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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 June 29, 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
(State of Incorporation) |  | 94-2712976
(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 August 8, 2003, there were 378,750,957 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 4. Submission of Matters to a Vote of Security Holders                                  
|                                         | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                              
|CERTIFICATION OF CHIEF EXECUTIVE OFFICER
|CERTIFICATION OF CHIEF FINANCIAL OFFICER
|INDEX TO EXHIBITS                       
|EXHIBIT 4.5                             
|EXHIBIT 10.45                           
|EXHIBIT 99.1                            
|EXHIBIT 99.1                            



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##### Table of Contents



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

|       |  |                                                                                                       |         | 
|------ |  | ----------------------------------------------------------------------------------------------------- | ------- | 
|       |  |                                                                                                       | PageNo.
|       |  |                                                                                                       |        
|       |  | PART I. FINANCIAL INFORMATION                                                                         |         | 
|Item 1 |  | Financial Statements                                                                                  | 3       | 
|       |  | Consolidated Balance Sheets  June 30, 2003 (unaudited) and December 31, 2002                         | 3       | 
|       |  | Consolidated Statements of Operations  Three and Six Months Ended June 30, 2003 and 2002 (unaudited) | 4       | 
|       |  | Consolidated Statements of Cash Flows  Six Months Ended June 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                 | 18      | 
|Item 3 |  | Quantitative and Qualitative Disclosures About Market Risk                                            | 32      | 
|Item 4 |  | Controls and
Procedures                                                                               | 32      | 
|       |  | PART II. OTHER INFORMATION                                                                            |         | 
|Item 1 |  | Legal Proceedings                                                                                     | 33      | 
|Item 2 |  | Changes in Securities and Use of Proceeds                                                             | 33      | 
|Item 4 |  | Submission of Matters to a Vote of Security Holders                                                   | 33      | 
|Item 6 |  | Exhibits and Reports on Form 8-K                                                                      | 34      | 
|       |  | Signatures                                                                                            | 35      | 
|       |  | Certifications                                                                                        | 36      | 
|       |  | Index to Exhibits                                                                                     | 38      | 

2





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##### Table of Contents






PART I  FINANCIAL INFORMATION




Item 1. Financial Statements




LSI LOGIC CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

|                                                                                                  |                                                          |   |                                 |           |              |   |           |           | 
|------------------------------------------------------------------------------------------------- | -------------------------------------------------------- | - | ------------------------------- | --------- | ------------ | - | --------- | --------- | 
|                                                                                                  |                                                          |   | June 30,                        |           | December 31,
|                                                                                                  |                                                          |   | 2003                            |           | 2002        
|                                                                                                  |                                                          |   |                                 |           |             
|                                                                                                  |                                                          |   | (In thousands, except per-share
|                                                                                                  |                                                          |   | amounts)                       
|Assets                                                                                            |                                                          |   |                                 |           |              |   |           |          
|Cash and cash equivalents                                                                         |                                                          | $ | 636,164                         |           |              | $ | 448,847   |          
|Short-term investments                                                                            |                                                          |   | 478,615                         |           |              |   | 541,129   |          
|Accounts receivable, less allowances of $6,329 and $7,033                                         |                                                          |   | 241,056                         |           |              |   | 248,621   |          
|Inventories                                                                                       |                                                          |   | 205,365                         |           |              |   | 194,466   |          
|Deferred tax assets                                                                               |                                                          |   | 11,405                          |           |              |   | 11,380    |          
|Prepaid expenses and other current assets                                                         |                                                          |   | 188,138                         |           |              |   | 181,610   |          
|                                                                                                  |                                                          |   |                                 |           |              |   |           |          
|                                                                                                  | Total current assets                                     |   |                                 | 1,760,743 |              |   |           | 1,626,053 | 
|Property and equipment, net                                                                       |                                                          |   | 497,396                         |           |              |   | 746,964   |          
|Goodwill                                                                                          |                                                          |   | 968,583                         |           |              |   | 968,464   |          
|Amortized Intangible assets, net                                                                  |                                                          |   | 219,115                         |           |              |   | 282,579   |          
|Deferred tax assets                                                                               |                                                          |   | 137,283                         |           |              |   | 137,152   |          
|Other assets                                                                                      |                                                          |   | 457,388                         |           |              |   | 381,525   |          
|                                                                                                  |                                                          |   |                                 |           |              |   |           |          
|                                                                                                  | Total assets                                             |   | $                               | 4,040,508 |              |   | $         | 4,142,737 | 
|                                                                                                  |                                                          |   |                                 |           |              |   |           |          
|Liabilities and Stockholders Equity                                                              |                                                          |   |                                 |           |              |   |           |          
|Accounts payable                                                                                  |                                                          | $ | 112,232                         |           |              | $ | 100,856   |          
|Accrued salaries, wages and benefits                                                              |                                                          |   | 61,841                          |           |              |   | 71,499    |          
|Other accrued liabilities                                                                         |                                                          |   | 201,090                         |           |              |   | 184,837   |          
|Income tax payable                                                                                |                                                          |   | 44,976                          |           |              |   | 30,066    |          
|Deferred tax liabilities                                                                          |                                                          |   | 10,192                          |           |              |   | 10,192    |          
|Current portion of long-term obligations                                                          |                                                          |   | 173,676                         |           |              |   | 361       |          
|                                                                                                  |                                                          |   |                                 |           |              |   |           |          
|                                                                                                  | Total current liabilities                                |   |                                 | 604,007   |              |   |           | 397,811   | 
|Deferred tax liabilities                                                                          |                                                          |   | 123,575                         |           |              |   | 123,365   |          
|Long-term debt and capital lease obligations                                                      |                                                          |   | 1,133,177                       |           |              |   | 1,241,217 |          
|Other non-current liabilities                                                                     |                                                          |   | 139,475                         |           |              |   | 73,483    |          
|                                                                                                  |                                                          |   |                                 |           |              |   |           |          
|                                                                                                  | Total long-term obligations and deferred tax liabilities |   |                                 | 1,396,227 |              |   |           | 1,438,065 | 
|                                                                                                  |                                                          |   |                                 |           |              |   |           |          
|Commitments and contingencies (Note 12)                                                           |                                                          |   |                                 |           |              |   |           |          
|Minority interest in subsidiary                                                                   |                                                          |   | 6,799                           |           |              |   | 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; 378,507 and
375,096 shares outstanding |                                                          |   | 3,785                           |           |              |   | 3,751     |          
|Additional paid-in capital                                                                        |                                                          |   | 2,941,853                       |           |              |   | 2,954,282 |          
|Deferred stock compensation                                                                       |                                                          |   | (31,734                         | )         |              |   | (51,161   | )        
|Accumulated deficit                                                                               |                                                          |   | (896,752                        | )         |              |   | (612,243  | )        
|Accumulated other comprehensive income                                                            |                                                          |   | 16,323                          |           |              |   | 5,726     |          
|                                                                                                  |                                                          |   |                                 |           |              |   |           |          
|                                                                                                  | Total stockholders equity                               |   |                                 | 2,033,475 |              |   |           | 2,300,355 | 
|                                                                                                  |                                                          |   |                                 |           |              |   |           |          
|                                                                                                  | Total liabilities and stockholders equity               |   | $                               | 4,040,508 |              |   | $         | 4,142,737 | 
|                                                                                                  |                                                          |   |                                 |           |              |   |           |          

See notes to unaudited consolidated financial statements.

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LSI LOGIC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

