                                     |  |                                  |              |                                 |  |      |              |      |  |  |              |   |  | 
|                         |  | Number of significant customers     |  |                                  | 2            |                                 |  |      | 1            |      |  |  | 2            |   |  |  | 1            |  
|                         |  | Percentage of consolidated revenues |  |                                  | 21%, 15      | %                               |  |      | 21           | %    |  |  | 14%, 14      | % |  |  | 17           | %

The following is a summary of total assets by segment as of September 30,
2003 and December 31, 2002:

|              |                 |       |   |                |           |              |   |           |           | 
|------------- | --------------- | ----- | - | -------------- | --------- | ------------ | - | --------- | --------- | 
|              |                 |       |   | September 30,  |           | December 31,
|              |                 |       |   | 2003           |           | 2002        
|              |                 |       |   |                |           |             
|              |                 |       |   | (In thousands)
|Total assets: |                 |       |   |                |           |              |   |          
|              | Semiconductor   |       | $ | 3,541,227      |           |              | $ | 3,851,283 |          
|              | Storage Systems |       |   | 316,283        |           |              |   | 291,454   |          
|              |                 |       |   |                |           |              |   |          
|              |                 | Total |   | $              | 3,857,510 |              |   | $         | 4,142,737 | 
|              |                 |       |   |                |           |              |   |           |          

Revenues from domestic operations were $209 million, representing 46% of
consolidated revenues for the third quarter of 2003 compared to $233 million,
representing 48% of consolidated revenues for the same period of 2002.

Revenues from domestic operations were $633 million, representing 51% of
consolidated revenues, for the first nine months of 2003 compared to $674
million, representing 50% of consolidated revenues, for the same period of
2002.

NOTE 12 COMMITMENTS AND CONTINGENCIES

On March 28, 2003, the Company entered into two lease and security
agreements, each with Bank of America, National Association (BANA), acting as
the Lessor, and Wells Fargo Bank Northwest, as the Agent, for a total of $395
million for certain wafer fabrication equipment (the Equipment). The leases
qualify for operating lease accounting treatment. As of September 30, 2003,
the amount under both leases was fully drawn. Each lease has a term of 3.5
years with no option for renewal. The Company may, at the end of the lease
term, return or purchase, at a pre-determined amount, all of the Equipment.
The first lease was for $235 million and was for equipment that was previously
on lease immediately prior to closing this transaction. Please see the
Companys Annual Report on Form 10-K for a complete discussion of the former
leases. In October 2003, BANA, with the Companys approval, assigned its
rights as Lessor on the first lease to Bank of the West. The second lease was
for $160 million and was for Equipment that was sold to BANA and then
immediately leased back in a transaction commonly referred to as a
sale-leaseback. The Equipment sold had a book value of approximately $103
million. The resulting $57 million gain on the sale of the Equipment will be
deferred until the end of the lease term and has been recorded as a non-current
liability as of September 30, 2003. The Company has $371 million in cash that
is posted as collateral for the new leases. The lessor has access to the
Companys cash collateral only in the event of a default. Of this cash
collateral, $59 million, representing the amount of cash collateral to be
released in the next 12 months, is reflected in other current assets and the
remaining cash collateral of $312 million is recorded in other non-current
assets. In addition,

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the Company is required to maintain unrestricted cash reserves in an amount no
less than the higher of a) the sum of $100 million plus the principal amount
outstanding under the 4% Convertible Subordinated Notes due February 15, 2005;
or b) $350 million. The Company was in compliance with this requirement as of
September 30, 2003.

The Company guarantees residual values related to equipment on leases. As
of September 30, 2003, its maximum potential exposure to residual value
guarantees was approximately $163 million and the Company does not expect to
have a loss on such guarantees.

In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN 45 requires that a
liability be recorded in the guarantors balance sheet upon issuance of a
guarantee. In addition, FIN 45 requires disclosures about the guarantees that
an entity has issued, including a reconciliation of changes in the entitys
product warranty liabilities. The initial recognition and initial measurement
provisions of FIN 45 are applicable on a prospective basis to guarantees issued
or modified after December 31, 2002, irrespective of the guarantors fiscal
year-end. The disclosure requirements of FIN 45 are effective for financial
statements of interim or annual periods ending after December 15, 2002. The
guaranteed residual values for the equipment under the Companys operating
leases are subject to FIN 45. The fair value of the guarantee of the residual
value of the equipment was determined using management estimates and an
independent appraisal and was recorded as a non-current asset and liability
each in the amount of $7 million as of September 30, 2003.

In connection with the equipment operating leases described above, the
Company entered into standby letters of credit for $63 million to expire at the
end of the lease term. These instruments are off-balance sheet commitments to
extend financial guarantees. The fair value of the letters of credit
approximates the contract amount.

No officer or employee of the Company has any financial interest in these
leasing arrangements. The minimum lease payments, excluding the residual value
guarantees, under the two lease agreements are $33 million, $64 million, $62
million and $45 million in 2003, 2004, 2005 and 2006, respectively.

The Company is a party to a variety of agreements pursuant to which it may
be obligated to indemnify the other party with respect to certain matters.
Typically, these obligations arise in connection with contracts and license
agreements or the sale of assets, under which the Company customarily agrees to
hold the other party harmless against losses arising from a breach of
warranties, representations and covenants related to such matters as title to
assets sold, validity of certain intellectual property rights, non-infringement
of third-party rights, and certain income tax related matters. In each of
these circumstances, payment by the Company is typically subject to the other
party making a claim to and cooperating with the Company pursuant to the
procedures specified in the particular contract. This usually allows the
Company to challenge the other partys claims or, in case of breach of
intellectual property representations or covenants, to control the defense or
settlement of any third-party claims brought against the other party. Further,
the Companys obligations under these agreements may be limited in terms of
activity (typically to replace or correct the products or terminate agreement
with a refund to the other party), duration and/or amounts. In some instances,
the Company may have recourse against third parties and/or insurance covering
certain payments made by the Company.

NOTE 13  LEGAL MATTERS

In February 1999, a lawsuit alleging patent infringement was filed in the
United States District Court for the District of Arizona by the Lemelson
Medical, Education & Research Foundation, Limited Partnership (Lemelson)
against 88 electronics industry companies, including the Company. The case
number is CIV990377PHXRGS. The patents involved in this lawsuit are alleged to
relate to semiconductor manufacturing and computer imaging, including the use
of bar coding for automatic identification of articles. The plaintiff sought an
infringement judgment, an injunction, treble damages, attorneys fees and
further relief as the court may provide. In September 1999, the Company filed
an answer denying infringement, raising affirmative defenses and asserting a
counterclaim for declaratory judgment of non-infringement, invalidity and
unenforceability of Lemelsons patents. As of September 30, 2003, the discovery
phase was continuing. Initial patent claim construction briefs were filed in
October 2003. As of this time, no trial date has been set. While the Company
cannot make any assurance regarding the eventual resolution of this matter, the
Company does not believe it will have a material adverse effect on the
consolidated results of operations or financial condition.

U.S. Philips Corporation, a subsidiary of Royal Philips Electronics of
Netherlands (Philips), filed suits on October 17, 2001 in the U.S. District
Court in New York against eight companies, including the Company, for allegedly
infringing and inducing others to infringe Philips U.S. Patent Number
4,689,740. This patent is directed to devices and methods used with the
Inter-Integrated Circuit Bus. Philips sought an infringement judgment, an
injunction, attorneys fees, costs and further relief as the court may provide.

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In September 2003, the parties reached a settlement agreement and anticipate
that the dismissal of the case will be filed in early 2004. The settlement did
not have a material impact on the Companys results of operations or financial
condition.

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

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

NOTE 14  SUBSEQUENT EVENTS

See Notes 5 and 12 of the Notes.




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

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

OVERVIEW

Revenues for the three months ended September 30, 2003, were approximately
$450.2 million compared to $407.2 million and $487.0 million for the three
months ended June 30, 2003 and September 30, 2002, respectively. The
consolidated gross profit margin was 41% for each of the three months ended
September 30, 2003, June 30, 2003 and September 30, 2002, respectively.
Operating expenses for the three months ended September 30, 2003, were $208.6
million compared to $320.9 million and $222.3 million for the three months
ended June 30, 2003 and September 30, 2002, respectively. Net loss per diluted
share was 8 cents for the three months ended September 30, 2003, compared to a
net loss per diluted share of 43 cents and 7 cents for the three months ended
June 30, 2003 and September 30, 2002, respectively.

In September 2003, we signed a definitive agreement with Rohm Company Ltd.
(Rohm), a Japanese company, to sell our wafer manufacturing facility in
Tsukuba, Japan for $2.65 billion yen ($23.7 million as of September 30, 2003).
The transaction is scheduled to close in the fourth quarter of 2003. The sale
of the Tsukuba, Japan facility will complete our transition to a flexible
production model by focusing internal wafer fabrication capacity at our
Gresham, Oregon campus, while subcontracting part of our wafer production with
foundry partners. We recorded $124.5 million and $24.5 million in restructuring
and other items in the second and third quarters of 2003, respectively. See
Note 3 of the Notes to our Unaudited Consolidated Financial Statements referred
to herein as the Notes. See discussion below under results of operations for
information by reportable segment and more details by income statement line
item.

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Looking forward into the fourth quarter of 2003, we are forecasting 0 to 2
percent revenue growth as compared to the third quarter of 2003. We believe
that our continuing R&D investments, our flexible manufacturing strategy and
our current cash, cash equivalents and short-term investments position ($987
million as of September 30, 2003) have enhanced our competitive position
heading into the projected industry upturn in 2004.

