##### Table of Contents



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




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##### 



LSI LOGIC CORPORATION
 Form 10-Q
For the Quarter Ended October 1, 2006
INDEX
 PageNo.PART I. FINANCIAL INFORMATIONItem 1
    
    Financial StatementsConsolidated Condensed Balance Sheets as of October 1, 2006 (unaudited) and December 31, 2005
    
    
    3Consolidated Condensed Statements of Operations  for the three months and the nine months
ended October 1, 2006 and October 2, 2005 (unaudited)
    
    
    4Consolidated Condensed Statements of Cash Flows  for the nine months ended October 1, 2006
and October 2, 2005 (unaudited)
    
    
    5Notes to Unaudited Consolidated Condensed Financial Statements
    
    
    6Item 2
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    21Item 3
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    34Item 4
    
    Controls and Procedures
    
    
    34PART II. OTHER INFORMATIONItem 1
    
    Legal Proceedings
    
    
    34Item 1A
    
    Risk Factors
    
    
    34Item 2
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    41Item 6
    
    Exhibits
    
    
    42Signatures
    
    
    43Index to Exhibits
    
    
    44EXHIBIT 10.19EXHIBIT 10.55EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 LSI LOGIC CORPORATION
 
 CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
 October 1,
    
    December 31,2006
    
    2005(In thousands, exceptper share amounts)AssetsCash and cash equivalents
    
    $
    398,410
    
    
    $
    264,649Short-term investments
    
    
    869,723
    
    
    
    674,260Accounts receivable, less allowances of $17,231 and $15,328
    
    
    320,251
    
    
    
    323,310Inventories
    
    
    183,731
    
    
    
    194,814Prepaid expenses and other current assets
    
    
    64,036
    
    
    
    163,086Total current assets
    
    
    1,836,151
    
    
    
    1,620,119Property and equipment, net
    
    
    83,259
    
    
    
    98,285Other intangibles assets, net
    
    
    14,197
    
    
    
    45,974Goodwill
    
    
    927,169
    
    
    
    928,542Other assets
    
    
    118,134
    
    
    
    103,146Total assets
    
    $
    2,978,910
    
    
    $
    2,796,066Liabilities and Stockholders EquityAccounts payable
    
    $
    169,525
    
    
    $
    171,632Accrued salaries, wages and benefits
    
    
    75,660
    
    
    
    77,713Other accrued liabilities
    
    
    135,874
    
    
    
    140,194Income taxes payable
    
    
    89,131
    
    
    
    79,290Current portion of long-term debt
    
    
    272,038
    
    
    
    273,940Total current liabilities
    
    
    742,228
    
    
    
    742,769Long-term debt
    
    
    350,000
    
    
    
    350,000Tax-related liabilities and other
    
    
    82,470
    
    
    
    75,110Total long-term obligations and other liabilities
    
    
    432,470
    
    
    
    425,110Commitments and contingencies (Note 11)
    
    
    
    
    
    
    Minority interest in subsidiary
    
    
    234
    
    
    
    237Stockholders equity:Preferred shares; $0.01 par value; 2,000 shares authorized, none outstanding
    
    
    
    
    
    
    Common stock; $0.01 par value; 1,300,000 shares authorized; 399,975 and 394,015
shares outstanding, respectively
    
    
    4,000
    
    
    
    3,940Additional paid-in capital
    
    
    3,066,158
    
    
    
    2,996,102Accumulated deficit
    
    
    (1,279,319
    )
    
    
    (1,389,944
    )Accumulated other comprehensive income
    
    
    13,139
    
    
    
    17,852Total stockholders equity
    
    
    1,803,978
    
    
    
    1,627,950Total liabilities and stockholders equity
    
    $
    2,978,910
    
    
    $
    2,796,066
  3




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LSI LOGIC CORPORATION
 
 CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
 Three months ended
    
    Nine months endedOctober 1,
    
    October 2,
    
    October 1,
    
    October 2,2006
    
    2005
    
    2006
    
    2005(In thousands, except per share amounts)Revenues
    
    $
    492,978
    
    
    $
    481,716
    
    
    $
    1,458,497
    
    
    $
    1,413,015Cost of revenues
    
    
    278,444
    
    
    
    271,697
    
    
    
    830,267
    
    
    
    801,293Gross profit
    
    
    214,534
    
    
    
    210,019
    
    
    
    628,230
    
    
    
    611,722Research and development
    
    
    102,533
    
    
    
    101,027
    
    
    
    305,169
    
    
    
    301,328Selling, general and administrative
    
    
    60,276
    
    
    
    58,966
    
    
    
    193,790
    
    
    
    177,875Restructuring of operations and other items, net
    
    
    2,614
    
    
    
    99,986
    
    
    
    (13,384
    )
    
    
    108,675Amortization of intangibles
    
    
    6,436
    
    
    
    15,693
    
    
    
    28,453
    
    
    
    50,919Income/(loss) from operations
    
    
    42,675
    
    
    
    (65,653
    )
    
    
    114,202
    
    
    
    (27,075
    )Interest expense
    
    
    (6,556
    )
    
    
    (6,058
    )
    
    
    (19,314
    )
    
    
    (19,088
    )Interest income and other, net
    
    
    13,066
    
    
    
    4,567
    
    
    
    32,912
    
    
    
    21,500Income/(loss) before income taxes
    
    
    49,185
    
    
    
    (67,144
    )
    
    
    127,800
    
    
    
    (24,663
    )Provision for income taxes
    
    
    5,575
    
    
    
    6,250
    
    
    
    17,175
    
    
    
    18,750Net income/(loss)
    
    $
    43,610
    
    
    $
    (73,394
    )
    