|                                            |                                                          |                          |          |                                          |         |                  |         |         |         |      |          |         |           |   |          |         |           | 
|------------------------------------------- | -------------------------------------------------------- | ------------------------ | -------- | ---------------------------------------- | ------- | ---------------- | ------- | ------- | ------- | ---- | -------- | ------- | --------- | - | -------- | ------- | --------- | 
|                                            |                                                          |                          |          | Three Months Ended                       |         | Six Months Ended
|                                            |                                                          |                          |          | June 30,                                 |         | June 30,        
|                                            |                                                          |                          |          | 2003                                     |         | 2002             |         | 2003    |         | 2002
|                                            |                                                          |                          |          |                                          |         |                  |         |         |         |     
|                                            |                                                          |                          |          | (In thousands, except per share amounts)
|Revenues                                    |                                                          | $                        | 407,213  |                                          |         | $                | 437,768 |         |         | $    | 779,998  |         |           | $ | 850,277  |        
|                                            |                                                          |                          |          |                                          |         |                  |         |         |         |      |          |         |           |   |          |        
|Costs and expenses:                         |                                                          |                          |          |                                          |         |                  |         |         |         |      |          |         |           |   |          |        
|                                            | Cost of revenues                                         |                          |          | 238,469                                  |         |                  |         | 274,404 |         |      |          | 486,537 |           |   |          | 581,067 |          
|                                            | Research and development                                 |                          |          | 111,326                                  |         |                  |         | 112,833 |         |      |          | 226,453 |           |   |          | 227,176 |          
|                                            | Selling, general and administrative                      |                          |          | 56,870                                   |         |                  |         | 57,366  |         |      |          | 114,499 |           |   |          | 115,546 |          
|                                            | Restructuring of operations and other items, net         |                          |          | 124,527                                  |         |                  |         | (6,405  | )       |      |          | 160,193 |           |   |          | 58,655  |          
|                                            | Amortization of non-cash deferred stock
compensation (*) |                          |          | 8,884                                    |         |                  |         | 23,849  |         |      |          | 19,427  |           |   |          | 50,770  |          
|                                            | Amortization of intangibles                              |                          |          | 19,267                                   |         |                  |         | 19,147  |         |      |          | 39,392  |           |   |          | 38,304  |          
|                                            |                                                          |                          |          |                                          |         |                  |         |         |         |      |          |         |           |   |          |        
|                                            |                                                          | Total costs and expenses |          |                                          | 559,343 |                  |         |         | 481,194 |      |          |         | 1,046,501 |   |          |         | 1,071,518 | 
|                                            |                                                          |                          |          |                                          |         |                  |         |         |         |      |          |         |           |   |          |        
|Loss from operations                        |                                                          |                          | (152,130 | )                                        |         |                  | (43,426 | )       |         |      | (266,503 | )       |           |   | (221,241 | )      
|Interest expense                            |                                                          |                          | (7,314   | )                                        |         |                  | (15,486 | )       |         |      | (16,145  | )       |           |   | (31,320  | )      
|Interest income and other, net              |                                                          |                          | 3,360    |                                          |         |                  | 2,621   |         |         |      | 10,139   |         |           |   | 6,267    |        
|                                            |                                                          |                          |          |                                          |         |                  |         |         |         |      |          |         |           |   |          |        
|Loss before income taxes                    |                                                          |                          | (156,084 | )                                        |         |                  | (56,291 | )       |         |      | (272,509 | )       |           |   | (246,294 | )      
|Provision/ (benefit) for income taxes       |                                                          |                          | 6,000    |                                          |         |                  | 6,000   |         |         |      | 12,000   |         |           |   | (12,250  | )      
|                                            |                                                          |                          |          |                                          |         |                  |         |         |         |      |          |         |           |   |          |        
|Net loss                                    |                                                          | $                        | (162,084 | )                                        |         | $                | (62,291 | )       |         | $    | (284,509 | )       |           | $ | (234,044 | )      
|                                            |                                                          |                          |          |                                          |         |                  |         |         |         |      |          |         |           |   |          |        
|Loss per share:                             |                                                          |                          |          |                                          |         |                  |         |         |         |      |          |         |           |   |          |        
|                                            | Basic                                                    |                          | $        | (0.43                                    | )       |                  | $       | (0.17   | )       |      | $        | (0.76   | )         |   | $        | (0.63   | )        
|                                            |                                                          |                          |          |                                          |         |                  |         |         |         |      |          |         |           |   |          |        
|                                            | Dilutive                                                 |                          | $        | (0.43                                    | )       |                  | $       | (0.17   | )       |      | $        | (0.76   | )         |   | $        | (0.63   | )        
|                                            |                                                          |                          |          |                                          |         |                  |         |         |         |      |          |         |           |   |          |        
|Shares used in computing per share amounts: |                                                          |                          |          |                                          |         |                  |         |         |         |      |          |         |           |   |          |        
|                                            | Basic                                                    |                          |          | 376,619                                  |         |                  |         | 369,672 |         |      |          | 375,745 |           |   |          | 368,769 |          
|                                            |                                                          |                          |          |                                          |         |                  |         |         |         |      |          |         |           |   |          |        
|                                            | Dilutive                                                 |                          |          | 376,619                                  |         |                  |         | 369,672 |         |      |          | 375,745 |           |   |          | 368,769 |          
|                                            |                                                          |                          |          |                                          |         |                  |         |         |         |      |          |         |           |   |          |        



| | (*) | 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 June 30, |       | Six months ended June 30,
|                                    |  |                             |       |                          
|                                    |  | 2003                        |       | 2002                      |  | 2003 |        | 2002
|                                    |  |                             |       |                           |  |      |        |     
|                                    |  | (In thousands)             
|Cost of revenues                    |  | $                           | 88    |                           |  | $    | 444    |      |  | $ | 270    |  |  | $ | 994    | 
|Research and development            |  |                             | 7,391 |                           |  |      | 18,580 |      |  |   | 15,541 |  |  |   | 38,899 | 
|Selling, general and administrative |  |                             | 1,405 |                           |  |      | 4,825  |      |  |   | 3,616  |  |  |   | 10,877 | 

See notes to unaudited consolidated financial statements.

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##### Table of Contents






LSI LOGIC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

|                                                             |                                                            |                                                      |          |                                                       |         |                  |          |          |         |   |          |  
|------------------------------------------------------------ | ---------------------------------------------------------- | ---------------------------------------------------- | -------- | ----------------------------------------------------- | ------- | ---------------- | -------- | -------- | ------- | - | -------- | -
|                                                             |                                                            |                                                      |          |                                                       |         | Six Months Ended
|                                                             |                                                            |                                                      |          |                                                       |         | June 30,        
|                                                             |                                                            |                                                      |          |                                                       |         |                 
|                                                             |                                                            |                                                      |          |                                                       |         | 2003             |          | 2002    
|                                                             |                                                            |                                                      |          |                                                       |         |                  |          |         
|                                                             |                                                            |                                                      |          |                                                       |         | (In thousands)  
|Operating activities:                                        |                                                            |                                                      |          |                                                       |         |                  |          |         
|Net loss                                                     |                                                            | $                                                    | (284,509 | )                                                     |         | $                | (234,044 | )       
|Adjustments:                                                 |                                                            |                                                      |          |                                                       |         |                  |          |         
|                                                             | Depreciation and amortization                              |                                                      |          | 152,111                                               |         |                  |          | 175,928  |        
|                                                             | Amortization of non-cash deferred stock compensation       |                                                      |          | 19,427                                                |         |                  |          | 50,770   |        
|                                                             |                                                            | Non-cash restructuring and other items, net          |          |                                                       | 127,323 |                  |          |          | 49,598  |  
|                                                             |                                                            | Loss on write-down of equity securities              |          |                                                       | 9,074   |                  |          |          |        |  
|                                                             |                                                            | Loss on repurchase of Convertible Subordinated Notes |          |                                                       | 2,029   |                  |          |          |        |  
|                                                             |                                                            | Gain on sale of property and equipment               |          |                                                       | (2,560  | )                |          |          |        |  
|                                                             |                                                            | Changes in deferred tax assets and liabilities       |          |                                                       | 37      |                  |          |          | (3,171  | )
|                                                             |                                                            | Changes in assets and liabilities:                   |          |                                                       |         |                  |          |          |         |  
|                                                             |                                                            | Accounts receivable, net                             |          |                                                       | 8,500   |                  |          |          | (49,577 | )
|                                                             |                                                            | Inventories, net                                     |          |                                                       | (10,040 | )                |          |          | 61,115  |  
|                                                             |                                                            | Prepaid expenses and other assets                    |          |                                                       | 52,440  |                  |          |          | (9,308  | )
|                                                             |                                                            | Accounts payable                                     |          |                                                       | 12,028  |                  |          |          | (41,398 | )
|                                                             |                                                            | Accrued and other liabilities                        |          |                                                       | 18,205  |                  |          |          | (9,847  | )
|                                                             |                                                            |                                                      |          |                                                       |         |                  |          |         
|                                                             |                                                            |                                                      |          | Net cash provided by / (used in) operating activities |         |                  | 104,065  |          |         |   | (9,934   | )
|                                                             |                                                            |                                                      |          |                                                       |         |                  |          |         
|Investing activities:                                        |                                                            |                                                      |          |                                                       |         |                  |          |         
|                                                             | Purchase of debt securities available-for-sale             |                                                      |          | (1,409,529                                            | )       |                  |          | (937,742 | )      
|                                                             | Maturities and sales of debt securities available-for-sale |                                                      |          | 1,455,927                                             |         |                  |          | 627,823  |        
|                                                             | Purchases of equity securities                             |                                                      |          |                                                      |         |                  |          | (9,894   | )      
|                                                             | Purchases of property and equipment, net                   |                                                      |          | (19,663                                               | )       |                  |          | (12,148  | )      
|                                                             | Proceeds from the sale-lease back of equipment             |                                                      |          | 160,000                                               |         |                  |          |         |        
|                                                             | (Increase)/decrease in non-current assets and deposits     |                                                      |          | (145,768                                              | )       |                  |          | 236      |        
|                                                             |                                                            |                                                      |          |                                                       |         |                  |          |         
|                                                             |                                                            |                                                      |          | Net cash provided by / (used in) investing activities |         |                  | 40,967   |          |         |   | (331,725 | )
|                                                             |                                                            |                                                      |          |                                                       |         |                  |          |         
|Financing activities:                                        |                                                            |                                                      |          |                                                       |         |                  |          |         
|                                                             | Proceeds from borrowings                                   |                                                      |          | 350,000                                               |         |                  |          |         |        
|                                                             | Repurchase of Convertible Subordinated Notes               |                                                      |          | (288,587                                              | )       |                  |          |         |        
|                                                             | Cash paid for call spread options                          |                                                      |          | (28,000                                               | )       |                  |          |         |        
|                                                             | Debt issuance costs                                        |                                                      |          | (10,566                                               | )       |                  |          |         |        
|                                                             | Repayment of debt obligations                              |                                                      |          | (174                                                  | )       |                  |          | (191     | )      
|                                                             | Issuance of common stock, net                              |                                                      |          | 15,890                                                |         |                  |          | 26,589   |        
|                                                             |                                                            |                                                      |          |                                                       |         |                  |          |         
|                                                             |                                                            |                                                      |          | Net cash provided by financing activities             |         |                  | 38,563   |          |         |   | 26,398   |  
|                                                             |                                                            |                                                      |          |                                                       |         |                  |          |         
|Effect of exchange rate changes on cash and cash equivalents |                                                            |                                                      | 3,722    |                                                       |         |                  | 4,065    |         
|                                                             |                                                            |                                                      |          |                                                       |         |                  |          |         
|Increase / (decrease) in cash and cash equivalents           |                                                            |                                                      | 187,317  |                                                       |         |                  | (311,196 | )       
|                                                             |                                                            |                                                      |          |                                                       |         |                  |          |         
|Cash and cash equivalents at beginning of period             |                                                            |                                                      | 448,847  |                                                       |         |                  | 757,138  |         
|                                                             |                                                            |                                                      |          |                                                       |         |                  |          |         
|Cash and cash equivalents at end of period                   |                                                            | $                                                    | 636,164  |                                                       |         | $                | 445,942  |         
|                                                             |                                                            |                                                      |          |                                                       |         |                  |          |         