Financing activities

On September 18, 2003, we redeemed the balance of the 1999 Convertible
Subordinated Notes (the 1999 Convertible Notes) that were outstanding on that
date. Cash of $173 million was paid to redeem the remaining 1999 Convertible
Notes at a total redemption price of $1,008.86 per $1,000 principal amount of
the notes consisting of $1,008.50 principal amount plus accrued interest of
$0.36. A net pre-tax loss of $1 million was recognized, in interest income and
other, net, on the redemption of the 1999 Convertible Notes. The pre-tax loss
is net of the write-off of debt issuance costs and the remaining deferred gain
on the terminated Swap.

On May 12, 2003, we issued $350 million of 4% Convertible Subordinated
Notes (the 2003 Convertible Notes) due in 2010. The 2003 Convertible Notes
are subordinated to all existing and future senior debt, are convertible at the
holders option, at any time prior to the maturity date of the Convertible
Notes, into shares of our common stock at a conversion price of approximately
$13.42 per share. We cannot elect to redeem the 2003 Convertible Notes prior
to maturity; however, each holder of the 2003 Convertible Notes has the right
to cause us to repurchase all of such holders Convertible Notes at 100% of
their principal amount plus accrued interest upon the occurrence of any
fundamental change, which includes a transaction or event such as an exchange
offer, liquidation, tender offer, consolidation, merger or combination.
Interest is payable semiannually. We paid approximately $10.9 million for debt
issuance costs that are being amortized using the interest method.

Approximately $28 million of the proceeds from issuance of the 2003
Convertible Notes were used to purchase call spread options on LSIs common
stock (the Call Spread Options). The Call Spread Options cover approximately
26.1 million shares of our common stock, which is the number of shares that are
initially issuable upon conversion of the 2003 Convertible Notes in full. The
Call Spread Options are designed to mitigate dilution from conversion of the
2003 Convertible Notes in the event that the market price per share of our
common stock upon exercise of the Call Spread Options is greater than $13.42
and is less than or equal to $23.875. The Call Spread Options may be settled
at our option in either net shares or in cash and expire in 2010.

Proceeds from the 2003 Convertible Notes were used to repurchase $153
million of the 1999 Convertible Subordinated Notes and $135 million of the 2000
Convertible Subordinated Notes. A net pre-tax loss of $2 million was
recognized, in interest income and other, net, on the repurchases of the 1999
and 2000 Convertible Notes. The pre-tax loss is net of the write-off of debt
issuance costs and a portion of the unamortized gain on the terminated Swaps
(see Notes 5 and 7 of the Notes).

Stock option exchange

On August 20, 2002, we filed, with the Securities Exchange Commission, an
offer to exchange stock options outstanding under the 1991 Equity Incentive
Plan and the 1999 Nonstatutory Stock Option Plan for new options. Under the
exchange offer, eligible employees had the opportunity to exchange eligible
stock options for the promise to grant new options under the 1999 Nonstatutory
Stock Option Plan. Directors and executive officers of the Company were not
eligible to participate in this program. The exchange offer expired September
18, 2002, and the Company accepted options to purchase an aggregate of
16,546,370 shares for exchange. On March 20, 2003, we granted a new option
that covered two shares of LSI Logic common stock for every three shares
covered by an option that an employee had elected to exchange. The exercise
price per share of the new options was equal to the fair market value of our
common stock on the grant date. We granted options to purchase 10,691,139
shares at an exercise price of $5.06 per share. The exchange program did not
result in the recording of any compensation expense.

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.

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RESULTS OF OPERATIONS

Revenues:

|                        |  |                    |       |                   |  |                |       |                |  |                |       |  |  |   |         |  |  |   |         | 
|----------------------- |  | ------------------ | ----- | ----------------- |  | -------------- | ----- | -------------- |  | -------------- | ----- |  |  | - | ------- |  |  | - | ------- | 
|                        |  | Three months ended |       | Nine months ended
|                        |  |                    |       |                  
|                        |  | Sept. 30, 2003     |       | June 30, 2003     |  | Sept. 30, 2002 |       | Sept. 30, 2003 |  | Sept. 30, 2002
|                        |  |                    |       |                   |  |                |       |                |  |               
|                        |  |                    |       |                   |  |                |       |                |  | (In millions)  |       |  |  |   |         |  |  |  
|Semiconductor segment   |  | $                  | 346.4 |                   |  | $              | 306.2 |                |  | $              | 400.3 |  |  | $ | 925.6   |  |  | $ | 1,107.6 | 
|Storage Systems segment |  |                    | 103.8 |                   |  |                | 101.0 |                |  |                | 86.7  |  |  |   | 304.6   |  |  |   | 229.6   | 
|                        |  |                    |       |                   |  |                |       |                |  |                |       |  |  |   |         |  |  |   |         | 
|Consolidated            |  | $                  | 450.2 |                   |  | $              | 407.2 |                |  | $              | 487.0 |  |  | $ | 1,230.2 |  |  | $ | 1,337.2 | 
|                        |  |                    |       |                   |  |                |       |                |  |                |       |  |  |   |         |  |  |   |         | 

There were no significant intersegment revenues during the periods presented.

Third quarter of 2003 compared to the second quarter of 2003

Total consolidated revenues for the third quarter of 2003 increased $43.0
million or 11% from the second quarter of 2003. The increase in revenues in
the third quarter of 2003 is primarily attributable to higher revenues in our
Semiconductor segment and a modest increase in our Storage Systems segment.

Revenues for the Semiconductor segment increased $40.2 million or 13% in
the third quarter of 2003 as compared to the second quarter of 2003. The
increase in the Semiconductor segment was primarily attributable to an increase
in demand for products used in consumer custom solutions within the consumer
products market. The third quarter of our fiscal year is historically the
strongest quarter for our consumer business.

Revenues for the Storage Systems segment increased $2.8 million or 3% from
the second quarter of 2003. This is primarily due to the increased demand from
one of our large customers.

In the fourth quarter of 2003, we expect total consolidated revenues to
grow by 0 to 2 percent as compared to the third quarter of 2003 as the seasonal
decline in the consumer business is expected to be offset by growth from the
other markets in which we participate.

Three and nine months ended September 30, 2003 compared to the same period
of 2002

Total consolidated revenues for the third quarter of 2003 decreased $36.8
million or 8% as compared to the third quarter of 2002. For the nine months
ended September 30, 2003, revenues were $107.0 million or 8% lower than the
same period of the prior year. The decrease is primarily attributable to lower
revenues in our Semiconductor segment offset in part by increases in revenues
in the Storage Systems segment as discussed below.

Revenues for the Semiconductor segment decreased $53.9 million or 13% for
the third quarter of 2003 and decreased $182.0 million or 16% for the nine
months ended September 30, 2003 as compared to the same periods of the previous
year. The decline in revenues in the Semiconductor segment in the third
quarter of 2003 and the nine months ended September 30, 2003 as compared to the
same periods of 2002 is primarily due to lower revenues from broadband
entertainment and consumer custom solutions products in our consumer business
market and weaker demand from communication ASIC products, offset in part by
growth in storage components products.

Revenues for the Storage Systems segment increased $17.1 million or 20%
for the third quarter of 2003 and increased $75.0 million or 33% for the nine
months ended September 30, 2003 as compared to the same periods of 2002. The
increase in revenues in the Storage Systems segment for the third quarter of
2003 and the nine months ended September 30, 2003 as compared to the same
periods of 2002, is due to continued strong demand for modular storage
products, increased demand from one of our large customers, sales to a master
distributor, and additional revenues from the Mylex business unit of IBM, which
was acquired in August 2002 and primarily became part of the Storage Systems
segment.

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Significant Customers.The following table summarizes the number of our
significant customers, each of whom accounted for 10% or more of our revenues,
along with the percentage of revenues they individually represent on a
consolidated basis and by segment (see Note 11 of the Notes):

|                         |                                     |  |                                  |              |                                 |  |      |              |      |  |  |              |    |  |  |              |  
|------------------------ | ----------------------------------- |  | -------------------------------- | ------------ | ------------------------------- |  | ---- | ------------ | ---- |  |  | ------------ | -- |  |  | ------------ | -
|                         |                                     |  | Three months ended September 30, |              | Nine months ended September 30,
|                         |                                     |  |                                  |              |                                
|                         |                                     |  | 2003                             |              | 2002                            |  | 2003 |              | 2002
|                         |                                     |  |                                  |              |                                 |  |      |              |     
|Semiconductor segment:   |                                     |  |                                  |              |                                 |  |      |              |      |  |  |              |    |  |  |             
|                         | Number of significant customers     |  |                                  | 1            |                                 |  |      | 1            |      |  |  | 1            |    |  |  | 1            |  
|                         | Percentage of segment revenues      |  |                                  | 27           | %                               |  |      | 26           | %    |  |  | 18           | %, |  |  | 21           | %
|Storage Systems segment: |                                     |  |                                  |              |                                 |  |      |              |      |  |  |              |    |  |  |             
|                         | Number of significant customers     |  |                                  | 3            |                                 |  |      | 3            |      |  |  | 3            |    |  |  | 3            |  
|                         | Percentage of segment revenues      |  |                                  | 58%, 12%, 11 | %                               |  |      | 39%, 21%, 16 | %    |  |  | 50%, 14%, 12 | %  |  |  | 35%, 19%, 17 | %
|Consolidated:            |                                     |  |                                  |              |                                 |  |      |              |      |  |  |              |    |  |  |             
|                         | Number of significant customers     |  |                                  | 2            |                                 |  |      | 1            |      |  |  | 2            |    |  |  | 1            |  
|                         | Percentage of consolidated
revenues |  |                                  | 21%, 15      | %                               |  |      | 21           | %    |  |  | 14%, 14      | %  |  |  | 17           | %