    $
    110,625
    
    
    $
    (43,413
    )Net income/(loss) per share:Basic
    
    $
    0.11
    
    
    $
    (0.19
    )
    
    $
    0.28
    
    
    $
    (0.11
    )Diluted
    
    $
    0.11
    
    
    $
    (0.19
    )
    
    $
    0.27
    
    
    $
    (0.11
    )Shares used in computing per share amounts:Basic
    
    
    399,613
    
    
    
    391,017
    
    
    
    397,408
    
    
    
    389,247Diluted
    
    
    403,715
    
    
    
    391,017
    
    
    
    403,779
    
    
    
    389,247
  4




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LSI LOGIC CORPORATION
 
 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 Nine months endedOctober 1, 2006
    
    October 2, 2005(In thousands)Operating activities:Net income/(loss)
    
    $
    110,625
    
    
    $
    (43,413
    )Adjustments:Depreciation and amortization
    
    
    65,693
    
    
    
    120,468Stock-based compensation expense
    
    
    36,154
    
    
    
    3,940Non-cash restructuring and other items
    
    
    (2,576
    )
    
    
    86,661Gain on sale of intellectual property
    
    
    (15,000
    )
    
    
    Gain on sale of Gresham manufacturing facility and associated intellectual property
    
    
    (12,553
    )
    
    
    Write-off of intangible assets acquired in a purchase business combination
    
    
    3,325
    
    
    
    Non-cash foreign exchange gain
    
    
    (472
    )
    
    
    Gain on sale of equity securities
    
    
    (1,998
    )
    
    
    (824
    )Gain on repurchase of Convertible Subordinated Notes
    
    
    
    
    
    
    (4,123
    )Gain on sale of property and equipment
    
    
    (245
    )
    
    
    (91
    )Changes in deferred tax assets and liabilities
    
    
    24
    
    
    
    112Changes in assets and liabilities:Accounts receivable
    
    
    3,063
    
    
    
    (26,468
    )Inventories
    
    
    7,158
    
    
    
    29,767Prepaid expenses and other assets
    
    
    (13,380
    )
    
    
    (2,090
    )Accounts payable
    
    
    (1,161
    )
    
    
    6,118Accrued and other liabilities
    
    
    17,104
    
    
    
    26,627Net cash provided by operating activities
    
    
    195,761
    
    
    
    196,684Investing activities:Purchase of debt securities available-for-sale
    
    
    (498,408
    )
    
    
    (397,240
    )Proceeds from maturities and sales of debt securities available-for-sale
    
    
    302,407
    
    
    
    365,228Purchases of equity securities
    
    
    (8,150
    )
    
    
    Proceeds from sales of equity securities
    
    
    6,092
    
    
    
    3,871Purchases of property, equipment and software
    
    
    (44,244
    )
    
    
    (35,326
    )Proceeds from sale of property and equipment
    
    
    89
    
    
    
    3,399Proceeds from sale of intellectual property
    
    
    22,670
    
    
    
    Proceeds from sale of Fort Collins facility
    
    
    10,998
    
    
    
    Proceeds from sale of Colorado Springs facility
    
    
    7,029
    
    
    
    Proceeds from sale of Gresham manufacturing facility
    
    
    96,426
    
    
    
    Proceeds from sale of Gresham manufacturing facility associated intellectual property
    
    
    5,100
    
    
    
    Proceeds from the resolution of a pre-acquisition income tax contingency
    
    
    1,373
    
    
    
    7,662Net cash used in investing activities
    
    
    (98,618
    )
    
    
    (52,406
    )Financing activities:Repurchase of Convertible Subordinated Notes
    
    
    
    
    
    
    (148,126
    )Issuance of common stock
    
    
    36,005
    
    
    
    20,073Repayment of debt obligations
    
    
    
    
    
    
    (129
    )Net cash provided by /(used in) financing activities
    
    
    36,005
    
    
    
    (128,182
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    613
    
    
    
    (9,165
    )Increase in cash and cash equivalents
    
    
    133,761
    
    
    
    6,931Cash and cash equivalents at beginning of period
    
    
    264,649
    
    
    
    218,723Cash and cash equivalents at end of period
    
    $
    398,410
    
    
    $
    225,654
  5




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




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Fair Value Measurements
 NOTE 2  STOCK-BASED COMPENSATION
  Description of the Companys equity compensation plans:
 The 2003 Equity Incentive Plan (the 2003 Plan):
 The 1991 Equity Incentive Plan (the 1991 Plan):
 The 1995 Director
 Option Plan:
 The 1999 Nonstatutory Stock Option Plan (the 1999 Plan):
 The Employee Stock Purchase Plan, as amended and restated (US ESPP):
 7




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International Employee Stock Purchase Plan (IESPP):
 Stock-based compensation expense under SFAS 123R:
    Three months ended
    
    
    Nine months endedOctober 1,
    
    
    October 2,
    
    
    October 1,
    
    
    October 2,Stock-based compensation expense:
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands)
    
    
    (In thousands)Cost of revenues
    
    $
    1,719
    
    
    $
    186
    
    
    $
    5,702
    
    
    $
    511Research and development
    
    
    3,908
    
    
    
    503
    
    
    
    13,073
    
    
    
    1,908Selling, general and administrative
    
    
    5,398
    
    
    
    624
    
    
    
    17,379
    
    
    
    1,521Total stock-based compensation expense
    
    $
    11,025
    
    
    $
    1,313
    
    
    $
    36,154
    
    
    $
    3,940
 8




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Stock Options
  Three months ended
    
    Nine months endedEmployee Stock Options Granted
    
    October 1, 2006
    
    October 1, 2006Weighted average estimated grant date fair value
    
    $
    2.97
    
    
    $
    3.30Weighted average assumptions in calculation:Expected life (years)
    