See notes to unaudited consolidated financial statements.

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LSI LOGIC CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1  BASIS OF PRESENTATION

In the opinion of LSI Logic Corporation (the Company or LSI), the
accompanying unaudited consolidated financial statements contain all
adjustments (consisting only of normal recurring adjustments, additional excess
inventory and other related charges and restructuring and other 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 June 29,
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 June 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 must be applied for the first interim or annual period
beginning after June 15, 2003. 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 Company believes that the adoption of this standard
will not have a material impact on our 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 Company believes that the adoption of this
standard will not have a material impact on our consolidated balance sheet or
statement of operations.

6



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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 Company believes that the adoption of this
standard will not have a material impact on our consolidated balance sheet or
statement of operations.

NOTE 2  STOCK-BASED COMPENSATION

The Company adopted the disclosure requirement 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 June 30, |       | Six months ended June 30,
|                                                                                                                                                                    |                     |   |                             |       |                          
|                                                                                                                                                                    |                     |   | 2003                        |       | 2002                      |   | 2003                                     |       | 2002
|                                                                                                                                                                    |                     |   |                             |       |                           |   |                                          |       |     
|                                                                                                                                                                    |                     |   |                             |       |                           |   | (In thousands, except per share amounts)
|Net loss, as reported                                                                                                                                               |                     | $ | (162,084                    | )     |                           | $ | (62,291                                  | )     |      | $ | (284,509 | )     |   | $ | (234,044 | )    
|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 * |                     |   | 2,228                       |       |                           |   | 7,904                                    |       |      |   | 6,129    |       |   |   | 18,742   |      
|Deduct: Total
stock-based employee
compensation expense
determined under fair
value method for all
awards, net of related
tax effects                               |                     |   | (50,338                     | )     |                           |   | (58,930                                  | )     |      |   | (103,005 | )     |   |   | (119,598 | )    
|                                                                                                                                                                    |                     |   |                             |       |                           |   |                                          |       |      |   |          |       |   |   |          |      
|Pro forma net loss                                                                                                                                                  |                     | $ | (210,194                    | )     |                           | $ | (113,317                                 | )     |      | $ | (381,385 | )     |   | $ | (334,900 | )    
|                                                                                                                                                                    |                     |   |                             |       |                           |   |                                          |       |      |   |          |       |   |   |          |      
|Loss per share:                                                                                                                                                     |                     |   |                             |       |                           |   |                                          |       |      |   |          |       |   |   |          |      
|                                                                                                                                                                    | Basic-as reported   |   | $                           | (0.43 | )                         |   | $                                        | (0.17 | )    |   | $        | (0.76 | ) |   | $        | (0.63 | )
|                                                                                                                                                                    | Basic-pro forma     |   | $                           | (0.56 | )                         |   | $                                        | (0.31 | )    |   | $        | (1.02 | ) |   | $        | (0.91 | )
|                                                                                                                                                                   
|                                                                                                                                                                    | Diluted-as reported |   | $                           | (0.43 | )                         |   | $                                        | (0.17 | )    |   | $        | (0.76 | ) |   | $        | (0.63 | )
|                                                                                                                                                                    | Diluted-pro forma   |   | $                           | (0.56 | )                         |   | $                                        | (0.31 | )    |   | $        | (1.02 | ) |   | $        | (0.91 | )



---

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

For the three and six months ended June 30, 2003, common stock equivalents
of approximately 85.7 million and 73.0 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 six months ended June 30,
2002, common stock equivalents of approximately 93.7 million and 97.3 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 a charge of $125 million and $160 million in
restructuring of operations and other items for the three and six months ended
June 30, 2003, respectively. The Company recorded a gain of $6 million and a
charge of $59 million in restructuring of operations and other items for the
three and six months ended June 30, 2002, respectively. For a complete
discussion of the 2002 restructuring actions, please refer to the Companys
Annual Report on Form 10-K.

7



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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.

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 terminated
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 six months ended
June 30, 2003, payments related to the February 2003 restructuring actions have
consisted of approximately $4 million for severance and termination benefits
and $0.4 million for lease and contract terminations.

In April 2003, the Company announced a restructuring of our operations
that includes 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 terminated 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 six
months ended June 30, 2003, payments related to the April 2003 restructuring
actions have consisted of approximately $7 million for severance and
termination benefits and $0.2 million for lease and contract terminations.

In June 2003, the Company announced the decision to sell the Tsukuba,
Japan manufacturing facility. As a result, a charge of $73 million was
recorded in the Semiconductor segment to write down fixed assets to their fair
market value, which has been reclassified 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 for severance and other exit costs. During the six
months ended June 30, 2003, there have been no payments related to the amounts
accrued for severance and other exit costs under the June 2003 restructuring
actions.

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.

The fair value of assets determined to be impaired was the result of the
use of management estimates and independent appraisals. 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 for the assets. 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 $60 million and $74
million were included as a component of prepaid expenses and other current
assets as of June 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
June 30, 2003, which are included in other accrued liabilities on the balance
sheet:

|                                                 |  |            |        |               |  |          |        |            |  |                |         |          |  |            |        |  |  |   |         |  |  |   |          |   |  |   |        | 
|------------------------------------------------ |  | ---------- | ------ | ------------- |  | -------- | ------ | ---------- |  | -------------- | ------- | -------- |  | ---------- | ------ |  |  | - | ------- |  |  | - | -------- | - |  | - | ------ | 
|                                                 |  | Balance at |        | Restructuring |  | Utilized |        | Balance at |  | Restructuring  |         | Utilized |  | Balance at
|                                                 |  | December   |        | Expense       |  | during   |        | March 31,  |  | Expense        |         | during   |  | June 30,  
|                                                 |  | 31, 2002   |        | Q1 2003       |  | Q1 2003  |        | 2003       |  | Q2 2003        |         | Q2 2003  |  | 2003      
|                                                 |  |            |        |               |  |          |        |            |  |                |         |          |  |           
|                                                 |  |            |        |               |  |          |        |            |  | (In thousands) |         |          |  |            |        |  |  |   |         |  |  |  
|Write-down of excess assets (a)                  |  | $          | 6,008  |               |  | $        | 29,754 |            |  | $              | (30,021 | )        |  | $          | 5,741  |  |  | $ | 96,805  |  |  | $ | (97,917  | ) |  | $ | 4,629  | 
|Lease terminations and
maintenance contracts (b) |  |            | 6,757  |               |  |          | 1,396  |            |  |                | (1,172  | )        |  |            | 6,981  |  |  |   | 18,762  |  |  |   | (1,425   | ) |  |   | 24,318 | 
|Facility closure and other
exit costs (c)        |  |            | 8,129  |               |  |          |       |            |  |                | (2,520  | )        |  |            | 5,609  |  |  |   | 498     |  |  |   | (2,040   | ) |  |   | 4,067  | 
|Payments to employees for
severance (d)          |  |            | 1,391  |               |  |          | 4,516  |            |  |                | (4,493  | )        |  |            | 1,414  |  |  |   | 10,637  |  |  |   | (7,116   | ) |  |   | 4,935  | 
|                                                 |  |            |        |               |  |          |        |            |  |                |         |          |  |            |        |  |  |   |         |  |  |   |          |   |  |   |        | 
|Total                                            |  | $          | 22,285 |               |  | $        | 35,666 |            |  | $              | (38,206 | )        |  | $          | 19,745 |  |  | $ | 126,702 |  |  | $ | (108,498 | ) |  | $ | 37,949 | 
|                                                 |  |            |        |               |  |          |        |            |  |                |         |          |  |            |        |  |  |   |         |  |  |   |          |   |  |   |        | 