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

|          |                       |   |                    |       |                   |   |                |       |                |   |                |       |  |   |         |       |  |   |         |       | 
|--------- | --------------------- | - | ------------------ | ----- | ----------------- | - | -------------- | ----- | -------------- | - | -------------- | ----- |  | - | ------- | ----- |  | - | ------- | ----- | 
|          |                       |   | Three months ended |       | Nine months ended
|          |                       |   |                    |       |                  
|          |                       |   | Sept. 30, 2003     |       | June 30, 2003     |   | Sept. 30, 2002 |       | Sept. 30, 2003 |   | Sept. 30, 2002
|          |                       |   |                    |       |                   |   |                |       |                |   |               
|          |                       |   | (In millions)     
|Revenues: |                       |   |                    |       |                   |   |                |       |                |   |                |       |  |   |         |       |  |   |         |      
|          | North America         |   | $                  | 209.3 |                   |   | $              | 216.7 |                |   | $              | 233.2 |  |   | $       | 633.0 |  |   | $       | 673.8 | 
|          | Asia, including Japan |   |                    | 207.6 |                   |   |                | 154.6 |                |   |                | 217.0 |  |   |         | 487.1 |  |   |         | 541.8 | 
|          | Europe                |   |                    | 33.3  |                   |   |                | 35.9  |                |   |                | 36.8  |  |   |         | 110.1 |  |   |         | 121.6 | 
|          |                       |   |                    |       |                   |   |                |       |                |   |                |       |  |   |         |       |  |   |         |      
|Total     |                       | $ | 450.2              |       |                   | $ | 407.2          |       |                | $ | 487.0          |       |  | $ | 1,230.2 |       |  | $ | 1,337.2 |      
|          |                       |   |                    |       |                   |   |                |       |                |   |                |       |  |   |         |       |  |   |         |      

In the third quarter of 2003, revenues decreased in North America and
Europe, as compared to the second quarter of 2003. The decrease in revenues in
North America and Europe in the third quarter of 2003 represents primarily
lower revenues for certain communication products compared to the second
quarter of 2003. Revenues increased in Asia, including Japan, in the third
quarter as compared to the second quarter of 2003. This is primarily due to
higher revenues in the consumer products market.

In the third quarter and the nine months ended September 30, 2003,
revenues declined in all geographic regions as compared to the same periods in
2002. The decline in domestic revenues for the above noted periods is mainly
due to the economic downturn in the United States. The decline in
revenues in Asia, including Japan, for the three months ended September 30,
2003 represents weaker demand as compared to the same period of 2002. The
decline in revenues in Asia, including Japan, for the nine months ended
September 30, 2003 represents primarily lower revenues in the consumer products
market, as the sales in these markets were lower than normal in the first
quarter as a result of high levels of inventory in the retail channel in prior
quarters.

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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 |    | Nine months ended
|                        |                        |   |                    |    |                  
|                        |                        |   | Sept. 30, 2003     |    | June 30, 2003     |   | Sept. 30, 2002 |    | Sept. 30, 2003 |   | Sept. 30, 2002
|                        |                        |   |                    |    |                   |   |                |    |                |   |               
|                        |                        |   | (In millions)     
|Semiconductor segment   |                        | $ | 144.1              |    |                   | $ | 130.2          |    |                | $ | 167.0          |    |   | $ | 362.8 |    |   | $ | 383.8 |   
|                        | Percentage of revenues |   |                    | 42 | %                 |   |                | 43 | %              |   |                | 42 | % |   |       | 39 | % |   |       | 35 | %
|Storage Systems segment |                        | $ | 40.9               |    |                   | $ | 38.5           |    |                | $ | 31.5           |    |   | $ | 115.6 |    |   | $ | 83.9  |   
|                        | Percentage of revenues |   |                    | 39 | %                 |   |                | 38 | %              |   |                | 36 | % |   |       | 38 | % |   |       | 37 | %
|                        |                        |   |                    |    |                   |   |                |    |                |   |                |    |   |   |       |    |   |   |       |   
|Consolidated            |                        | $ | 185.0              |    |                   | $ | 168.7          |    |                | $ | 198.5          |    |   | $ | 478.4 |    |   | $ | 467.7 |   
|                        |                        |   |                    |    |                   |   |                |    |                |   |                |    |   |   |       |    |   |   |       |   
|                        | Percentage of revenues |   |                    | 41 | %                 |   |                | 41 | %              |   |                | 41 | % |   |       | 39 | % |   |       | 35 | %

Third quarter of 2003 compared to the second quarter of 2003

The consolidated gross profit margin was 41% of revenues in the third and
second quarters of 2003. The gross profit margin for the Semiconductor segment
decreased by one percentage point to 42% in the third quarter as compared to
43% in the second quarter of 2003. Sales of previously reserved excess
inventory declined in the quarter thus reducing our gross profit margins in the third quarter of 2003 by one
percentage point as compared to sales of previously reserved inventory in the
second quarter of 2003. We recorded a $4 million charge associated with a
commitment to purchase wafers from Rohm as part of the anticipated sale of the
Tsukuba, Japan manufacturing facility (see Note 3 of the Notes). This charge
was offset in part by a one-time sales tax refund of $3.9 million in the
quarter. A continued favorable shift in product mix, improved yields and lower
cost versions of product shipped has enabled us to sustain our gross margins as
compared to the second quarter of 2003.

The gross profit margin for the Storage Systems segment increased by one
percentage point to 39% in the third quarter of 2003 as compared to 38% in the
second quarter of 2003. This is primarily attributable to a shift in product
mix to higher margin products in the third quarter as compared to the second.

We expect gross profit margins to be 41% to 42% on a consolidated basis in
the fourth quarter of 2003.

Three and nine months ended September 30, 2003 compared to the same period
of 2002

Gross profit margins on a consolidated basis and for the Semiconductor
segment remained flat at 41% and 42% respectively for the three months ended
September 30, 2003 as compared to the three months ended September 30, 2002.

Gross profit margins on a consolidated basis and for the Semiconductor
segment both increased by 4 percentage points to 39% for the nine months ended
September 30, 2003 as compared to 35% for the same period of 2002. This
increase is the result of improved capacity utilization and factory absorption,
lower compensation related costs and higher sales of previously reserved
inventory.

Gross profit margins for the Storage Systems segment increased both in the
three months and in the nine months ended September 30, 2003 as compared to the
same period in 2002, as a result of changes in product mix.

Factors that may affect gross profit margins

We have advanced wafer-manufacturing operations in Oregon, which is our
primary manufacturing site. In September 2003, we signed a definitive
agreement with Rohm, to sell our wafer manufacturing facility in Tsukuba, Japan
for 2.65 billion yen ($23.7 million as of September 30, 2003). See Note 3 of
the Notes. We also acquire wafers from foundries in other locations. Utilizing
a diversity of manufacturing locations allows us to better manage potential
disruption in the manufacturing process due to economic and geographic risks
associated with each location.

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##### Table of Contents



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



| |  | Competitive pricing pressures;                       
|- |  | -----------------------------------------------------
| 
| |  | 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.

Research and development:

|                        |                        |   |                    |    |                   |   |                |    |                |   |                |    |   |   |       |    |   |   |       |    |  
|----------------------- | ---------------------- | - | ------------------ | -- | ----------------- | - | -------------- | -- | -------------- | - | -------------- | -- | - | - | ----- | -- | - | - | ----- | -- | -
|                        |                        |   | Three months ended |    | Nine months ended
|                        |                        |   |                    |    |                  
|                        |                        |   | Sept. 30, 2003     |    | June 30, 2003     |   | Sept. 30, 2002 |    | Sept. 30, 2003 |   | Sept. 30, 2002
|                        |                        |   |                    |    |                   |   |                |    |                |   |               
|                        |                        |   | (In millions)     
|Semiconductor segment   |                        | $ | 91.7               |    |                   | $ | 100.4          |    |                | $ | 105.4          |    |   | $ | 297.3 |    |   | $ | 317.3 |   
|                        | Percentage of revenues |   |                    | 26 | %                 |   |                | 33 | %              |   |                | 26 | % |   |       | 32 | % |   |       | 29 | %
|Storage Systems segment |                        | $ | 12.1               |    |                   | $ | 10.9           |    |                | $ | 9.0            |    |   | $ | 33.0  |    |   | $ | 24.3  |   
|                        | Percentage of revenues |   |                    | 12 | %                 |   |                | 11 | %              |   |                | 10 | % |   |       | 11 | % |   |       | 11 | %
|                        |                        |   |                    |    |                   |   |                |    |                |   |                |    |   |   |       |    |   |   |       |   
|Consolidated            |                        | $ | 103.8              |    |                   | $ | 111.3          |    |                | $ | 114.4          |    |   | $ | 330.3 |    |   | $ | 341.6 |   
|                        |                        |   |                    |    |                   |   |                |    |                |   |                |    |   |   |       |    |   |   |       |   
|                        | Percentage of revenues |   |                    | 23 | %                 |   |                | 27 | %              |   |                | 23 | % |   |       | 27 | % |   |       | 26 | %

Third quarter of 2003 compared to the second quarter of 2003

Research and development (R&D) expenses declined $7.5 million or 7% in
the third quarter of 2003 as compared to the second quarter of 2003 on a
consolidated basis.

R&D expenses in the Semiconductor segment decreased $8.7 million or 9% in
the third quarter of 2003 as compared to the second quarter of 2003. The
decrease in R&D expenses for the Semiconductor segment is primarily a result of
the benefits from our restructuring actions as outlined below and in Note 3 of
the Notes. We continue to develop advanced sub-micron product technologies.
We completed the build out of the current generation RapidChip platform
infrastructure in the third quarter of 2003. Products utilizing RapidChip
technology combine the high-density, high-performance and proven intellectual
property benefits of cell-based ASICs with the advantages of Field Programmable
Gate Arrays (FPGAs), such as customization and faster time to market. We
expect products utilizing RapidChip technology to have performance comparable
to cell-based ASICs at a cost significantly lower than FPGAs. Markets for our
RapidChip platform ASIC solutions will include communications, storage,
security and others. Our customer base for products utilizing RapidChip
technology will encompass a range from small start-up companies to major system
OEMs. We expect to begin shipping products utilizing RapidChip technology in
the fourth quarter of 2003.