    
    4.36
    
    
    
    4.32Risk-free interest rate
    
    
    5
    %
    
    
    5
    %Volatility
    
    
    48
    %
    
    
    48
    %Dividend yield
    
    
    
    
    
    
    
      9




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WeightedWeighted
    
    Average
    
    AverageAverage
    
    Remaining
    
    IntrinsicNumber of
    
    Exercise
    
    Contractual
    
    ValueShares
    
    Price Per
    
    Term
    
    (In(In thousands)
    
    Share
    
    (In years)
    
    thousands)Options outstanding at January 1, 2006
    
    
    70,618
    
    
    $
    13.21
    
    
    
    
    
    
    $
    Options granted
    
    
    7,069
    
    
    
    9.16
    
    
    
    
    
    
    
    Options exercised
    
    
    (3,542
    )
    
    
    (6.62
    )
    
    
    
    
    
    
    Options canceled
    
    
    (11,040
    )
    
    
    (16.02
    )
    
    
    
    
    
    
    Options outstanding at October 1, 2006
    
    
    63,105
    
    
    $
    12.63
    
    
    
    4.84
    
    
    $
    44,300Options exercisable at October 1, 2006
    
    
    41,208
    
    
    $
    15.15
    
    
    
    4.21
    
    
    $
    24,448
    Employee Stock Purchase Plans
  Three months endedEmployee Stock Purchase Plans Granted
    
    July 2, 2006Weighted average estimated grant date fair value
    
    $
    3.05Weighted average assumptions in calculation:Expected life (years)
    
    
    0.8Risk-free interest rate
    
    
    5
    %Volatility
    
    
    39
    %Dividend yield
    
    
    
 Restricted Stock Awards
  10




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Number ofshares(In thousands)Non-vested shares at January 1, 2006
    
    
    2,375Granted
    
    
    498Vested
    
    
    (850
    )Forfeited
    
    
    (223
    )Non-vested shares at October 1, 2006
    
    
    1,800
   Income taxes
   Earnings per share
  Pro Forma Information under SFAS 123 for Period Prior to January 1, 2006 :
  11




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Three months
    
    Nine monthsended
    
    endedOctober 2,
    
    October 2,2005
    
    2005(In thousands, except per shareamounts)Net loss, as reported
    
    $
    (73,394
    )
    
    $
    (43,413
    )Add: Amortization of
non-cash deferred stock
compensation determined
under the intrinsic
value method as reported
in net income, net of
related tax effects *
    
    
    44
    
    
    
    340Deduct: Total
stock-based employee
compensation expense
determined under fair
value method for all
awards, net of related
tax effects*
    
    
    (17,362
    )
    
    
    (60,876
    )Pro forma net loss
    
    $
    (90,712
    )
    
    $
    (103,949
    )Loss per share:Basic-as reported
    
    $
    (0.19
    )
    
    $
    (0.11
    )Basic-pro forma
    
    $
    (0.23
    )
    
    $
    (0.27
    )Diluted-as reported
    
    $
    (0.19
    )
    
    $
    (0.11
    )Diluted-pro forma
    
    $
    (0.23
    )
    
    $
    (0.27
    )
 
 *
    
    This amount excludes amortization of stock-based compensation on restricted stock
awards.  Three months ended
    
    Nine months endedEmployee Stock Options Granted
    
    October 2, 2005
    
    October 2, 2005Weighted average estimated grant date fair value
    
    $
    5.77
    
    
    $
    4.62Assumptions in calculation:Expected life (years)
    
    
    4.42
    
    
    
    4.50Risk-free interest rate
    
    
    4
    %
    
    
    4
    %Volatility
    
    
    78
    %
    
    
    79
    %Dividend yield
    
    
    
    
    
    
    
 NOTE 3 RESTRUCTURING AND OTHER ITEMS
  Restructuring and impairment of long- lived assets:
 First quarter of 2006:
  12




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Second quarter of 2006:
  
    
    $12.5 million net gain recorded for the sale of Gresham, Oregon manufacturing facility
and certain related manufacturing process intellectual property to ON Semiconductor;
    
    $15.0 million gain recorded for the sale of certain intellectual property to a third
party based on the sale of zero basis intellectual property for $15.0 million in cash
proceeds;
    
    $7.4 million gain recorded for the sale of the Companys ZSP digital signal processor
intellectual technology;
    
    $8.6 million charge recorded for severance and termination benefits for employees
primarily related to the broad-based reorganization that was announced in August 2005;
    
    $3.3 million charge recorded for the write-off of certain intangible assets acquired in a
purchase business combination; and
    
    $1.4 million net charge recorded primarily for changes in sublease assumptions for
certain previously accrued facility lease termination costs.
 Sale of the Gresham facility:
    Third quarter of 2006:
  
    
    $1.7 million charge recorded for severance and termination benefits for employees
primarily related to the broad-based reorganization that was announced in August 2005;
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
    
    $0.4 million net charge recorded primarily for changes in sublease assumptions for
certain previously accrued facility lease termination costs and additional $0.4 million
recorded to reflect the change-in-time value of accruals for facility lease termination
costs; and
    
    $0.1 million net charge recorded for other exit costs, mainly related to the contract
termination costs related to the Companys strategic realignment of the sales function.
   Balance at
    
    
    Restructuring
    
    
    Utilized
    
    
    
    
    
    
    Restructuring
    
    
    Utilized
    
    
    Balance at
    
    
    Restructuring
    
    
    Utilized
    
    
    Balance atDecember
    
    
    Expense
    
    
    during
    
    
    Balance at
    
    
    Expense
    
    
    during Q2,
    
    
    July 2,
    
    
    Expense
    
    
    during
    
    
    October 1,(In thousands)
    