8



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|(a) |  | The amounts utilized in 2003 reflect $126.6 million of non-cash
write-downs of amortizable intangible and other long-lived assets in the
U.S due to impairment, and $1.4 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 $4.6 million balance as of June 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
2010.                                                                                                                                                                                                                                                                                                                                                                            
|   
|(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 470
employees during the six months ended June 30, 2003. The balance remaining
for severance will be paid during 2003.                                                                                                                                                                                                                                                                                                                                                                                                               

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

|                                          |                              |   |                |         |              |   |         |         | 
|----------------------------------------- | ---------------------------- | - | -------------- | ------- | ------------ | - | ------- | ------- | 
|                                          |                              |   | June 30,       |         | December 31,
|                                          |                              |   | 2003           |         | 2002        
|                                          |                              |   |                |         |             
|                                          |                              |   | (In thousands)
|Available-for-sale debt securities        |                              |   |                |         |              |   |         |        
|Asset and mortgage-backed securities      |                              | $ | 258,897        |         |              | $ | 102,083 |        
|U.S. government and agency securities     |                              |   | 138,245        |         |              |   | 202,613 |        
|Corporate and municipal debt securities   |                              |   | 76,129         |         |              |   | 180,843 |        
|Auction rate preferred stock              |                              |   | 5,005          |         |              |   | 55,590  |        
|Foreign debt securities                   |                              |   | 339            |         |              |   |        |        
|                                          |                              |   |                |         |              |   |         |        
|                                          | Total short-term investments |   | $              | 478,615 |              |   | $       | 541,129 | 
|                                          |                              |   |                |         |              |   |         |        
|Long-term investment in equity securities |                              | $ | 32,970         |         |              | $ | 37,655  |        
|                                          |                              |   |                |         |              |   |         |        

An unrealized gain on available-for-sale securities of $4 million, net of
the related tax effect of $2 million, and $3 million, net of the related tax
effect of $1 million, was included in accumulated other comprehensive income as
of June 30, 2003 and December 31, 2002, respectively. Net realized
gains/(losses) on sales of available-for-sale debt securities were $2 million
and $9 million for the three and six months ended June 30, 2003, respectively.
Realized gains and losses on available-for-sale debt securities were not
significant for the three and six months ended June 30, 2002. The Company
recorded a pre-tax loss of $2 million and $9 million, in interest income and
other, net, associated with the decline in value of long-term investment in
equity securities during the three and six months ended June 30, 2003,
respectively. The decline in value was considered by management to be other
than temporary.

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

9



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##### Table of Contents



agreements
were modified to be denominated in U.S. dollars. At the time the options were
terminated, there were no unrealized gains
or losses in accumulated other comprehensive income. The change in option
time value was approximately $1 million for both the three and six months ended
June 30, 2003. For the three and six months ended June 30, 2002, the change in
option time value was not significant. During the three and six months ended
June 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 three and six months ended June 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 June 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 June 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 six month period. There were no such hedges
outstanding as of December 31, 2002. For the three and six months ended June
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 June 30, 2003, which will be reclassified to interest income and
other, net over the next six months, were not significant. The amounts
reclassified to the income statement for the three and six months ended June
30, 2003 were not significant. The Company did not record any gains or losses
due to hedge ineffectiveness for the six months ended June 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.

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 $2
million and $1 million for the three and six months ended June 30, 2003,
respectively. For the three months ended June 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 a
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 sales 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 June 30, 2003, is expected to be reclassified
to cost of sales within the next 12 months. The loss due to ineffectiveness
recorded in interest income and other, net during the three months ended June
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 June 30, 2003, collateral of approximately $8 million was included in other
long-term assets.

10



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##### Table of Contents



NOTE 6  BALANCE SHEET DETAIL

|                                                              |                                 |                                           |           |         |                |   |              |         |            |   | 
|------------------------------------------------------------- | ------------------------------- | ----------------------------------------- | --------- | ------- | -------------- | - | ------------ | ------- | ---------- | - | 
|                                                              |                                 |                                           |           |         | June 30,       |   | December 31,
|                                                              |                                 |                                           |           |         | 2003           |   | 2002        
|                                                              |                                 |                                           |           |         |                |   |             
|                                                              |                                 |                                           |           |         | (In thousands)
|Cash and cash equivalents:                                    |                                 |                                           |           |         |                |   |              |        
|                                                              |                                 | Cash                                      |           | $       | 65,564         |   |              | $       | 279,620    |  
|                                                              |                                 | Cash equivalents                          |           |         | 570,600        |   |              |         | 169,227    |  
|                                                              |                                 |                                           |           |         |                |   |              |         |            |  
|                                                              |                                 | $                                         | 636,164   |         |                | $ | 448,847      |        
|                                                              |                                 |                                           |           |         |                |   |              |         |            |  
|Inventories:                                                  |                                 |                                           |           |         |                |   |              |        
|                                                              | Raw materials                   |                                           | $         | 16,229  |                |   | $            | 18,152  |           
|                                                              | Work-in-process                 |                                           |           | 79,616  |                |   |              | 65,052  |           
|                                                              | Finished goods                  |                                           |           | 109,520 |                |   |              | 111,262 |           
|                                                              |                                 |                                           |           |         |                |   |              |         |            |  
|                                                              |                                 | $                                         | 205,365   |         |                | $ | 194,466      |        
|                                                              |                                 |                                           |           |         |                |   |              |         |            |  
|Property and equipment:                                       |                                 |                                           |           |         |                |   |              |        
|                                                              |                                 | Land                                      |           | $       | 38,202         |   |              | $       | 53,013     |  
|                                                              |                                 | Buildings and improvements                |           |         | 344,288        |   |              |         | 470,028    |  
|                                                              |                                 | Equipment                                 |           |         | 730,030        |   |              |         | 1,253,061  |  
|                                                              |                                 | Furniture and fixtures                    |           |         | 36,996         |   |              |         | 46,783     |  
|                                                              |                                 | Leasehold improvements                    |           |         | 36,921         |   |              |         | 37,151     |  
|                                                              |                                 | Construction in progress                  |           |         | 13,633         |   |              |         | 18,747     |  
|                                                              |                                 |                                           |           |         |                |   |              |         |            |  
|                                                              |                                 |                                           | 1,200,070 |         |                |   | 1,878,783    |        
|                                                              |                                 | Accumulated depreciation and
amortization |           |         | (702,674       | ) |              |         | (1,131,819 | )
|                                                              |                                 |                                           |           |         |                |   |              |         |            |  
|                                                              |                                 | $                                         | 497,396   |         |                | $ | 746,964      |        
|                                                              |                                 |                                           |           |         |                |   |              |         |            |  
|Other long-term assets:                                       |                                 |                                           |           |         |                |   |              |        
|                                                              | Non-current assets and deposits |                                           | $         | 341,828 |                |   | $            | 211,248 |           
|                                                              | Investment in equity securities |                                           |           | 32,970  |                |   |              | 37,655  |           
|                                                              | Other assets                    |                                           |           | 82,590  |                |   |              | 132,622 |           
|                                                              |                                 |                                           |           |         |                |   |              |         |            |  
|                                                              |                                 | $                                         | 457,388   |         |                | $ | 381,525      |        
|                                                              |                                 |                                           |           |         |                |   |              |         |            |  
|Goodwill:                                                     |                                 |                                           |           |         |                |   |              |        
|                                                              |                                 | Semiconductor segment                     |           | $       | 887,990        |   |              | $       | 887,990    |  
|                                                              |                                 | Storage systems segment                   |           |         | 80,593         |   |              |         | 80,474     |  
|                                                              |                                 |                                           |           |         |                |   |              |         |            |  
|                                                              |                                 | $                                         | 968,583   |         |                | $ | 968,464      |        
|                                                              |                                 |                                           |           |         |                |   |              |         |            |  
|Amortized intangible assets, net of
accumulated amortization: |                                 |                                           |           |         |                |   |              |        
|                                                              |                                 | Semiconductor segment                     |           | $       | 188,884        |   |              | $       | 236,723    |  
|                                                              |                                 | Storage systems segment                   |           |         | 30,231         |   |              |         | 45,856     |  
|                                                              |                                 |                                           |           |         |                |   |              |         |            |  
|                                                              |                                 | $                                         | 219,115   |         |                | $ | 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 |   | June 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  |  |              |   | 171,935        |           |  |   | 324,935   |          
|Change in fair value of the hedged
interest rate risk on Convertible
Subordinated Notes |                                              |  |          |  |        |  |          |   |            |   |          |  |              |   |               |           |  |   | 36,724    |          
|Unamortized gain on terminated swaps                                                    |                                              |  |          |  |        |  |          |   |            |   |          |  |              |   | 44,198         |           |  |   | 4,025     |          
|Capital lease obligations                                                               |                                              |  |          |  |        |  |          |   |            |   |          |  |              |   | 720            |           |  |   | 894       |          
|                                                                                        |                                              |  |          |  |        |  |          |   |            |   |          |  |              |   |                |           |  |   |           |          
|                                                                                        |                                              |  |          |  |        |  |          |   |            |   |          |  |              |   | 1,306,853      |           |  |   | 1,241,578 |          
|Current portion of long-term debt
and capital lease obligations                         |                                              |  |          |  |        |  |          |   |            |   |          |  |              |   | (173,676       | )         |  |   | (361      | )        
|                                                                                        |                                              |  |          |  |        |  |          |   |            |   |          |  |              |   |                |           |  |   |           |          
|                                                                                        | Long-term debt and capital
lease obligations |  |          |  |        |  |          |   |            |   |          |  |              |   | $              | 1,133,177 |  |   | $         | 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 2.94% and
3.92% for the three months ended June 30, 2003 and 2002, respectively,
and 2.54% and 3.99% for the six months ended June 30, 2003 and 2002,
respectively.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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
the convertible 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 $10.6 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 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 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.