R&D expenses in the Storage Systems segment increased $1.2 million or 11%
in the third quarter of 2003 as compared to the second quarter of 2003
primarily due to higher expenditures on existing R&D programs.

The decrease in R&D expenses as a percentage of revenues on a consolidated
basis is primarily a result of higher revenues and lower R&D expenses in the
third quarter as compared to the second quarter of 2003.

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Three and nine months ended September 30, 2003 compared to the same period
of 2002

R&D expenses, on a consolidated basis, decreased $10.6 million or 9%
during the third quarter of 2003 as compared to the same quarter of 2002. R&D
expenses for the nine months ended September 30, 2003 decreased by $11.3
million or 3% as compared to the same period of the prior year on a
consolidated basis.

R&D expenses for the Semiconductor segment decreased $13.7 million or 13%
in the third quarter of 2003 and $20.0 million or 6% for the nine months ended
September 30, 2003 as compared to the same periods of 2002. The decrease in
R&D expenses for the Semiconductor segment is primarily a result of benefits
from the restructuring actions of 2002 and 2003 (see Note 3 of the Notes). No
benefit associated with the technology transfer agreement entered into with
Silterra during 1999 was recorded during the nine months ended September 30,
2003 as compared to a benefit of $6 million for the nine months ended September
30, 2002.

R&D expenses for the Storage Systems segment increased by $3.1 million or
34% in the third quarter of 2003 and $8.7 million or 36% in the nine months
ended September 30, 2003 as compared to the same periods of 2002. This is
primarily due to higher compensation related expenditures and additional R&D
expenses incurred for the former Mylex business unit of IBM, which was acquired
in August 2002, and is now mainly a part of the Storage Systems segment.

R&D expenses as a percentage of revenues on a consolidated basis and for
the Semiconductor segment remained the same in the third quarter of 2003 as
compared to the same quarter of 2002. R&D expenses as a percentage of revenues
on a consolidated basis increased to 27% for the nine months ended September
30, 2003 as compared to 26% for the nine months ended September 30, 2002. R&D
expenses for the Semiconductor segment as a percentage of revenues increased to
32% for the nine months ended September 30, 2003 from 29% for the nine months
ended September 30, 2002. This is a result of lower revenues, offset in part
by lower R&D expenses for the nine months ended September 30, 2003 as compared
to the same period in 2002. R&D expenses as a percentage of revenues for the
Storage Systems segment increased to 12% in the third quarter of 2003 from 10%
in the same quarter of 2002. The increase is a result of an increase in R&D
expenses offset in part by an increase in revenues for the third quarter of
2003 as compared to the same period of 2002. R&D expenses as a percentage of
revenues for the Storage Systems segment stayed flat at 11% in the nine months
ended September 30, 2003 as compared to the same period of 2002.

Selling, general and administrative:

|                        |                       |   |                    |    |                   |   |                |    |                |   |                |    |   |   |       |    |   |   |       |    |  
|----------------------- | --------------------- | - | ------------------ | -- | ----------------- | - | -------------- | -- | -------------- | - | -------------- | -- | - | - | ----- | -- | - | - | ----- | -- | -
|                        |                       |   | Three months ended |    | Nine months ended
|                        |                       |   |                    |    |                  
|                        |                       |   | Sept. 30, 2003     |    | June 30, 2003     |   | Sept. 30, 2002 |    | Sept. 30, 2003 |   | Sept. 30, 2002
|                        |                       |   |                    |    |                   |   |                |    |                |   |               
|                        |                       |   | (In millions)     
|Semiconductor segment   |                       | $ | 42.2               |    |                   | $ | 40.8           |    |                | $ | 46.8           |    |   | $ | 126.0 |    |   | $ | 139.1 |   
|                        | Percentage of revenue |   |                    | 12 | %                 |   |                | 13 | %              |   |                | 12 | % |   |       | 14 | % |   |       | 13 | %
|Storage Systems segment |                       | $ | 15.5               |    |                   | $ | 16.1           |    |                | $ | 12.3           |    |   | $ | 46.2  |    |   | $ | 35.5  |   
|                        | Percentage of revenue |   |                    | 15 | %                 |   |                | 16 | %              |   |                | 14 | % |   |       | 15 | % |   |       | 15 | %
|                        |                       |   |                    |    |                   |   |                |    |                |   |                |    |   |   |       |    |   |   |       |   
|Consolidated            |                       | $ | 57.7               |    |                   | $ | 56.9           |    |                | $ | 59.1           |    |   | $ | 172.2 |    |   | $ | 174.6 |   
|                        |                       |   |                    |    |                   |   |                |    |                |   |                |    |   |   |       |    |   |   |       |   
|                        | Percentage of revenue |   |                    | 13 | %                 |   |                | 14 | %              |   |                | 12 | % |   |       | 14 | % |   |       | 13 | %

Third quarter of 2003 compared to the second quarter of 2003

Selling, general and administrative (SG&A) expenses increased $0.8
million or 1% during the third quarter of 2003 from the second quarter of 2003
on a consolidated basis. SG&A expenses for the Semiconductor segment increased
$1.4 million or 3% in the third quarter of 2003 as compared to the second
quarter of 2003. The increase for the Semiconductor segment is due to an
increase in compensation-related expenditures for the third quarter of 2003 as
compared to the second quarter of 2003. SG&A expenses for the Storage Systems
segment decreased $0.6 million or 4% when comparing the third quarter of 2003
to the second quarter of 2003. The decrease for the Storage Systems segment is
primarily attributable to reduced program spending on infrastructure costs and
customer programs.

As a percentage of revenues, consolidated SG&A expenses decreased to 13%
in the third quarter of 2003 from 14% in the second quarter of 2003.

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For the Semiconductor segment, SG&A expenses, as a percentage of revenues, decreased to
12% from 13%, and for the Storage Systems segment, SG&A expenses decreased to
15% in the third quarter of 2003 as compared to 16% for the second quarter of 2003. The decrease as a percentage of revenues on a
consolidated basis and for the Semiconductor segment and Storage segment is
primarily a result of higher revenues during the third quarter of 2003 as
compared to the second quarter of 2003.

Three and nine months ended September 30, 2003 compared to the same period
of 2002

Consolidated SG&A expenses decreased $1.4 million or 2% during the third
quarter of 2003 and decreased $2.4 million or 1% during the nine months ended
September 30, 2003 as compared to the same periods of 2002.

SG&A expenses for the Semiconductor segment decreased $4.6 million or 10%
for the third quarter and decreased $13.1 million or 9% for the nine months
ended September 30, 2003, as compared to the same periods of 2002. The
decrease for the Semiconductor segment was primarily attributable to the
various cost reduction measures implemented in 2002 and 2003 (see Note 3 of the
Notes) offset by an increase in compensation-related costs.

SG&A expenses for the Storage Systems segment increased $3.2 million or
26% in the third quarter of 2003 and increased $10.7 million or 30% in the nine
months ended September 30, 2003 as compared to the same periods of 2002. The
increase is primarily a result of continued increase in partner alliance
spending on channel development. For the nine months ended September 30, 2003,
the increase is also due to an increase in compensation-related costs.

As a percentage of revenues, SG&A expenses increased to 13% in the third
quarter of 2003 from 12% in the same period of 2002 on a consolidated basis.
For the Semiconductor segment, SG&A expenses as a percentage of revenues were
relatively flat at 12% as a result of lower revenues, offset by lower SG&A
expenses. For the Storage Systems segment, SG&A expenses as a percentage of
revenues increased to 15% from 14% as a result of higher revenues, more than
offset by higher SG&A expenses in the third quarter of 2003 as compared to the
same period of 2002, as discussed above.

As a percentage of revenues, SG&A expenses increased to 14% for the nine
months ended September 30, 2003 as compared to 13% for the nine months ended
September 30, 2002 on a consolidated basis. For the Semiconductor segment,
SG&A expenses as a percentage of revenues increased to 14% from 13% as a result
of lower revenues, offset in part by lower SG&A expenses. For the Storage
Systems segment, SG&A expenses as a percentage of revenues relatively flat at
15% as a result of the higher revenues, offset by the higher SG&A expenses in
the nine months ended September 30, 2003 as compared to the same period of
2002.

Restructuring of operations and other items:We recorded a charge of
$24.5 million and $184.7 million in restructuring of operations and other items
for the three and nine months ended September 30, 2003, respectively. We
recorded a charge of $13.0 million and a charge of $71.6 million in
restructuring of operations and other items for the three and nine months ended
September 30, 2002, respectively. For a complete discussion of the 2002
restructuring actions, please refer to the Companys Annual Report on Form
10-K.

Restructuring and impairment of long-lived assets:

First quarter of 2003:

On January 1, 2003, we adopted SFAS No. 146, Accounting for Exit or
Disposal Activities. SFAS No. 146 has been applied to restructuring
activities initiated after December 31, 2002, and changes the timing of when
restructuring charges are recorded to the date when the liabilities are
incurred. The adoption of SFAS No. 146 did not affect restructuring reserves
recorded prior to December 31, 2002.

In February 2003, we downsized our operations and recorded $35.7 million
in charges for restructuring of operations and other items. Of this charge,
$21.1 million was associated with the Semiconductor segment and $14.6 million
was attributable to the Storage Systems segment. The charges consisted of
severance and termination benefits for approximately 210 employees primarily
involved in manufacturing operations, research and development and marketing
and sales; costs associated with exiting certain operating leases primarily for
real estate; and a write-down of certain acquired intangibles and other
long-lived assets. During the nine months ended September 30, 2003, payments related
to the February 2003 restructuring actions have consisted of approximately $4.4
million for severance and termination benefits and $0.5 million for lease and
contract terminations.