    31, 2005
    
    
    Q1, 2006
    
    
    Q1, 2006
    
    
    April 2, 2006
    
    
    Q2, 2006
    
    
    2006
    
    
    2006
    
    
    Q3, 2006
    
    
    Q3, 2006
    
    
    2006Write-down of excess
assets and
decommissioning costs
(a)
    
    $
    4,993
    
    
    $
    
    
    
    $
    (48
    )
    
    $
    4,945
    
    
    $
    
    
    
    $
    (4,565
    )
    
    $
    380
    
    
    $
    (30
    )
    
    $
    (350
    )
    
    $
    Lease terminations (b)
    
    
    22,287
    
    
    
    3,144
    
    
    
    (2,220
    )
    
    
    23,211
    
    
    
    1,627
    
    
    
    (1,684
    )
    
    
    23,154
    
    
    
    824
    
    
    
    (1,213
    )
    
    
    22,765Facility closure and
other exit costs (c)
    
    
    
    
    
    
    1,368
    
    
    
    (463
    )
    
    
    905
    
    
    
    20
    
    
    
    (612
    )
    
    
    313
    
    
    
    105
    
    
    
    (418
    )
    
    
    Payments to employees
for severance (d)
    
    
    5,395
    
    
    
    5,693
    
    
    
    (1,743
    )
    
    
    9,345
    
    
    
    8,552
    
    
    
    (3,295
    )
    
    
    14,602
    
    
    
    1,715
    
    
    
    (15,544
    )
    
    
    773Total
    
    $
    32,675
    
    
    $
    10,205
    
    
    $
    (4,474
    )
    
    $
    38,406
    
    
    $
    10,199
    
    
    $
    (10,156
    )
    
    $
    38,449
    
    
    $
    2,614
    
    
    $
    (17,525
    )
    
    $
    23,538
 
 (a)
    
    The remaining balance was utilized during the third quarter of 2006.(b)
    
    Amounts utilized represent cash payments. The balance remaining for real estate lease
terminations will be paid during the remaining terms of these contracts, which extend through
2011.(c)
    
    Amounts utilized represent cash payments. 14




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(d)
    
    Amounts utilized represent a) cash severance payments to 118 employees during the nine months
ended October 1, 2006 and b) cash payments for one-time termination benefits for 512 employees
associated with the sale of the Gresham manufacturing facility.
 NOTE 4 INVESTMENTS
 October 1,
    
    December 31,2006
    
    2005(In thousands)Available-for-sale debt securitiesAsset and mortgage-backed securities
    
    $
    361,417
    
    
    $
    335,495U.S. government and agency securities
    
    
    323,984
    
    
    
    266,077Corporate and municipal debt securities
    
    
    184,322
    
    
    
    72,688Total short-term investments
    
    $
    869,723
    
    
    $
    674,260Long-term investments in equity securitiesMarketable equity securities available-for-sale
    
    $
    7,814
    
    
    $
    18,769Non-marketable equity securities
    
    
    12,973
    
    
    
    7,070Total long-term investments in equity securities
    
    $
    20,787
    
    
    $
    25,839
    
    
    A $0.8 million pre-tax gain related to the sale of certain marketable available-for-sale
equity securities for the three months ended October 1, 2006;
    
    A $1.4 million pre-tax gain related to the sale of certain marketable available-for-sale
equity securities for the three months ended April 2, 2006; and
    
    A $0.2 million pre-tax loss related to the sale of certain marketable available-for-sale
equity securities of a certain technology company that was acquired by another technology company
for the three months ended July 2, 2006.
  
    
    A $1.0 million pre-tax gain related to the sale of certain marketable available-for-sale
equity securities for the three months ended July 3, 2005; and
    
    A $1.4 million pre-tax gain associated with marketable available-for-sale equity
securities of a certain technology company that was acquired by another technology company for the
three months ended July 3, 2005.
 15




---



##### Table of Contents



Non-marketable
    
    Marketableequity
    
    equityinvestments
    
    investments(in millions)Pre-tax loss:Three months ended October 1, 2006
    
    $
    
    
    
    $
    Nine months ended October 1, 2006
    
    
    
    
    
    
    Pre-tax loss:Three months ended October 2, 2005
    
    $
    1.5
    
    
    $
    Nine months ended October 2, 2005
    
    
    1.5
    
    
    
    Total carrying value of impaired investments as of October 1, 2006
    
    $
    
    
    
    $
    
  NOTE 5  BALANCE SHEET DETAIL
 October 1,
    
    December 31,2006
    
    2005(In thousands)Cash and cash equivalents:Cash in financial institutions
    
    $
    34,916
    
    
    $
    85,641Cash equivalents
    
    
    363,494
    
    
    
    179,008$
    398,410
    
    
    $
    264,649Inventories:Raw materials
    
    $
    35,263
    
    
    $
    30,541Work-in-process
    
    
    49,887
    
    
    
    62,167Finished goods
    
    
    98,581
    
    
    
    102,106$
    183,731
    
    
    $
    194,814
  16




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##### Table of Contents



NOTE 6  DEBT
 Conversion
    
    October 1,
    
    December 31,Maturity
    
    Interest Rate
    
    Price
    
    2006
    
    2005(In thousands)2003 Convertible Subordinated Notes
    
    May 2010
    
    
    4
    %
    
    $
    13.4200
    
    
    $
    350,000
    
    
    $
    350,0002001 Convertible Subordinated Notes
    
    November 2006
    
    
    4
    %
    
    $
    26.3390
    
    
    
    271,848
    
    
    
    271,848Deferred gain on terminated swaps
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    190
    
    
    
    2,092622,038
    
    
    