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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 unamortized 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 thereunder by 1 million. As of June 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 June 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 an aggregate of 16,546,370 options 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 10,691,139 options 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.

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 June 30,
|                                          |                                           |       |                            
|                                          |                                           |       | 2003                        |          | 2002
|                                          |                                           |       |                             |          |     
|                                          |                                           |       |                             |          |      |        |         |         |  |         | Per-Share |        |   |   |         |         |   |  |         |         | Per-Share
|(In thousands except per share amounts)   |                                           | Loss* |                             | Shares+  |      | Amount |         | Loss*   |  | Shares+ |           | Amount
|                                          |                                           |       |                             |          |      |        |         |         |  |         |           |       
|Basic EPS:                                |                                           |       |                             |          |      |        |         |         |  |         |           |        |   |   |         |         |   |  |         |         |           |   |       |      
|Net loss available to common stockholders |                                           | $     | (162,084                    | )        |      |        | 376,619 |         |  | $       | (0.43     | )      |   | $ | (62,291 | )       |   |  | 369,672 |         |           | $ | (0.17 | )    
|                                          |                                           |       |                             |          |      |        |         |         |  |         |           |        |   |   |         |         |   |  |         |         |           |   |       |      
|                                          | Effect of dilutive securities:            |       |                             |         |      |        |         |        |  |         |           |       |   |   |         |        |   |  |         |        |           |   |       |      |  
|Diluted EPS:                              |                                           |       |                             |          |      |        |         |         |  |         |           |        |   |   |         |         |   |  |         |         |           |   |       |      
|                                          | Net loss available to common stockholders |       | $                           | (162,084 | )    |        |         | 376,619 |  |         | $         | (0.43  | ) |   | $       | (62,291 | ) |  |         | 369,672 |           |   | $     | (0.17 | )
|                                          |                                           |       |                             |          |      |        |         |         |  |         |           |        |   |   |         |         |   |  |         |         |           |   |       |      

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|                                          |                                           |       |                           |          |      |        |         |         |  |         |           |        |   |   |          |          |   |  |         |         |           |   |       |       |  
|----------------------------------------- | ----------------------------------------- | ----- | ------------------------- | -------- | ---- | ------ | ------- | ------- |  | ------- | --------- | ------ | - | - | -------- | -------- | - |  | ------- | ------- | --------- | - | ----- | ----- | -
|                                          |                                           |       | Six Months Ended June 30,
|                                          |                                           |       |                          
|                                          |                                           |       | 2003                      |          | 2002
|                                          |                                           |       |                           |          |     
|                                          |                                           |       |                           |          |      |        |         |         |  |         | Per-Share |        |   |   |          |          |   |  |         |         | Per-Share
|(In thousands except per share amounts)   |                                           | Loss* |                           | Shares+  |      | Amount |         | Loss*   |  | Shares+ |           | Amount
|                                          |                                           |       |                           |          |      |        |         |         |  |         |           |       
|Basic EPS:                                |                                           |       |                           |          |      |        |         |         |  |         |           |        |   |   |          |          |   |  |         |         |           |   |       |      
|Net loss available to common stockholders |                                           | $     | (284,509                  | )        |      |        | 375,745 |         |  | $       | (0.76     | )      |   | $ | (234,044 | )        |   |  | 368,769 |         |           | $ | (0.63 | )    
|                                          |                                           |       |                           |          |      |        |         |         |  |         |           |        |   |   |          |          |   |  |         |         |           |   |       |      
|                                          | Effect of dilutive securities:            |       |                           |         |      |        |         |        |  |         |           |       |   |   |          |         |   |  |         |        |           |   |       |      |  
|Diluted EPS:                              |                                           |       |                           |          |      |        |         |         |  |         |           |        |   |   |          |          |   |  |         |         |           |   |       |      
|                                          | Net loss available to common stockholders |       | $                         | (284,509 | )    |        |         | 375,745 |  |         | $         | (0.76  | ) |   | $        | (234,044 | ) |  |         | 368,769 |           |   | $     | (0.63 | )
|                                          |                                           |       |                           |          |      |        |         |         |  |         |           |        |   |   |          |          |   |  |         |         |           |   |       |      



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

Options to purchase approximately 66,326,662 shares and 74,740,226 shares
were outstanding at June 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 six months then ended. The exercise price of
these options ranged from $0.06 to $72.25 at June 30, 2003, and from $0.01 to
$72.25 at June 30, 2002.

For the three and six months ended June 30, 2003, common equivalent shares
of 54,720,989 and 49,819,986, 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 six months ended June 30, 2002, common equivalent shares of 47,720,853
associated with the 2001, 2000 and 1999 Convertible Notes were excluded from
the calculation of diluted shares because of their antidilutive effect on loss
per share.

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 June 30, |          | Six Months Ended June 30,
|                                                                                                                 |  |                             |          |                          
|                                                                                                                 |  | 2003                        |          | 2002                      |  | 2003           |         | 2002
|                                                                                                                 |  |                             |          |                           |  |                |         |     
|                                                                                                                 |  |                             |          |                           |  | (In thousands) |         |      |  |  
|Net loss                                                                                                         |  | $                           | (162,084 | )                         |  | $              | (62,291 | )    |  | $ | (284,509 | ) |  | $ | (234,044 | )
|Change in unrealized gain on derivative instruments designated
as and qualifying as cash-flow hedges, net of tax |  |                             | (16      | )                         |  |                | (2,608  | )    |  |   | 464      |   |  |   |         |  
|Change in unrealized gain on available for sale securities, net of
tax                                           |  |                             | 1,454    |                           |  |                | (10,074 | )    |  |   | 1,711    |   |  |   | (16,267  | )
|Change in foreign currency translation adjustments                                                               |  |                             | 6,178    |                           |  |                | 23,758  |      |  |   | 8,422    |   |  |   | 14,199   |  
|                                                                                                                 |  |                             |          |                           |  |                |         |      |  |   |          |   |  |   |          |  
|Comprehensive loss                                                                                               |  | $                           | (154,468 | )                         |  | $              | (51,215 | )    |  | $ | (273,912 | ) |  | $ | (236,112 | )
|                                                                                                                 |  |                             |          |                           |  |                |         |      |  |   |          |   |  |   |          |  

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-

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performance, highly scaleable open storage area network systems, storage
solutions and a complete line of RAID systems, subsystems and related software.