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##### Table of Contents



Second quarter of 2003:

In April 2003, we announced a restructuring of our operations that
included a reduction in our workforce and the consolidation of certain
non-manufacturing facilities. A charge of $32.4 million was recorded in the
Semiconductor segment consisting of severance and termination benefits for
approximately 325 employees involved in manufacturing operations, research and
development, marketing, sales and administration; costs associated with exiting
certain operating leases primarily for real estate; other exit costs; and a
write-down of fixed assets due to impairment. During the nine months ended
September 30, 2003, payments related to the April 2003 restructuring actions
have consisted of approximately $8.1 million for severance and termination
benefits and $1.5 million for lease and contract terminations.

In June 2003, we announced the decision to sell the Tsukuba, Japan
manufacturing facility. During the second quarter, a charge of $72.9 million
was recorded in the Semiconductor segment to write down fixed assets to their
fair market value, and reclassify the fair value from property, plant and
equipment to other current assets to reflect the intention to dispose of the
facility within the next twelve months. In addition, approximately $2.0
million in restructuring charges were recorded for severance and other exit
costs. See further discussion in the third quarter below.

In June 2003, we also recorded $19.4 million of additional fixed asset
write-downs to reflect the decrease in fair market value of the assets during
the period. This write-down included a reduction in the value of the Colorado
Springs fabrication facility of $16.4 million to reflect continued and
accelerated efforts to sell the facility.

Third quarter of 2003:

Agreement to sell Japan fabrication facility:

In September 2003, we entered into a definitive agreement to sell the
Tsukuba, Japan facility to Rohm, a Japanese Company for 2.65 billion yen ($23.7
million as of September 30, 2003). The transaction is scheduled to close in
the fourth quarter of 2003. As part of the agreement, we agreed to purchase a
minimum amount of production wafers from Rohm for a period of 15 months
following the close of the transaction. As a result, a charge of $4.3 million
was recorded in cost of revenues during the third quarter of 2003. This charge
is a result of the application of our policy to accrue for non-cancelable
inventory purchase commitments in excess of 12 months of judged demand.
Included in the $4.3 million charge to cost of revenues is a reclassification
of $3.0 million from restructuring expense originally recorded in the second
quarter of 2003 to better reflect the terms of the definitive agreement. Also
in the quarter, $1.8 million was recorded for additional severance benefits to
be paid and for contract termination and other exit costs associated with the
definitive agreement. During the nine months ended September 30, 2003, there
have been no payments related to the amounts accrued for severance and other
exit costs for the Japan restructuring actions.

Other third quarter 2003 restructuring actions:

In the third quarter of 2003, we continued to consolidate
non-manufacturing facilities and recorded $1.5 million for costs associated
with exiting certain operating leases for real estate as we ceased using the
facilities.

In September 2003, we decided to discontinue development programs and
refocus sales and marketing efforts for certain product lines in the
Semiconductor segment. As a result of an analysis of future net cash flows
related to the affected product lines it was determined that certain acquired
intangible assets were impaired. An impairment charge of $21.0 million related
to the write-down of the acquired intangible assets to fair market value was
recorded in the third quarter of 2003. These intangible assets were originally
acquired in connection with the acquisition of C-Cube Microsystems in the
second quarter of 2001. In addition, $2.0 million in restructuring charges
were recorded in the third quarter of 2003. These charges related to severance
and termination benefits for approximately 97 employees primarily involved in
research and development and for certain contract termination costs. The
severance benefits were paid during the third quarter of 2003.

The fair
value of equipment, facilities and intangible assets determined to be impaired was the result of the
use of management estimates. Given that current market conditions
for the sale of older fabrication facilities and related equipment may
fluctuate, there can be no assurance that we will realize the current net
carrying value for the assets. We reassess the realizability of the carrying
value of these assets at the end of each quarter until the assets are sold or
otherwise disposed of and additional adjustments may be necessary. We are
making appropriate efforts to sell assets held for sale within the current
year.

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##### Table of Contents



Assets held for sale of
$59.3 million and $74.2 million were included as a component of prepaid expenses and other
current assets as of September 30, 2003 and December 31, 2002, respectively.
Assets classified as held for sale are not depreciated.

The following table sets forth the Companys restructuring reserves as of
September 30, 2003, which are included in other accrued liabilities on the
balance sheet:

|                                                 |       |   |                |        |               |   |          |        |               |   |           |         |               |   |          |         |               |   |         |          |   |   |        |        |  |   |         |         |   |   |        |        | 
|------------------------------------------------ | ----- | - | -------------- | ------ | ------------- | - | -------- | ------ | ------------- | - | --------- | ------- | ------------- | - | -------- | ------- | ------------- | - | ------- | -------- | - | - | ------ | ------ |  | - | ------- | ------- | - | - | ------ | ------ | 
|                                                 |       |   | Balance        |        |               |   |          |        |               |   |           |         |               |   |          |         |               |   |         |          |   |   |        |        |  |   |         |         |   |   |       
|                                                 |       |   | at             |        | Restructuring |   | Utilized |        | Restructuring |   | Utilized  |         | Restructuring |   | Utilized |         | Balance at   
|                                                 |       |   | December       |        | Expense       |   | during   |        | Expense       |   | during Q2 |         | Expense       |   | during   |         | September 30,
|                                                 |       |   | 31, 2002       |        | Q1 2003       |   | Q1 2003  |        | Q2 2003       |   | 2003      |         | Q3 2003       |   | Q3 2003  |         | 2003         
|                                                 |       |   |                |        |               |   |          |        |               |   |           |         |               |   |          |         |              
|                                                 |       |   | (In thousands)
|Write-down of excess assets (a)                  |       | $ | 6,008          |        |               | $ | 29,754   |        |               | $ | (30,021   | )       |               | $ | 96,805   |         |               | $ | (97,917 | )        |   | $ | 18,505 |        |  | $ | (18,804 | )       |   | $ | 4,330  |       
|Lease terminations and
maintenance contracts (b) |       |   | 6,757          |        |               |   | 1,396    |        |               |   | (1,172    | )       |               |   | 18,762   |         |               |   | (1,425  | )        |   |   | 2,795  |        |  |   | (2,220  | )       |   |   | 24,893 |       
|Facility closure and other
exit costs (c)        |       |   | 8,129          |        |               |   |         |        |               |   | (2,520    | )       |               |   | 498      |         |               |   | (2,040  | )        |   |   | 274    |        |  |   | (2,378  | )       |   |   | 1,963  |       
|Payments to employees for
severance (d)          |       |   | 1,391          |        |               |   | 4,516    |        |               |   | (4,493    | )       |               |   | 10,637   |         |               |   | (7,116  | )        |   |   | 2,942  |        |  |   | (3,471  | )       |   |   | 4,406  |       
|                                                 |       |   |                |        |               |   |          |        |               |   |           |         |               |   |          |         |               |   |         |          |   |   |        |        |  |   |         |         |   |   |        |       
|                                                 | Total |   | $              | 22,285 |               |   | $        | 35,666 |               |   | $         | (38,206 | )             |   | $        | 126,702 |               |   | $       | (108,498 | ) |   | $      | 24,516 |  |   | $       | (26,873 | ) |   | $      | 35,592 | 
|                                                 |       |   |                |        |               |   |          |        |               |   |           |         |               |   |          |         |               |   |         |          |   |   |        |        |  |   |         |         |   |   |        |       



|(a) |  | The amounts utilized in 2003 reflect $145.1 million of non-cash
write-downs of amortizable intangible and other long-lived assets in the
U.S and Japan due to impairment, and $1.7 million in cash payments to
decommission and sell assets. The write-downs of the intangible and other
long-lived assets were accounted for as a reduction of the assets and did
not result in a liability. The $4.3 million balance as of September 30,
2003, relates to machinery and equipment decommissioning costs in the U.S
and estimates of selling costs for assets held for sale and is expected to
be utilized during 2003.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | Amounts utilized represent cash payments. The balance remaining for
primarily real estate lease terminations and maintenance contracts will be
paid during the remaining terms of these contracts, which extend through
2011.                                                                                                                                                                                                                                                                                                                                                                                           
|   
|(c) |  | Amounts utilized represent cash payments. The balance remaining for
facility closure and other exit costs will be paid during 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|(d) |  | Amounts utilized represent cash severance payments to approximately 604
employees during the nine months ended September 30, 2003. The balance
remaining for severance is expected to be paid by the end of the first
quarter of 2004.                                                                                                                                                                                                                                                                                                                                                                                  

The restructuring actions discussed above are expected to reach a
quarterly savings rate of approximately $20 million to $25 million in total
costs and expenses per quarter by the fourth quarter of 2003.

Other items:

A gain of approximately $2.2 million was recorded in restructuring and
other items, net during the second quarter of 2003 associated with additional
sales of intellectual property associated with the CDMA handset product line.

Amortization of non-cash deferred stock compensation:Amortization of
non-cash deferred stock compensation was $3.4 million for the three months
ended September 30, 2003, $8.9 million for the second quarter of 2003 and $14.2
million for the three months ended September 30, 2002. For the nine months
ended September 30, 2003 and 2002, the amortization of non-cash deferred stock
compensation was $22.8 million and $65.0 million, respectively. The
acquisitions for which deferred stock compensation and related amortization
were recorded consisted of an acquisition in the fourth quarter of 2002,
acquisitions of C-Cube and the RAID business from AMI in 2001, and acquisitions
of DataPath and Syntax in 2000. We amortize deferred stock compensation
ratably over the vesting period.

Amortization of intangibles:Amortization of intangible assets was $19.2
million and $19.3 million for the third quarter of 2003 and second quarter of
2003, respectively. The slight decrease over the prior quarter is due to a
reduction in amortization as a result of the write-down of intangible assets
acquired from the 2001 acquisition of C-Cube Microsystems during the third
quarter of 2003.