    623,940Current portion of long-term debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (272,038
    )
    
    
    (273,940
    )Long-term debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    350,000
    
    
    $
    350,000
  NOTE 7 RECONCILIATION OF BASIC AND DILUTED INCOME/(LOSS) PER SHARE
 Three months endedOctober 1, 2006
    
    October 2, 2005Per-Share
    
    
    
    
    
    
    
    
    
    Per-ShareIncome*
    
    Shares+
    
    Amount
    
    (Loss)*
    
    Shares+
    
    Amount(In thousands except per share amounts)Basic EPS:Net income/(loss) available to common stockholders
    
    $
    43,610
    
    
    
    399,613
    
    
    $
    0.11
    
    
    $
    (73,394
    )
    
    
    391,017
    
    
    $
    (0.19
    )Stock options, employee stock purchase rights and
restricted stock awards
    
    
    
    
    
    
    4,102
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted EPS:Net income/(loss) available to common stockholders
    
    $
    43,610
    
    
    
    403,715
    
    
    $
    0.11
    
    
    $
    (73,394
    )
    
    
    391,017
    
    
    $
    (0.19
    )
 Nine months endedOctober 1, 2006
    
    October 2, 2005Per-Share
    
    
    
    
    
    
    
    
    
    
    
    
    
    Per-ShareIncome*
    
    Shares+
    
    Amount
    
    (Loss)*
    
    Shares+
    
    Amount(In thousands except per share amounts)Basic EPS:Net income/(loss) available to common stockholders
    
    $
    110,625
    
    
    
    397,408
    
    
    $
    0.28
    
    
    $
    (43,413
    )
    
    
    
    
    
    
    389,247
    
    
    $
    (0.11
    )Stock options, employee stock purchase rights and
restricted stock awards
    
    
    
    
    
    
    6,371
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted EPS:Net income/(loss) available to common stockholders
    
    $
    110,625
    
    
    
    403,779
    
    
    $
    0.27
    
    
    $
    (43,413
    )
    
    
    
    
    
    
    389,247
    
    
    $
    (0.11
    )
 
 *
    
    Numerator+
    
    Denominator
   17




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NOTE 8  COMPREHENSIVE INCOME/ (LOSS)
  Three months ended
    
    Nine months endedOctober 1,
    
    October 2,
    
    October 1,
    
    October 2,2006
    
    2005
    
    2006
    
    2005(In thousands)Net income/(loss)
    
    $
    43,610
    
    
    $
    (73,394
    )
    
    $
    110,625
    
    
    $
    (43,413
    )Change in unrealized gain/(loss) on derivative instruments
designated as and qualifying as cash-flow hedges
    
    
    
    
    
    
    260
    
    
    
    
    
    
    
    (275
    )Change in unrealized gain/(loss) on available-for-sale
securities
    
    
    3,867
    
    
    
    2,422
    
    
    
    (4,893
    )
    
    
    (1,851
    )Change in foreign currency translation adjustments
    
    
    (916
    )
    
    
    (2,546
    )
    
    
    180
    
    
    
    (9,336
    )Comprehensive income/(loss)
    
    $
    46,561
    
    
    $
    (73,258
    )
    
    $
    105,912
    
    
    $
    (54,875
    )
 NOTE 9  SEGMENT REPORTING
   Three months ended
    
    Nine months endedOctober 1,
    
    October 2,
    
    October 1,
    
    October 2,2006
    
    2005
    
    2006
    
    2005(In thousands)Revenues:Semiconductor
    
    $
    313,273
    
    
    $
    311,739
    
    
    $
    919,038
    
    
    $
    940,940Storage Systems
    
    
    179,705
    
    
    
    169,977
    
    
    
    539,459
    
    
    
    472,075Total
    
    $
    492,978
    
    
    $
    481,716
    
    
    $
    1,458,497
    
    
    $
    1,413,015Income/(loss) from operations:Semiconductor
    
    $
    26,276
    
    
    $
    (75,641
    )
    
    $
    72,177
    
    
    $
    (37,188
    )Storage Systems
    
    
    16,399
    
    
    
    9,988
    
    
    
    42,025
    
    
    
    10,113Total
    
    $
    42,675
    
    
    $
    (65,653
    )
    
    $
    114,202
    
    
    $
    (27,075
    )
  18




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Significant Customers.
 Three months ended
    
    Nine months endedOctober 1,
    
    October 2,
    
    October 1,
    
    October 2,2006
    
    2005
    
    2006
    
    2005Semiconductor segment:Number of significant customers
    
    
    1
    
    
    
    2
    
    
    
    1
    
    
    
    1Percentage of segment revenues
    
    
    19
    %
    
    
    16%,12
    %
    
    
    19
    %
    
    
    17
    %Storage Systems segment:Number of significant customers
    
    
    3
    
    
    
    2
    
    
    
    2
    
    
    
    3Percentage of segment revenues
    
    
    45%,15%,10
    %
    
    
    46%,11
    %
    
    
    45%,15
    %
    
    
    43%,13%,10
    %Consolidated:Number of significant customers
    
    
    2
    
    
    
    2
    
    
    
    2
    
    
    
    2Percentage of consolidated revenues
    
    
    17%,12
    %
    
    
    17%,11
    %
    
    
    18%,12
    %
    
    
    15%,11
    %
  October 1,
    
    December 31,2006
    
    2005(In thousands)Total assets:Semiconductor
    
    $
    2,447,153
    
    
    $
    2,285,913Storage Systems
    
    
    531,757
    
    
    
    510,153Total
    
    $
    2,978,910
    
    
    $
    2,796,066
   NOTE 10 RELATED PARTY TRANSACTIONS
  NOTE 11  COMMITMENTS, CONTINGENCIES AND LEGAL MATTERS
  19




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NOTE 12 SUBSEQUENT EVENTS
   20