The following is a summary of operations by segment for the three and six
months ended June 30, 2003 and 2002:

|                      |                 |       |   |                             |          |                           |   |         |         |      |   |          |          |   |   |          |          |  
|--------------------- | --------------- | ----- | - | --------------------------- | -------- | ------------------------- | - | ------- | ------- | ---- | - | -------- | -------- | - | - | -------- | -------- | -
|                      |                 |       |   | Three months ended June 30, |          | Six months ended June 30,
|                      |                 |       |   |                             |          |                          
|                      |                 |       |   | 2003                        |          | 2002                      |   | 2003    |         | 2002
|                      |                 |       |   |                             |          | (In thousands)            |   |         |         |     
|Revenues:             |                 |       |   |                             |          |                           |   |         |         |      |   |          |          |   |   |         
|                      | Semiconductor   |       | $ | 306,150                     |          |                           | $ | 354,761 |         |      | $ | 579,214  |          |   | $ | 707,351  |         
|                      | Storage Systems |       |   | 101,063                     |          |                           |   | 83,007  |         |      |   | 200,784  |          |   |   | 142,926  |         
|                      |                 |       |   |                             |          |                           |   |         |         |      |   |          |          |   |   |          |         
|                      |                 | Total |   | $                           | 407,213  |                           |   | $       | 437,768 |      |   | $        | 779,998  |   |   | $        | 850,277  |  
|                      |                 |       |   |                             |          |                           |   |         |         |      |   |          |          |   |   |          |         
|Loss from operations: |                 |       |   |                             |          |                           |   |         |         |      |   |          |          |   |   |         
|                      | Semiconductor   |       | $ | (160,532                    | )        |                           | $ | (51,879 | )       |      | $ | (268,426 | )        |   | $ | (228,592 | )       
|                      | Storage Systems |       |   | 8,402                       |          |                           |   | 8,453   |         |      |   | 1,923    |          |   |   | 7,351    |         
|                      |                 |       |   |                             |          |                           |   |         |         |      |   |          |          |   |   |          |         
|                      |                 | Total |   | $                           | (152,130 | )                         |   | $       | (43,426 | )    |   | $        | (266,503 | ) |   | $        | (221,241 | )
|                      |                 |       |   |                             |          |                           |   |         |         |      |   |          |          |   |   |          |         

Intersegment revenues for the periods presented above were not
significant. For the three months ended June 30, 2003, restructuring of
operations and other items, net of $125 million primarily impacted the
Semiconductor segment. For the six months ended June 30, 2003, restructuring
of operations and other items, net of $145 million and $15 million were
included in the Semiconductor segment and the Storage Systems segment,
respectively. For the three and six months ended June 30, 2002, restructuring
of operations and other items, net of $(6) million and $59 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 June 30, |              | Six months ended June 30,
|                         |                                     |  |                             |              |                          
|                         |                                     |  | 2003                        |              | 2002                      |  | 2003 |              | 2002
|                         |                                     |  |                             |              |                           |  |      |              |     
|Semiconductor segment:   |                                     |  |                             |              |                           |  |      |              |      |  |  |              |   |  |  |             
|                         | Number of significant customers     |  |                             | 2            |                           |  |      | 1            |      |  |  | 2            |   |  |  | 1            |  
|                         | Percentage of segment revenues      |  |                             | 14%, 11      | %                         |  |      | 19           | %    |  |  | 13%, 10      | % |  |  | 18           | %
|Storage Systems segment: |                                     |  |                             |              |                           |  |      |              |      |  |  |              |   |  |  |             
|                         | Number of significant customers     |  |                             | 3            |                           |  |      | 3            |      |  |  | 3            |   |  |  | 3            |  
|                         | Percentage of segment revenues      |  |                             | 50%, 14%, 11 | %                         |  |      | 32%, 22%, 18 | %    |  |  | 45%, 15%, 12 | % |  |  | 33%, 18%, 17 | %
|Consolidated:            |                                     |  |                             |              |                           |  |      |              |      |  |  |              |   |  |  |             
|                         | Number of significant customers     |  |                             | 2            |                           |  |      | 1            |      |  |  | 1            |   |  |  | 1            |  
|                         | Percentage of consolidated
revenues |  |                             | 14%, 11      | %                         |  |      | 15           | %    |  |  | 14           | % |  |  | 15           | %

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

|              |                 |       |   |                |           |              |   |           |           | 
|------------- | --------------- | ----- | - | -------------- | --------- | ------------ | - | --------- | --------- | 
|              |                 |       |   | June 30,       |           | December 31,
|              |                 |       |   | 2003           |           | 2002        
|              |                 |       |   |                |           |             
|              |                 |       |   | (In thousands)
|Total assets: |                 |       |   |                |           |              |   |          
|              | Semiconductor   |       | $ | 3,737,773      |           |              | $ | 3,851,283 |          
|              | Storage Systems |       |   | 302,735        |           |              |   | 291,454   |          
|              |                 |       |   |                |           |              |   |          
|              |                 | Total |   | $              | 4,040,508 |              |   | $         | 4,142,737 | 
|              |                 |       |   |                |           |              |   |           |          

Revenues from domestic operations were $217 million, representing 53% of
consolidated revenues for the second quarter of 2003 compared to $227 million,
representing 52% of consolidated revenues for the same period of 2002.

Revenues from domestic operations were $424 million, representing 54% of
consolidated revenues, for the first half of 2003 compared to $441 million,
representing 52% 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 June 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. Refer to our Annual
Report on Form 10-K for a complete discussion of the former leases. 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 June 30, 2003. The Company has $384 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, $60 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 $324 million is recorded in other non-current
assets. In addition, 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 June 30, 2003.

The Company guarantees residual values related to equipment on leases. As
of June 30, 2003, our 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 our 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 June 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.

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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 $50 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 us. 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 June 30, 2003, the discovery
phase was continuing. Initial patent claim construction briefs are due in
March 2004. 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 us, 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.
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.

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. LSI 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.

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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

During the second quarter of 2003, both of our business segments improved
compared to the first quarter of 2003, and we are moving into seasonally
stronger quarters in the second half of the year. Our consumer products market
in the Semiconductor segment improved significantly in the second quarter and
we expect continued growth in the third quarter, which is generally the
strongest quarter for our consumer products market. However, the outlook
continues to remain uncertain, as any macroeconomic and geopolitical factors
may adversely affect the global economy. These issues may impact our operating
results and financial condition.

Revenues for three months ended June 30, 2003, were approximately $407.2
million compared to $372.8 million and $437.8 million for the three months
ended March 31, 2003 and June 30, 2002, respectively. The consolidated gross
profit margin was 41% for the three months ended June 30, 2003, compared to 33%
and 37% for the three months ended March 31, 2003 and June 30, 2002,
respectively. Operating expenses for the three months ended June 30, 2003,
were $320.9 million compared to $239.1 million and $206.8 million for the three
months ended March 31, 2003 and June 30, 2002, respectively. Net loss per
diluted share was 43 cents for the three months ended June 30, 2003, compared
to a net loss per diluted share of 33 cents and 17 cents for the three months
ended March 31, 2003 and June 30, 2002, respectively. We have taken measures
in the first and second quarters of 2003 with the objective of consolidating
our internal manufacturing at our Gresham manufacturing location and returning
to profitability in the second half of 2003. We recorded $35.7 million and
$124.5 million in restructuring and other items in the first quarter and second
quarter of 2003, respectively. See discussion below under results of
operations for information by reportable segment and more details by income
statement line item.

Looking forward, LSI is projected to move to profitability in the second
half of the year, which will reflect the impact of revenue growth and our
completed restructuring program including the consolidation of our internal
manufacturing at our Gresham manufacturing facility, supplemented by strategic
foundry engagements. In the third quarter of 2003, we expect total
consolidated revenues to increase 8% to 12% from the $407.2 million recorded in
the second quarter of 2003. We expect our net loss per diluted share to be 4
to 7 cents in the third quarter of 2003.

Financing activities

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 $10.6 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

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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 an aggregate of 16,546,370 options 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 10,691,139 options 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.