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Amortization of intangible assets was $19.7 million for the three months
ended September 30, 2002. For the nine months ended September 30, 2003 and
2002, amortization of intangible assets was $58.6 million and $58.0 million,
respectively. The increase is attributable to the additional amortization of
intangible assets recorded in connection with the acquisition of the former
Mylex business unit of IBM valued at $50.5 million in the third quarter of 2002
and the acquisition of a company valued at $7.0 million in the fourth quarter
of 2002. As a result of restructuring actions taken during the first quarter
of 2003, we wrote down certain acquired intangible assets by $15.1 million in
the Semiconductor segment and $9.0 million in the Storage Systems segment due
to impairment. During the third quarter of 2003, we wrote down $21.0 million
intangible assets in the Semiconductor segment that were originally acquired as
part of the acquisition of C-Cube Microsystems in 2001. As of September 30,
2003, we had approximately $178.9 million of intangible assets, net of
accumulated amortization that will continue to amortize.

We monitor the recoverability of goodwill recorded in connection with
acquisitions annually, or sooner if events or changes in circumstances indicate
that the carrying amount may not be recoverable. Impairment, if any, would be
determined in accordance with SFAS No. 142, which uses a fair value model for
determining the carrying value of goodwill. We plan to perform our annual
impairment review in the fourth quarter of 2003.

Interest expense:Interest expense decreased by $0.3 million to $7.0
million in the third quarter of 2003 from $7.3 million in the second quarter of
2003. Interest expense decreased by $3.1 million to $7.0 million during the
three months ended September 30, 2003 from $10.1 million during the same period
in 2002. Interest expense decreased $18.3 million to $23.1 million in the nine
months ended September 30, 2003 from $41.4 million in the same period of 2002.
The decrease is due to the repurchase of $135.0 million of the Convertible
Subordinated Notes (Convertible Notes) in the third and fourth quarters of
2002, the repurchase of an additional $288.0 of Convertible Notes during the
second quarter of 2003 and the redemption of $172.0 million of Convertible
Notes during the third quarter of 2003. The decrease from the repurchases and
redemption was partly offset by interest expense on the $350 million of 4%
Convertible Notes issued on May 12, 2003. Our interest expense continued to be
below the stated coupon rate of approximately 4% as a result of the interest
rate swaps (the Swaps) on the Convertible Notes entered into in the second
quarter of 2002. The Swaps, entered into with various banks, effectively
converted fixed interest payments on a portion of the Convertible Notes to
LIBOR-based floating rates (see Note 5 of the Notes). During the second
quarter of 2003, we terminated the Swaps, resulting in an unrecognized gain of
approximately $44.1 million that will be amortized as an adjustment to interest
expense over the remaining term of the hedged Convertible Notes.

Interest income and other, net:Interest income and other, net, was $5.0
million in the third quarter of 2003, $3.4 million in the second quarter of
2003 and $14.1 million in the third quarter of 2002. Interest income decreased
to $5.2 million in the third quarter of 2003 from $7.1 million in the second
quarter of 2003. The decrease in interest income is mainly due to lower
returns on our short-term investments. Other expense, net of $0.2 million in
the third quarter of 2003 included a net pre-tax loss of $1 million on the
redemption of $172 million in principal of our Convertible Notes (see Note 7 of
the Notes), offset in part by net gains on foreign exchange and the sale of
miscellaneous assets. In the second quarter of 2003, we recorded a $2.1
million charge related to a write-down of investments in equity securities due
to impairment considered to be other than temporary.

Interest income and other, net decreased to $15.1 million in the nine
months ended September 30, 2003 from $20.4 million in the same period of 2002.
Interest income increased by $1.1 million to $24.7 million in the nine months
ended September 30, 2003 from $23.6 million in the same period of 2002. The
increase in interest income is mainly due to higher returns on our short-term
investments during the nine months ended September 30, 2003. Other expense,
net of $9.6 million in the nine months ended September 30, 2003 included $9.1
million in charges for write-downs of investments in equity securities due to
impairment considered to be other than temporary (see Note 4 of
the Notes), a net loss on the
redemption/repurchase of Convertible Notes of $3.2 million, and currency option
premium expenses, offset in part by net foreign exchange gains, gains on sale
of miscellaneous assets, and other expenses that were individually
insignificant. Other expense, net of $3.2 million in the nine months ended
September 30, 2002 included a $12.0 million charge associated with a write-down
of investments in equity securities due to impairment that was considered to be
other than temporary (see Note 4 of the Notes), offset by a net gain of $11.6
million on the repurchase of Convertible Notes and other miscellaneous
expenses. We expect interest income to be lower in the fourth quarter as
compared to the third quarter of 2003

Provision for income taxes:During the three and the nine months ended
September 30, 2003, we recorded an income tax expense of $6.0 million and $18.0
million, respectively. The expense relates to foreign income taxes; we expect
our tax expense for the year ending December 31, 2003 to total approximately
$24.0 million, and this amount will be provided ratably through the year. The
future benefit of certain operating losses is not currently being recognized.
For the three months ended September 30, 2002, we recorded an income tax
expense of $7.9 million. The expense relates to income taxes for certain
foreign subsidiaries.

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For the nine months ended September 30, 2002, we recorded a net income tax benefit of $4.3
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.

FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY

Cash, cash equivalents and short-term investments decreased to $987.0
million at September 30, 2003, from $990.0 million at December 31, 2002. The
decrease is due to net cash outflows from investing and financing
activities, offset by cash and cash equivalents generated from
operating activities as described below.

Working capital.Working capital decreased by $28.4 million to $1.20
billion at September 30, 2003, from $1.23 billion as of December 31, 2002.
Working capital at the nine months ended September 30, 2003 was impacted by
the following activities:



| |  |  | Cash, cash equivalents and short-term investments decreased by $3.0
million at September 30, 2003, as compared to December 31, 2002;                                                                                                                                                                                                  
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Prepaid expenses and other current assets decreased by $3.1 million,
primarily due to the reductions in the swap related interest receivable
due to termination of the Swaps (see Note 5 of the Notes) and a lower
balance in assets held for sale due to sales of assets and write-downs,
net of additions (see Note 3 of the Notes);
|
| |  |  | Higher accrued salaries, wages and benefits due to timing differences
in payment of salaries;                                                                                                                                                                                                                                         
|
| |  |  | Other accrued liabilities increased by $18.3 million primarily as a
result of additions to the restructuring reserve for lease exit costs
and severance; and                                                                                                                                                                          
|
| |  |  | Higher income taxes payable due to the timing of tax payments made
and income tax provision recorded in the nine months ended September 30,
2003.                                                                                                                                                                                     

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



| |  |  | Accounts receivable increased by $15.7 million from $248.6 million at
December 31, 2002, to $264.3 million at September 30, 2003. This
increase is attributable to timing differences in collections in the
current quarter compared to the fourth quarter of 2002;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Inventories increased by $8.8 million, primarily as a result of
decreased revenues, offset in part by decreased production, in the
current quarter as compared to the fourth quarter of 2002; and                                                                  
|
| |  |  | Lower accounts payable due to timing of payments.                                                                                                                                                                                                                  

Cash and cash equivalents generated from operating activities.During the
nine months ended September 30, 2003, we generated $138.4 million of net cash
and cash equivalents from operating activities compared to $43.7 million
generated in the same period of 2002. Cash and cash equivalents generated by
operating activities for the nine months ended September 30, 2003 were the
result of the following:



| |  |  | Higher net changes in assets and
liabilities, net of assets acquired and liabilities assumed in
business combinations for the nine months ended September 30, 2003 as
compared to the same period in 2002, offset by lower income (before
depreciation and amortization; non-cash restructuring and
other items; amortization of non-cash deferred stock
compensation; IPR&D; and loss on write-down of equity securities, net of
gain on sales) over the two periods presented. The non-cash items and other
non-operating adjustments are quantified in our Consolidated Statements
of Cash Flows included in this Current report on Form 10-Q;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Changes in working capital components from September 30, 2003 as
compared to December 31, 2002 as discussed above; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  |  | Cash of $44.9 million was received upon termination of the Swaps
during the second quarter of 2003 (see Note 5 of the Notes). The Swap
related asset was formerly included in other non-current assets.                                                                                                                                                                                                                                                                                                                                                                                                                                          

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Cash and cash equivalents used in investing activities.Cash and cash
equivalents used in investing activities were $109.0 million in the nine months
ended September 30, 2003, compared to $310.4 million used in the same period in
2002. The primary investing activities during the nine months ended September
30, 2003 were as follows:



| |  |  | Purchases of debt and equity securities available for sale, net of sales and maturities in 2003;                                                                                                              
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Proceeds from the sale-leaseback transaction entered into during the first quarter of 2003 (see Note 12 of the Notes);                                                                                        
|
| |  |  | The deposit received toward the expected sale of the Japan manufacturing facility (see Note 3 of the Notes);                                                                                                  
|
| |  |  | Net purchases of property and equipment during the nine months ended September 30, 2003; and                                                                                                                  
|
| |  |  | Higher non-current assets and deposits in the nine months ended
September 30, 2003, primarily as a result of the new lease agreement
entered into during the first quarter of 2003 (see Note 12 of the
Notes).

We believe that maintaining technological leadership in the highly
competitive worldwide semiconductor manufacturing industry requires access to
additional advanced manufacturing capacity. Our focus is on establishing
strategic supplier alliances with foundry semiconductor manufacturers, which
enables us to have access to advanced manufacturing capacity, and reduces our
capital spending requirements. We expect total capital expenditures to be
under $75 million in 2003.