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  OVERVIEW
         21




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RESULTS OF OPERATIONS
 Revenues:
 Three months ended
    
    Nine months endedOctober 1,
    
    October 2,
    
    October 1,
    
    October 2,2006
    
    2005
    
    2006
    
    2005(in millions)Semiconductor segment
    
    $
    313.3
    
    
    $
    311.7
    
    
    $
    919.1
    
    
    $
    940.9Storage Systems segment
    
    
    179.7
    
    
    
    170.0
    
    
    
    539.4
    
    
    
    472.1Consolidated
    
    $
    493.0
    
    
    $
    481.7
    
    
    $
    1,458.5
    
    
    $
    1,413.0
  Three months ended October 1, 2006 compared to the three months ended October 2, 2005
  Semiconductor segment
  
 
  Storage Systems segment
  22




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Nine months ended October 1, 2006 compared to the nine months ended October 2, 2005
  Semiconductor segment
  
  Storage Systems segment
  Significant Customers.
 Three months ended
    
    Nine months endedOctober 1,
    
    October 2,
    
    October 1,
    
    October 2,2006
    
    2005
    
    2006
    
    2005Semiconductor segment:Number of significant customers
    
    
    1
    
    
    
    2
    
    
    
    1
    
    
    
    1Percentage of segment revenues
    
    
    19
    %
    
    
    16%,12
    %
    
    
    19
    %
    
    
    17
    %Storage Systems segment:Number of significant customers
    
    
    3
    
    
    
    2
    
    
    
    2
    
    
    
    3Percentage of segment revenues
    
    
    45%,15%,10
    %
    
    
    46%,11
    %
    
    
    45%,15
    %
    
    
    43%,13%,10
    %Consolidated:Number of significant customers
    
    
    2
    
    
    
    2
    
    
    
    2
    
    
    
    2Percentage of consolidated revenues
    
    
    17%,12
    %
    
    
    17%,11
    %
    
    
    18% 12
    %
    
    
    15%,11
    %
 Revenues by geography.
 Three months ended
    
    Nine months endedOctober 1, 2006
    
    October 2, 2005
    
    October 1, 2006
    
    October 2, 2005(in millions)Revenues:North America
    
    $
    219.9
    
    
    $
    230.8
    
    
    $
    692.4
    
    
    $
    666.4Asia, including Japan
    
    
    224.3
    
    
    
    193.1
    
    
    
    605.3
    
    
    
    583.8Europe
    
    
    48.8
    
    
    
    57.8
    
    
    
    160.8
    
    
    
    162.8Total
    
    $
    493.0
    
    
    $
    481.7
    
    
    $
    1,458.5
    
    
    $
    1,413.0
 23




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Three months ended October 1, 2006 compared to the three months ended October 2, 2005
  Nine months ended October 1, 2006 compared to the nine months ended October 2, 2005
  Operating costs and expenses.
 Gross profit margin:
 Three months ended
    
    Nine months endedOctober 1, 2006
    
    October 2, 2005
    
    October 1, 2006
    
    October 2, 2005(in millions)Semiconductor segment
    
    $
    149.5
    
    
    $
    147.3
    
    
    $
    439.1
    
    
    $
    447.8Percentage of revenues
    
    
    48
    %
    
    
    47
    %
    
    
    48
    %
    
    
    48
    %Storage Systems segment
    
    $
    65.0
    
    
    $
    62.7
    
    
    $
    189.1
    
    
    $
    163.9Percentage of revenues
    
    
    36
    %
    
    
    37
    %
    
    
    35
    %
    
    
    35
    %Consolidated
    
    $
    214.5
    
    
    $
    210.0
    
    
    $
    628.2
    
    
    $
    611.7Percentage of revenues
    
    
    44
    %
    
    
    44
    %
    
    
    43
    %
    
    
    43
    %
 Three months ended October 1, 2006 compared to the three months ended October 2, 2005
  24




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Semiconductor segment:
  
 
 
 
 
 Storage Systems segment:
  Nine months ended October 1, 2006 compared to the nine months ended October 2, 2005
  Semiconductor segment:
  
 
 
 
 
 Storage Systems segment:
  25




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##### Table of Contents




    
    Competitive pricing pressures;
    
    Product mix;
    
    Factory capacity and utilization;
    
    Geographic location of manufacturing;
    
    Unexpected changes in regulatory requirements;
    
    Foreign technical standards;
    
    Manufacturing yields;
    
    Availability of certain raw materials;
    
    Adoption of new industry standards;
    
    Terms negotiated with third-party subcontractors; and
    
    Foreign currency fluctuations.
  Research and development:
 Three months ended
    
    Nine months endedOctober 1, 2006
    
    October 2, 2005
    
    October 1, 2006
    
    October 2, 2005(in millions)Semiconductor segment
    
    $
    77.0
    
    
    $
    75.9
    
    
    $
    236.3
    
    
    $
    232.7Percentage of revenues
    
    
    25
    %
    
    
    24
    %
    
    
    26
    %
    
    
    25
    %Storage Systems segment
    
    $
    25.5
    
    
    $
    25.1
    
    
    $
    68.9
    
    
    $
    68.6Percentage of revenues
    
    
    14
    %
    
    
    15
    %
    
    
    13
    %
    
    
    15
    %Consolidated
    
    $
    102.5
    
    
    $
    101.0
    
    
    $
    305.2
    
    
    $
    301.3Percentage of revenues
    
    
    21
    %
    
    
    21
    %
    
    
    21
    %
    
    
    21
    %
 Three months ended October 1, 2006 compared to the three months ended October 2, 2005
  26