RESULTS OF OPERATIONS

Revenues:

|                        |  |                    |       |                  |  |               |       |               |  |               |       |  |  |   |       |  |  |   |       | 
|----------------------- |  | ------------------ | ----- | ---------------- |  | ------------- | ----- | ------------- |  | ------------- | ----- |  |  | - | ----- |  |  | - | ----- | 
|                        |  | Three months ended |       | Six months ended
|                        |  |                    |       |                 
|                        |  | June 30, 2003      |       | March 31, 2003   |  | June 30, 2002 |       | June 30, 2003 |  | June 30, 2002
|                        |  |                    |       |                  |  |               |       |               |  |              
|                        |  | (in millions)     
|Semiconductor segment   |  | $                  | 306.2 |                  |  | $             | 273.1 |               |  | $             | 354.8 |  |  | $ | 579.2 |  |  | $ | 707.4 | 
|Storage Systems segment |  |                    | 101.0 |                  |  |               | 99.7  |               |  |               | 83.0  |  |  |   | 200.8 |  |  |   | 142.9 | 
|                        |  |                    |       |                  |  |               |       |               |  |               |       |  |  |   |       |  |  |   |       | 
|Consolidated            |  | $                  | 407.2 |                  |  | $             | 372.8 |               |  | $             | 437.8 |  |  | $ | 780.0 |  |  | $ | 850.3 | 
|                        |  |                    |       |                  |  |               |       |               |  |               |       |  |  |   |       |  |  |   |       | 

There were no significant intersegment revenues during the periods presented.

Second quarter of 2003 compared to the first quarter of 2003

Total consolidated revenues for the second quarter of 2003 increased $34.4
million or 9% from the first quarter of 2003. The increase in revenues in the
second quarter of 2003 is primarily attributable to an overall seasonal
recovery in the Semiconductor segment as a result of an increase in demand for
products used in consumer custom solutions applications within the consumer
products market.

Revenues for the Semiconductor segment increased $33.1 million or 12% in
the second quarter of 2003 as compared to the first quarter of 2003. The
increase in the Semiconductor segment was primarily attributable to an increase
in demand for consumer products due to seasonality, communications ASICs, and
storage ASICs used in storage networking and hard disk drive applications.

Revenues for the Storage Systems segment increased $1.3 million or 1% from
the first quarter of 2003.

We expect total consolidated revenues to increase 8% to 12% in the third
quarter of 2003 as compared to the second quarter of 2003. The third quarter
is expected to be a seasonally stronger quarter in our consumer and storage
product markets. We expect our storage businesses, storage components and
Storage Systems, to total approximately $1 billion in combined revenues for the
year 2003.

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Three and six months ended June 30, 2003 compared to the same period of
2002

Total consolidated revenues for the second quarter of 2003 decreased $30.6
million or 7% as compared to the second quarter of 2002. For the six months
ended June 30, 2003, revenues were $70.3 million or 8% lower than the same
period of the prior year.

Revenues for the Semiconductor segment decreased $48.6 million or 14% for
the second quarter of 2003 and decreased $128.2 million or 18% for the first
half of 2003 as compared to the same periods of the previous year. The decline
in revenues in the Semiconductor segment in the second quarter and first half
of 2003 as compared to the same periods of 2002 is primarily related to the
consumer products market, where we experienced lower revenues from video game
and set-top box semiconductors.

Revenues for the Storage Systems segment increased $18.0 million or 22%
for the second quarter of 2003 and increased $57.9 million or 41% for the first
half of 2003 as compared to the same periods of 2002. The increase in revenues
in the Storage Systems segment for the second quarter and first half of 2003 as
compared to the same periods of 2002, is due to continued strong demand for
modular storage products, sales to a new 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.

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 June 30, |              | Six months ended June 30,
|                         |                                     |  |                             |              |                          
|                         |                                     |  | 2003                        |              | 2002                      |  | 2003 |              | 2002
|                         |                                     |  |                             |              |                           |  |      |              |     
|Semiconductor segment:   |                                     |  |                             |              |                           |  |      |              |      |  |  |              |   |  |  |             
|                         | Number of significant customers     |  |                             | 2            |                           |  |      | 1            |      |  |  | 2            |   |  |  | 1            |  
|                         | Percentage of segment revenues      |  |                             | 14%, 11      | %                         |  |      | 19           | %    |  |  | 13%, 10      | % |  |  | 18           | %
|Storage Systems segment: |                                     |  |                             |              |                           |  |      |              |      |  |  |              |   |  |  |             
|                         | Number of significant customers     |  |                             | 3            |                           |  |      | 3            |      |  |  | 3            |   |  |  | 3            |  
|                         | Percentage of segment revenues      |  |                             | 50%, 14%, 11 | %                         |  |      | 32%, 22%, 18 | %    |  |  | 45%, 15%, 12 | % |  |  | 33%, 18%, 17 | %
|Consolidated:            |                                     |  |                             |              |                           |  |      |              |      |  |  |              |   |  |  |             
|                         | Number of significant customers     |  |                             | 2            |                           |  |      | 1            |      |  |  | 1            |   |  |  | 1            |  
|                         | Percentage of consolidated
revenues |  |                             | 14%, 11      | %                         |  |      | 15           | %    |  |  | 14           | % |  |  | 15           | %

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

|          |                       |   |                    |       |                  |   |               |       |               |   |               |       |  |   |       |       |  |   |       |       | 
|--------- | --------------------- | - | ------------------ | ----- | ---------------- | - | ------------- | ----- | ------------- | - | ------------- | ----- |  | - | ----- | ----- |  | - | ----- | ----- | 
|          |                       |   | Three months ended |       | Six months ended
|          |                       |   |                    |       |                 
|          |                       |   | June 30, 2003      |       | March 31, 2003   |   | June 30, 2002 |       | June 30, 2003 |   | June 30, 2002
|          |                       |   |                    |       |                  |   |               |       |               |   |              
|          |                       |   |                    |       |                  |   |               |       |               |   | (in millions) |       |  |   |       |       |  |   |      
|Revenues: |                       |   |                    |       |                  |   |               |       |               |   |               |       |  |   |       |       |  |   |       |      
|          | North America         |   | $                  | 216.7 |                  |   | $             | 206.9 |               |   | $             | 227.4 |  |   | $     | 423.6 |  |   | $     | 440.6 | 
|          | Asia, including Japan |   |                    | 154.6 |                  |   |               | 124.9 |               |   |               | 173.5 |  |   |       | 279.6 |  |   |       | 324.8 | 
|          | Europe                |   |                    | 35.9  |                  |   |               | 41.0  |               |   |               | 36.9  |  |   |       | 76.8  |  |   |       | 84.9  | 
|          |                       |   |                    |       |                  |   |               |       |               |   |               |       |  |   |       |       |  |   |       |       | 
|Total     |                       | $ | 407.2              |       |                  | $ | 372.8         |       |               | $ | 437.8         |       |  | $ | 780.0 |       |  | $ | 850.3 |      
|          |                       |   |                    |       |                  |   |               |       |               |   |               |       |  |   |       |       |  |   |       |       | 

In the second quarter of 2003, revenues increased in North America and
Asia, including Japan, as compared to the first quarter of 2003. The overall
increase in revenues is primarily due to a seasonal recovery in the
Semiconductor segment. The increase in revenues in Asia, including Japan,
represents primarily higher revenues in the consumer products market, which
increased significantly in the second quarter of 2003 as compared to the first
quarter of 2003. The decrease in revenues in Europe in the second quarter of
2003 represents primarily lower revenues for certain communication products
compared to the first quarter of 2003.

In the second quarter and first half of 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 continued
economic downturn in the United States.

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The decline in revenues in Asia, including Japan, represents primarily lower
revenues in the consumer products market, as we experienced greater than normal
seasonality in the first quarter of 2003 as a result of high levels of
inventory in the retail channel.

We expect revenues from Asia, including Japan, to increase in the third
quarter of 2003 primarily due to the customer concentration in these regions
within the consumer products market, which is typically strong in the second
half of the year.

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

Gross profit margin:

|                        |  |                        |       |                    |    |                  |       |               |    |               |       |               |    |   |       |  |    |   |       |  |    |  
|----------------------- |  | ---------------------- | ----- | ------------------ | -- | ---------------- | ----- | ------------- | -- | ------------- | ----- | ------------- | -- | - | ----- |  | -- | - | ----- |  | -- | -
|                        |  |                        |       | Three months ended |    | Six months ended
|                        |  |                        |       |                    |    |                 
|                        |  |                        |       | June 30, 2003      |    | March 31, 2003   |       | June 30, 2002 |    | June 30, 2003 |       | June 30, 2002
|                        |  |                        |       |                    |    |                  |       |               |    |               |       |              
|                        |  |                        |       |                    |    |                  |       |               |    |               |       | (in millions) |    |   |       |  |    |   |       | 
|Semiconductor segment   |  | $                      | 130.2 |                    |    | $                | 88.5  |               |    | $             | 133.4 |               |    | $ | 218.8 |  |    | $ | 216.8 | 
|                        |  | Percentage of revenues |       |                    | 43 | %                |       |               | 32 | %             |       |               | 38 | % |       |  | 38 | % |       |  | 31 | %
|Storage Systems segment |  | $                      | 38.5  |                    |    | $                | 36.2  |               |    | $             | 30.0  |               |    | $ | 74.7  |  |    | $ | 52.4  | 
|                        |  | Percentage of revenues |       |                    | 38 | %                |       |               | 36 | %             |       |               | 36 | % |       |  | 37 | % |       |  | 37 | %
|                        |  |                        |       |                    |    |                  |       |               |    |               |       |               |    |   |       |  |    |   |       | 
|Consolidated            |  | $                      | 168.7 |                    |    | $                | 124.7 |               |    | $             | 163.4 |               |    | $ | 293.5 |  |    | $ | 269.2 | 
|                        |  |                        |       |                    |    |                  |       |               |    |               |       |               |    |   |       |  |    |   |       | 
|                        |  | Percentage of revenues |       |                    | 41 | %                |       |               | 33 | %             |       |               | 37 | % |       |  | 38 | % |       |  | 32 | %