As of September 30, 2003, we had operating leases financing certain wafer
fabrication equipment (see Note 12 of the Notes). The debt related to these
operating leases is not reflected on the balance sheet. We are required to
maintain unrestricted cash reserves in an amount no less than the higher of a)
the sum of $100 million plus the principal amount outstanding under the 4%
Convertible Subordinated Notes due February 15, 2005; or b) $350 million. We
were in compliance with this requirement as of September 30, 2003.

We guarantee residual values of equipment on these leases. As of
September 30, 2003, we do not expect to realize a loss on the guarantee at the
end of the lease term, and accordingly, no additional rent expense has been
recognized (see Note 12 of the Notes).

Cash and cash equivalents used in financing activities. Cash and cash
equivalents used in financing activities during the nine months ended September
30, 2003 were $133.4 million compared to $24.6 million in the same period in
2002. The increase is attributable to cash paid to redeem/repurchase portions
of the 1999 and 2000 Convertible Subordinated Notes, offset by net cash
received on issuance of the 2003 Convertible Subordinated Notes and lower cash
received on issuance of common stock under our employee stock purchase plan.

On September 18, 2003, the Company redeemed the balance of the 1999
Convertible Subordinated Notes (the 1999 Convertible Notes) that were
outstanding on that date (See Note 7 of the Notes). Cash of $173 million was
paid to redeem the remaining 1999 Convertible notes at a total redemption price
of $1,008.86 per $1,000 principal amount of the notes consisting of $1,008.50
principal amount plus accrued interest of $0.36. A net pre-tax loss of $1
million was recognized, in interest income and other, net, on the redemption of
the 1999 Convertible Notes. The pre-tax loss is net of the write-off of debt
issuance costs and the remaining deferred gain on the terminated Swap (see Note
5 of the Notes).

On May 12, 2003, we issued $350 million of 4% Convertible Subordinated
Notes (the 2003 Convertible Notes) due in 2010. The 2003 Convertible Notes
are subordinated to all existing and future senior debt, are convertible at the
holders option, at any time prior to the maturity date of the convertible
notes, into shares of our common stock at a conversion price of approximately
$13.42 per share. We cannot elect to redeem the 2003 Convertible Notes prior
to maturity. However each holder of the 2003 Convertible Notes has the right to
cause us to repurchase all of such holders convertible notes at 100% of their
principal amount plus accrued interest upon the occurrence of any fundamental
change, which includes a transaction or event such as an exchange offer,
liquidation, tender offer, consolidation, merger or combination. Interest is
payable semiannually. We paid approximately $10.9 million for debt issuance
costs that are being amortized using the interest method (See Note 7 of the
Notes).

Approximately $28 million of the proceeds from issuance of the 2003
Convertible Notes were used to purchase call spread options on LSIs common
stock (the Call Spread Options). The Call Spread Options, including fees and
costs have been accounted for as capital transactions in accordance with
Emerging Issues Task Force No. 00-19, Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Companys Own Stock.
The Call Spread Options cover approximately 26.1 million shares of our common
stock, which is the number of shares that are initially issuable upon
conversion of the 2003 Convertible Notes in full.

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The Call Spread Options are designed to mitigate dilution from conversion of
the 2003 Convertible Notes in the event that the market price per share of our
common stock upon exercise of the Call Spread Options is greater than $13.42
and is less than or equal to $23.875. The Call Spread Options may be settled
at our option in either net shares or in cash and expire in 2010.

The proceeds from the 2003 Convertible Notes were used to repurchase $153
million of the 1999 Convertible Subordinated Notes and $135 million of the 2000
Convertible Subordinated Notes. A net pre-tax loss of $2 million was
recognized, in interest income and other, net, on the repurchases of the 1999
and 2000 Convertible Subordinated Notes. The pre-tax loss is net of the
write-off of debt issuance costs and a portion of the deferred gain on the
terminated Swaps (see Note 5 of the Notes).

As of September 30, 2003, we also have Convertible Subordinated Notes of
$250 million due in February 2005 and $490 million due in October 2006. These
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
Convertible 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 Convertible Notes has the right to
cause us to repurchase all of such holders Convertible Notes at 100% of their
principal amount plus accrued interest upon the occurrence of any fundamental
change, which includes a transaction or event such as an exchange offer,
liquidation, tender offer, consolidation, merger or combination. Fluctuations
in our stock price impact the prices of our outstanding convertible securities
and the likelihood of the convertible securities being converted into cash or
equity. If we are required to redeem any of the Convertible Notes for cash, it
may affect our liquidity position. However, in the event they do not convert
to equity, we believe that our current cash position and expected future
operating cash flows will be adequate to meet these obligations as they mature.
From time to time, we may buy back Convertible Subordinated Notes.

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

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The following table summarizes our contractual obligations at September
30, 2003, and the effect these obligations are expected to have on our
liquidity and cash flow in future periods.

|                            |       |                  |                        |             |  |             |       |               |  |       |      |       |  |  |      |       |  |  |       |         | 
|--------------------------- | ----- | ---------------- | ---------------------- | ----------- |  | ----------- | ----- | ------------- |  | ----- | ---- | ----- |  |  | ---- | ----- |  |  | ----- | ------- | 
|                            |       |                  | Payments due by period
|                            |       |                  |                       
|Contractual Obligations     |       | Less than 1 year |                        | 1  3 years |  | 4  5 years |       | After 5 years |  | Total
|                            |       |                  |                        |             |  |             |       |               |  |       |     
|                            |       |                  | (In millions)         
|Convertible Subordinated    |       |                  |                        |             |  |             |       |               |  |       |      |       |  |  |      |       |  |  |       |        
|                            | Notes |                  | $                      |            |  |             | $     | 250.0         |  |       | $    | 490.0 |  |  | $    | 350.0 |  |  | $     | 1,090.0 | 
|Operating lease obligations |       |                  | 146.8                  |             |  |             | 215.1 |               |  |       | 22.0 |       |  |  | 58.4 |       |  |  | 442.3 |        
|Capital lease obligations   |       |                  | 0.4                    |             |  |             | 0.3   |               |  |       |     |       |  |  |     |       |  |  | 0.7   |        
|                            |       |                  |                        |             |  |             |       |               |  |       |      |       |  |  |      |       |  |  |       |        
|                            | Total |                  | $                      | 147.2       |  |             | $     | 465.4         |  |       | $    | 512.0 |  |  | $    | 408.4 |  |  | $     | 1,533.0 | 
|                            |       |                  |                        |             |  |             |       |               |  |       |      |       |  |  |      |       |  |  |       |        

Critical Accounting Policies

The discussion and analysis of our financial condition and results of
operations are based on the consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires
estimates and assumptions that affect the reported amounts and disclosures.
For a detailed discussion of our critical accounting policies, please see the
Critical Accounting Policies contained in Part II, Item 7 of the Managements
Discussion and Analysis of Financial Condition and Results of Operations in our
Annual Report on Form 10-K for the year ended December 31, 2002.

Recent Accounting Pronouncements

In January 2003, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51. FIN 46 requires certain variable
interest entities to be consolidated by the primary beneficiary of the entity
if the equity investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. FIN 46 is effective immediately for all new
variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 were to be applied for the first interim or annual period
beginning after June 15, 2003. In October 2003, the board released a FASB
Staff Position (FSP) deferring the effective date for applying the provisions
of FIN 46. A public entity need not apply the provision of FIN 46 to an
interest held in a variable interest entity or potential variable interest
entity until the end of the first interim or annual period ending December 15,
2003 (as of December 31, 2003, for an entity with a calendar year-end or
quarter-end of December 31). On March 28, 2003, the Company entered into new
operating leases to refinance the old leases. See Note 12 of the Notes. The
Company refinanced these leases in a manner that best met our capital financing
strategy and cost of capital objectives and the new leases are not subject to
the consolidation provisions of FIN 46. The Company believes that the adoption
of this standard will not have a material impact on our consolidated balance
sheet or statement of operations.

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

In May 2003, the EITF reached a consensus on Issue No. 03-05,
Applicability of AICPA Statement of Position 97-2 to Non-Software Deliverables
in an Arrangement Containing More-Than-Incidental Software. EITF Issue No.
03-05 provides guidance on whether non-software deliverables included in
arrangements that contain more-than-incidental software are included within the
scope of SOP 97-2. It does not address the allocation of the overall
arrangement fee to the software and the non-software elements of the
arrangement. This Issue does not address the determination of whether the
software is more than incidental but assumes that an arrangement includes
software that is more than incidental to the products or services as a whole.
The provisions of EITF Issue No. 00-21 will apply to new revenue arrangements
entered into after the beginning of an entity reporting period beginning after
August 13, 2003. The adoption of this standard is not expected to have a material impact
on our consolidated balance sheet or statement of operations.

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In April 2003, the FASB issued Statement No. 149 (SFAS No. 149),
Amendment of Statement 133 on Derivative Instruments and Hedging Activities.
SFAS No. 149 amends and clarifies financial accounting and reporting for
derivative instruments by requiring that contracts with comparable
characteristics be accounted for similarly. In particular, this statement
clarifies the circumstances under which a contract with an initial net
investment meets the characteristics of a derivative, clarifies when a
derivative contains a financing component, amends the definition of an
underlying to conform it to the language used in FIN 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, and amends certain other existing
pronouncements. The provisions of SFAS No. 149, which were not already applied
under an Implementation Issue, are effective for contracts entered into or
modified after June 30, 2003. The adoption of this standard did not have a
material impact on our consolidated balance sheet or statement of operations.

In May 2003, the FASB issued Statement No.150 (SFAS No. 150),
Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity. SFAS No. 150 establishes standards for classification
and measurement of certain financial instruments with characteristics of both
liabilities and equity. It requires financial instruments within its scope be
classified as a liability (or an asset in some circumstances). Many of those
financial instruments were previously classified as equity. SFAS No. 150 is
effective for financial instruments entered into or modified after May 31,
2003. For financial instruments created before and still existing as of the
issuance of this statement, a cumulative effect of change in accounting
principle shall be reported upon implementation in the first interim period
beginning after June 15, 2003. The adoption of this standard did not have a
material impact on our consolidated balance sheet or statement of operations.