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Semiconductor segment:
  Storage Systems segment:
  Nine months ended October 1, 2006 compared to the nine months ended October 2, 2005
  Semiconductor segment:
  Storage Systems segment:
  Selling, general and administrative:
 Three months ended
    
    Nine months endedOctober 1, 2006
    
    October 2, 2005
    
    October 1, 2006
    
    October 2, 2005(in millions)Semiconductor segment
    
    $
    38.1
    
    
    $
    37.0
    
    
    $
    121.6
    
    
    $
    112.5Percentage of revenues
    
    
    12
    %
    
    
    12
    %
    
    
    13
    %
    
    
    12
    %Storage Systems segment
    
    $
    22.2
    
    
    $
    22.0
    
    
    $
    72.2
    
    
    $
    65.4Percentage of revenues
    
    
    12
    %
    
    
    13
    %
    
    
    13
    %
    
    
    14
    %Consolidated
    
    $
    60.3
    
    
    $
    59.0
    
    
    $
    193.8
    
    
    $
    177.9Percentage of revenue
    
    
    12
    %
    
    
    12
    %
    
    
    13
    %
    
    
    13
    %
 Three months ended October 1, 2006 compared to the three months ended October 2, 2005
  27




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Semiconductor segment:
  Storage Systems segment:
  Nine months ended October 1, 2006 compared to the nine months ended October 2, 2005
  Semiconductor segment:
  Storage Systems segment:
  
 
 Restructuring of operations and other items:
 Stock-based compensation
 28




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##### Table of Contents



Amortization of intangibles:
 Interest expense:
  Interest income and other, net:
  Provision for
 income taxes:
   29




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FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
  Working capital.
 
    
    Cash, cash equivalents and short-term investments increased by $329.2 million.
    
    Other accrued liabilities decreased by $4.3 million due to decreases in the restructuring reserve (Note 3 of the Notes)
and miscellaneous accruals, offset in part by increases in the interest accrual related to the Convertible Subordinated
Notes.
    
    Accounts payable decreased by $2.1 million due to the timing of invoice receipt and payments.
    
    Accrued salaries, wages and benefits decreased by $2.1 million primarily due to timing differences in payment of
salaries, benefits and performance-based compensation.
    
    Current portion of long-term obligation decreased by $1.9 million due to the amortization of deferred gain on the
terminated swaps.The increase in working capital was offset, in part, by the following:
    
    Prepaid expenses and other current assets decreased by $99.1 million primarily due to decreases in assets held for sale
due to the sale of our Gresham, Oregon manufacturing facility and two Colorado facilities, and a decrease in prepaid
software maintenance.
    
    Inventories decreased by $11.1 million to $183.7 million as of October 1, 2006, from $194.8 million as of December 31,
2005. The decline in inventory levels reflects a) our continued focus on supply chain management and b) inventory sold
to ON Semiconductor as part of the sale of the Gresham manufacturing facility.
    
    Income taxes payable increased by $9.8 million due to the timing of income tax payments made and the income tax
provision recorded during the nine months ended October 1, 2006.
    
    Accounts receivable decreased by $3.1 million to $320.3 million as of October 1, 2006 from $323.3 million as of
December 31, 2005. The decrease is mainly attributed to lower revenues during the three months ended October 1, 2006 as
compared to the three months ended December 31, 2005.
 Cash and cash equivalents generated from operating activities.
 
    
    Net income adjusted for non-cash transactions. The non-cash items and
other non-operating adjustments are quantified in our Consolidated
Condensed Statements of Cash Flows included in this Form 10-Q; and
    
    A net increase in assets and liabilities, including changes in working
capital components from December 31, 2005 to October 1, 2006, as
discussed above.
  Cash and cash equivalents used in investing activities.
 30




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
    
    Purchases of debt and equity securities available for sale, net of sales and maturities; and
    
    Proceeds from the sale of the Gresham, Oregon manufacturing facility, two Colorado facilities and intellectual
property, net of purchases of property, equipment and software.
    
    The receipt of an income tax refund for pre-acquisition tax matters associated with an acquisition in 2001.
  Cash and cash equivalents provided by/ (used in) financing activities
   Contractual Obligations
  Payments due by periodContractual Obligations
    
    Less than
    
    1  3
    
    4  5
    
    After 51 year
    
    years
    
    years
    
    years
    
    Total(in millions)Convertible Subordinated Notes
    
    $
    271.8
    
    
    $
    
    
    
    $
    350.0
    
    
    $
    
    
    
    $
    621.8Operating lease obligations
    
    
    48.5
    
    
    
    78.4
    
    
    
    38.9
    
    
    
    11.5
    
    
    
    177.3Purchase commitments
    
    
    413.9
    
    
    
    35.5
    
    
    
    
    
    
    
    
    
    
    
    449.4= =Total
    
    $
    734.2
    
    
    $
    113.9
    
    
    $
    388.9
    
    
    $
    11.5
    
    
    $
    1,248.5
 Convertible Subordinated Notes
   31




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Operating Lease Obligations
  Purchase Commitments
    Critical Accounting Policies
  Stock-Based compensation
  Stock Options
  Three months ended
    
    Nine months endedEmployee Stock Options Granted
    
    October 1, 2006
    
    October 1, 2006Weighted average estimated grant date fair value
    
    $
    2.97
    
    
    $
    3.30Weighted average assumptions in calculation:Expected life (years)
    
    
    4.36
    
    
    
    4.32Risk-free interest rate
    
    
    5
    %
    
    
    5
    %Volatility
    
    
    48
    %
    
    
    48
    %Dividend yield
    
    
    
    
    
    
    
 32




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##### Table of Contents



Employee Stock Purchase Plans
  Three months endedEmployee Stock Purchase Plans Granted
    
    July 2, 2006Weighted average estimated grant date fair value
    
    $
    3.05Weighted average assumptions in calculation:Expected life (years)
    
    
    0.8Risk-free interest rate
    
    
    5
    %Volatility
    
    
    39
    %Dividend yield
    
    
    
 Restricted Stock Awards
   33




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##### Table of Contents



Recent Accounting Pronouncements
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
  
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures:
 Changes in Internal Controls:
 
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
    34




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General economic weakness and geopolitical factors may harm our operating results and
financial condition.
 We depend entirely on independent foundry subcontractors to manufacture our semiconductor
products; accordingly, any failure to secure and maintain sufficient foundry capacity could
materially and adversely affect our business.
   
    
    a lack of guaranteed wafer supply and potential wafer shortages and higher wafer prices;
    
    limited control over delivery schedules, quality assurance, manufacturing yields and production costs; and
    
    the unavailability of, or potential delays in obtaining access to, key process technologies.
   35




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Our target markets are characterized by rapid technological change.
 We operate in highly competitive markets.
 We are dependent on a limited number of customers.
  
    
    we do not win new product designs from major existing customers;
    
    major customers reduce or cancel their existing business with us;
    
    major customers make significant changes in scheduled deliveries; or
    
    there are declines in the prices of products that we sell to these customers.
 We are potentially subject to credit risk from accounts receivable.
 Our new products may not achieve market acceptance.
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The storage manufacturing facility we operate is complex
 
    
    maintain a competitive manufacturing cost structure;
    
    exercise stringent quality control measures to ensure high yields;
    
    effectively manage the subcontractors engaged in the wafer fabrication, test and assembly of products; and
    
    update equipment and facilities as required for leading edge production capabilities.
 We procure parts and raw materials from a limited number of domestic and foreign sources.
 We utilize indirect channels of distribution over which we have limited control.
 We engage in acquisitions and alliances giving rise to financial and technological risks.
  .
 The price of our securities may be subject to wide fluctuations.
 37




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We may rely on capital and bank markets to provide liquidity.
 We design and develop highly complex semiconductors and storage systems.
 The high technology industry in which we operate is prone to intellectual property litigation.
   We may not be able to adequately protect or enforce our intellectual property rights, which
could harm our competitive position.
 38




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##### Table of Contents



Our Storage Systems manufacturing facility is subject to disruption
 We depend on third-party subcontractors to assemble, obtain packaging materials for, and test
substantially all of our current semiconductor products. If we lose the services of any of our
subcontractors or if these subcontractors are unable to obtain sufficient packaging materials,
shipments of our products may be disrupted, which could harm our customer relationships and
adversely affect our revenues.
  We depend on third-party subcontractors to manufacture all of our current board products.
  We are increasingly exposed to various legal, business, political and economic risks
associated with our international operations.
 39




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
    
    political, social and economic instability;
    
    exposure to different legal standards, particularly with respect to intellectual property;
    
    natural disasters and public health emergencies;
    
    nationalization of business and blocking of cash flows;
    
    trade and travel restrictions;
    
    the imposition of governmental controls and restrictions;
    
    burdens of complying with a variety of foreign laws;
    
    import and export license requirements and restrictions of the United States and each
other country in which we operate;
    
    unexpected changes in regulatory requirements;
    
    foreign technical standards;
    
    changes in tariffs;
    
    difficulties in staffing and managing international operations;
    
    fluctuations in currency exchange rates;
    
    difficulties in collecting receivables from foreign entities or delayed revenue recognition; and
    
    potentially adverse tax consequences.
  We are exposed to fluctuations in foreign currency exchange rates.
 We must attract and retain key employees in a highly competitive environment.
 The adoption of new accounting standards related to the expensing of stock awards adversely
affected our results for the nine months ended October 1, 2006 and is expected to negatively impact
the results of operations in subsequent periods. Future changes in financial accounting standards
or practices or existing taxation rules or practices may also cause adverse unexpected fluctuations
and affect our reported results of operations.
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We face uncertainties related to the effectiveness of internal controls.
  Internal control deficiencies or weaknesses that are not yet identified could emerge.
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  41




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Item 6. Exhibits
 10.19
    
    LSI Logic Corporation 2003 Equity Incentive Plan, amended and restated as of May 4, 2004.*10.55
    
    Wafer Supply and Test Services Agreement between LSI Logic Corporation and Semiconductor
Components Industries, LLC, as of May 16, 2006.+31.1
    
    Certification of the Chief Executive Officer pursuant to Securities and Exchange Act Rules
13a-15(e) and 15d-1(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of the Chief Financial Officer pursuant to Securities Exchange Act Rules
13a-15(e) and 15d-1(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**32.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
 
 +
    
    Schedules to this exhibit not filed herewith shall be furnished to the SEC upon request.
Portions of this exhibit have been omitted pursuant to a request for confidential treatment.*
    
    Denotes management plan or compensatory plan or arrangement.**
    
    Furnished not filed. 
 42




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##### Table of Contents



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




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##### Table of Contents



INDEX TO EXHIBITS
 10.19
    
    LSI Logic Corporation 2003 Equity Incentive Plan, amended and restated as of May 4, 2004.*10.55
    
    Wafer Supply and Test Services Agreement between LSI Logic Corporation and Semiconductor
Components Industries, LLC, as of May 16, 2006.+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.**
 
 +
    
    Schedules to this exhibit not filed herewith shall be furnished to the SEC upon request.
Portions of this exhibit have been omitted pursuant to a request for confidential treatment.*
    
    Denotes management plan or compensatory plan or arrangement.**
    
    Furnished not filed. 44