In
August 2003, the EITF reached a consensus on Issue No. 03-11,
Reporting Realized Gains and Losses on Derivative Instruments
That are Subject to FASB Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities, and Not Held for
Trading Purposes as Defined in EITF Issue No. 02-03,
Issues Involved in Accounting for Derivative Contracts Held for
Trading Purposes and Contracts Involved in Energy Trading and Risk
Management Activities. This issue addresses whether realized
gains and losses should be shown gross or net in the income statement
for contracts that are not held for trading purposes, but are
derivatives subject to FASB Statement No. 133 (whether or not
the derivative is designated as a hedging instrument). The provisions
of EITF Issue No. 03-11 will be applied to derivative
instruments entered into during reporting periods beginning after
August 13, 2003. The adoption of this standard is not expected
to have a material impact on our consolidated balance sheet or
statements of operations.

FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS

We believe that our future operating results will continue to be subject
to quarterly variations based upon a wide variety of factors detailed in the
Risk Factors in Part I of our Annual Report on Form 10-K for the year ended
December 31, 2002. Our actual results in future periods may be significantly
different from any future performance suggested in this report. Although we
believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. Risks and uncertainties that may affect our results include,
among others:



| |  |  | Disruptions in general economic activity due to global business and
geopolitical conditions would adversely affect our revenues.                                       
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Our operations are affected by cyclical fluctuations with in the semiconductor and storage systems industries.                                                         
|
| |  |  | The price of our securities may be subject to wide fluctuations.                                                                                                       
|
| |  |  | Our global operations expose the Company to numerous international business risks.                                                                                     
|
| |  |  | The high technology industry in which we operate is prone to intellectual property litigation.                                                                         
|
| |  |  | We operate in highly competitive markets.                                                                                                                              
|
| |  |  | Our product and process development activities occur in a highly
competitive environment characterized by rapid technological change.                                  
|
| |  |  | There is uncertainty associated with our research and development
investments, the development of new products and the timing and success
of new product introductions.
|
| |  |  | We do not control the timing or size of orders for our products.                                                                                                       
|
| |  |  | We are dependent on a limited number of customers.                                                                                                                     
|
| |  |  | The rate of depletion of customer inventory buildup can adversely affect our results.                                                                                  
|
| |  |  | We utilize indirect channels of distribution over which we have limited control.                                                                                       
|
| |  |  | We operate highly complex and costly manufacturing facilities.                                                                                                         
|
| |  |  | We have significant capital requirements to maintain and grow our business.                                                                                            

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| |  |  | Our manufacturing facilities are subject to disruption.                                                                                                                                                                                                                            
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | We outsource a substantial portion of wafers manufactured.                                                                                                                                                                                                                         
|
| |  |  | The continued availability of appropriate levels of manufacturing capacity.                                                                                                                                                                                                        
|
| |  |  | We procure parts and raw materials from limited domestic and foreign sources.                                                                                                                                                                                                      
|
| |  |  | We are exposed to fluctuations in interest rates and foreign currency exchange rates.                                                                                                                                                                                              
|
| |  |  | We may rely on capital and bank markets to provide liquidity.                                                                                                                                                                                                                      
|
| |  |  | We engage in acquisitions and alliances giving rise to economic and technological risks.                                                                                                                                                                                           
|
| |  |  | Improvement in results is dependent in part on the realization of benefits from the Companys strategic relationships.                                                                                                                                                             
|
| |  |  | We must attract and retain key employees in a highly competitive environment.                                                                                                                                                                                                      
|
| |  |  | Our achievement of revenue objectives and other financial targets.                                                                                                                                                                                                                 
|
| |  |  | We may not realize the cost savings we expect from the reduction in workforce and operating expenses.                                                                                                                                                                              
|
| |  |  | 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 cannot guarantee the success of our new product offerings that we
design in response to charging technology.                                                                                                                                                                    
|
| |  |  | There are multiple factors that may make it more difficult for third
parties to acquire us, and the rights of some shareholders could be
adversely affected.                                                                                                                       

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.




Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest rate sensitivity.We are subject to interest rate risk on our
investment portfolio, outstanding debt and equipment operating leases. Our
objective in managing interest rate risk is to protect cash flows and earnings
from the impact of fluctuations in interest rates, while minimizing cost of
capital.

In June 2002, we entered into interest rate swap transactions (the
Swaps) with several investment banks to effectively convert fixed interest
payments on a portion of our $1.1 billion Convertible Subordinated Notes to
LIBOR-based floating rates. As of September 30, 2003, all of the Swaps have
been terminated (see Note 5 of the Notes). All of our Convertible Subordinated
Notes bear fixed interest rates (see Note 7 of the Notes).

In May 2003, we entered into an interest rate swap transaction to
effectively convert the LIBOR-based floating rate interest payments on the
equipment operating lease discussed in Note 12 of the Notes, with a notional
amount of $395 million, to a fixed interest rate (Lease Swap). The Lease
Swap qualifies to be accounted for as a cash flow hedge of the forecasted
interest payments attributable to the benchmark interest rate on the equipment
operating lease through September 2006. Fluctuations in interest rates affect
the fair value of the Lease Swap, which is recorded as an asset or liability
and the unrealized gains or losses recorded in accumulated other comprehensive
income in the statement of financial position.

An interest rate move of 40 basis-points (10% of our weighted-average
worldwide interest rate on outstanding debt in the nine months ended September
30, 2003) affecting our floating-rate financial instruments as of September 30,
2003, would not have a significant effect on our financial position, results of
operations and cash flows over the next fiscal year, assuming that the
investment balance remains consistent.

There have been no significant changes in the foreign currency exchange
risk or equity price risk during the nine months ended September 30, 2003, as
compared to the discussion in Part II of our Annual Report on Form 10-K for the
year ended December 31, 2002.

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Item 4. Controls and Procedures

Our management evaluated, with the participation of our chief executive
officer and our chief financial officer, the effectiveness of our disclosure
controls and procedures as of the period covered by this Quarterly Report on
Form 10-Q. Based on this evaluation, our chief executive officer and our chief
financial officer have concluded that our disclosure controls and procedures
are effective to ensure that information we are required to disclose in reports
that we file or submit under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms.

There was no change in our internal control over financial reporting that
occurred during the period covered by this Quarterly Report on Form 10-Q that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting. We are aware that any system of
control, however well designed and operated, can only provide reasonable, and
not absolute, assurance that the objectives of this system are met, and that
maintenance of disclosure controls and procedures is an ongoing process that
may change over time.




PART II  OTHER INFORMATION




Item 1. Legal Proceedings

This information is included in Note 13 (Legal Matters) of the Notes to
the Unaudited Consolidated Financial Statements, which information is
incorporated herein by reference from Item 1 of Part I hereof.




Item 2. Changes in Securities and Use of Proceeds

On September 18, 2003, the Company redeemed the balance of the 1999
Convertible Subordinated Notes (the 1999 Convertible Notes) that were
outstanding on that date. Cash of $173 million was paid to redeem the
remaining 1999 Convertible Notes at a total redemption price of $1,008.86 per
$1,000 principal amount of the notes consisting of $1,008.50 principal amount
plus accrued interest of $0.36. A net pre-tax loss of $1 million was
recognized, in interest income and other, net, on the redemption of the 1999
Convertible Notes. The pre-tax loss is net of the write-off of debt issuance
costs and the remaining deferred gain on the terminated Swap (see
Note 5 of the Notes).




Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

|     |  |                                                                                                                                                                                     
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|31.1 |  | Certification of the Chief Executive Officer pursuant to Securities
Exchange Act Rules 13a-15(e) and 15d-1(e), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|     |  |                                                                                                                                                                                     
|31.2 |  | Certification of the Chief Financial Officer pursuant to Securities
Exchange Act Rules 13a-15(e) and 15d-1(e), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 
|     |  |                                                                                                                                                                                     
|32.1 |  | Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. *                                
|     |  |                                                                                                                                                                                     
|32.2 |  | Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. *                                

* Furnished not filed.

(b) Reports on Form 8-K

On July 7, 2003, the Company filed in part and furnished in part a Form
8-K pursuant to Items 5 and 9 to report information regarding its financial
results for the fiscal quarter ended June 30, 2003 set forth in the
Registrants news release dated June 30, 2003.

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On July 23, 2003, the Company furnished a Form 8-K pursuant to Items 7 and
9 to report information regarding its financial results for the fiscal quarter
ended June 30, 2003 set forth in the Registrants news release dated July 23,
2003.

On August 21, 2003, the Company filed a Form 8-K pursuant to Item 5 to
report that it had called the remaining outstanding Convertible Subordinated
Notes due in 2004 set forth in the Registrants news release dated August 19,
2003.

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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: November 12, 2003 |  | By |  | /s/ Bryon Look            
|                        |  |    |  |                           
|                        |  |    |  | Bryon Look                
|                        |  |    |  | Executive Vice President &
|                        |  |    |  | Chief Financial Officer   

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INDEX TO EXHIBITS

|     |  |                                                                                                                                                                                         
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|31.1 |  | Certification of the Chief Executive Officer pursuant to Securities
and Exchange Act Rules 13a-15(e) and 15d-1(e), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|     |  |                                                                                                                                                                                         
|31.2 |  | Certification of the Chief Financial Officer pursuant to Securities
and Exchange Act Rules 13-15(e) and 15d-1(e), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. 
|     |  |                                                                                                                                                                                         
|32.1 |  | Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. *                                    
|     |  |                                                                                                                                                                                         
|32.2 |  | Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. *                                    

* Furnished not filed.

39