Second quarter of 2003 compared to the first quarter of 2003

The increase in consolidated Semiconductor segment and Storage Systems
segment gross profit margins for the second quarter of 2003 compared to the
first quarter of 2003 are a result of the following factors:



| |  |  | A favorable shift in product mix, higher revenues from
cost-reduced parts, improved yields and productivity, mainly from our
0.18 micron process for semiconductor products sold. in the second
quarter of 2003 as compared to the first quarter of 2003; and                                                                                                                                                                  
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Lower inventory charges due to lower inventory reserve requirements
primarily resulting from sales of previously reserved inventory, which
was in part offset by higher manufacturing variances in the second
quarter of 2003. The sale of previously reserved excess inventory
improved gross profit margins by approximately one percentage point
during the second quarter of 2003 as compared to the first quarter of
2003.

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

Three and six months ended June 30, 2003 compared to the same period of
2002

The increase in consolidated and Semiconductor segment gross profit
margins for the second quarter and first half of 2003, as compared to the same
periods in 2002, are a result of improved capacity utilization and factory
absorption. Additional excess inventory and related charges for the three and
six months ended June 30, 2002, were $4.8 million and $45.5 million,
respectively. The charges in 2002 impacted the Semiconductor segment and were
primarily a result of underutilization charges associated with a partial idling
of our fabrication facilities due to decreased demand. The gross profit margin
was relatively flat in the Storage Systems segment as a result of consistent
distribution of products within the channel and product mix.

Factors that may affect gross profit margins

We have advanced wafer-manufacturing operations in Oregon, which is our
primary manufacturing site, and Japan. In June 2003, we announced the decision
to sell the manufacturing facility in Japan (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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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 |   | Six months ended |      
|                        |                        |   |       |                    |   |                  |      
|                        |                        |   |       | June 30, 2003      |   | March 31, 2003   |       | June 30, 2002 |   | June 30, 2003 | June 30, 2002 |              
|                        |                        |   |       |                    |   |                  |       |               |   |               |               |              
|                        |                        |   |       |                    |   |                  |       |               |   |               |               | (in millions) |   |   |       |    |   |   |       |   
|Semiconductor segment   |                        | $ | 100.4 |                    |   | $                | 105.1 |               |   | $             | 105.5         |               |   | $ | 205.6 |    |   | $ | 211.9 |   
|                        | Percentage of revenues |   |       | 33                 | % |                  |       | 38            | % |               |               | 30            | % |   |       | 35 | % |   |       | 30 | %
|Storage Systems segment |                        | $ | 10.9  |                    |   | $                | 10.0  |               |   | $             | 7.3           |               |   | $ | 20.9  |    |   | $ | 15.3  |   
|                        | Percentage of revenues |   |       | 11                 | % |                  |       | 10            | % |               |               | 9             | % |   |       | 10 | % |   |       | 11 | %
|                        |                        |   |       |                    |   |                  |       |               |   |               |               |               |   |   |       |    |   |   |       |   
|Consolidated            |                        | $ | 111.3 |                    |   | $                | 115.1 |               |   | $             | 112.8         |               |   | $ | 226.5 |    |   | $ | 227.2 |   
|                        |                        |   |       |                    |   |                  |       |               |   |               |               |               |   |   |       |    |   |   |       |   
|                        | Percentage of revenues |   |       | 27                 | % |                  |       | 31            | % |               |               | 26            | % |   |       | 29 | % |   |       | 27 | %

Second quarter of 2003 compared to the first quarter of 2003

Research and development (R&D) expenses declined $3.8 million or 3% in
the second quarter of 2003 as compared to the first quarter of 2003 on a
consolidated basis.

R&D expenses in the Semiconductor segment decreased $4.7 million or 4% in
the second quarter of 2003 as compared to the first quarter of 2003. The
decrease in R&D expenses for the Semiconductor segment is primarily a result of
benefits from the restructuring actions of 2003 (see Note 3 of the Notes). We
continue to develop advanced sub-micron product technologies. One of the
technologies under development is RapidChip. 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. We expect to
begin shipping products utilizing RapidChip technology in the second half of
2003, although we do not expect it to contribute significantly to our
consolidated revenues until 2004.

R&D expenses in the Storage Systems segment increased $0.9 million or 9%
in the second quarter of 2003 as compared to the first quarter of 2003
primarily due to higher compensation-related expenditures and increased
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
second quarter as compared to the first quarter of 2003.

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Three and six months ended June 30, 2003 compared to the same period of
2002

R&D expenses, on a consolidated basis, decreased $1.5 million or 1% during
the second quarter of 2003 as compared to the second quarter of 2002. R&D
expenses for the first half of 2003 decreased by $0.7 million or less than 1%
as compared to the first half of 2002 on a consolidated basis.

R&D expenses for the Semiconductor segment decreased $5.1 million or 5% in
the second quarter of 2003 and $6.3 million or 3% for the first half of 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). The decrease was offset in
part by a lower benefit associated with the technology transfer agreement
entered into with Silterra in Malaysia during 1999. No benefit was recorded in
the second quarter or first half of 2003 as compared to $2 million and $6
million benefit recorded in the second quarter and first half of 2002,
respectively. The obligations under the technology transfer agreement were
complete as of December 31, 2002.

R&D expenses for the Storage Systems segment increased by $3.6 million or
49% in the second quarter of 2003 and $5.6 million or 37% in the first half of
2003 as compared to the same periods of 2002 primarily due to the additional
R&D expenses incurred in the first half of 2003 for the former Mylex business
unit of IBM, which was acquired in August 2002, and is now primarily a part of
the Storage Systems segment.

The increases in R&D expenses as a percentage of revenues on a
consolidated basis and for the Semiconductor segment in the second quarter and
first half of 2003 as compared to the same periods of 2002, are a result of
lower revenues, offset in part by lower R&D expenses. R&D expenses as a
percentage of revenues for the Storage Systems segment increased to 11% in the
second quarter of 2003 from 9% in the same quarter of 2002. The increase is a
result of an increase in revenues, more than offset by an increase in R&D
expenses in the second quarter of 2003 as compared to the same period of 2002.
R&D expenses as a percentage of revenues for the Storage Systems segment
decreased to 10% in the first half of 2003 as compared to 11% in the same
period of 2002. The decrease is a result of higher revenues, offset in part by
an increase in R&D expenses in the first half of 2003 as compared to the same
period of 2002.

Selling, general and administrative:

|                        |  |                       |      |                    |    |                  |      |               |    |               |      |               |    |   |       |  |    |   |       |  |    |  
|----------------------- |  | --------------------- | ---- | ------------------ | -- | ---------------- | ---- | ------------- | -- | ------------- | ---- | ------------- | -- | - | ----- |  | -- | - | ----- |  | -- | -
|                        |  |                       |      | Three months ended |    | Six months ended
|                        |  |                       |      |                    |    |                 
|                        |  |                       |      | June 30, 2003      |    | March 31, 2003   |      | June 30, 2002 |    | June 30, 2003 |      | June 30, 2002
|                        |  |                       |      |                    |    |                  |      |               |    |               |      |              
|                        |  |                       |      | (in millions)     
|Semiconductor segment   |  | $                     | 40.8 |                    |    | $                | 42.9 |               |    | $             | 45.6 |               |    | $ | 83.8  |  |    | $ | 92.3  | 
|                        |  | Percentage of revenue |      |                    | 13 | %                |      |               | 16 | %             |      |               | 13 | % |       |  | 14 | % |       |  | 13 | %
|Storage Systems segment |  | $                     | 16.1 |                    |    | $                | 14.7 |               |    | $             | 11.8 |               |    | $ | 30.7  |  |    | $ | 23.2  | 
|                        |  | Percentage of revenue |      |                    | 16 | %                |      |               | 15 | %             |      |               | 14 | % |       |  | 15 | % |       |  | 16 | %
|                        |  |                       |      |                    |    |                  |      |               |    |               |      |               |    |   |       |  |    |   |       | 
|Consolidated            |  | $                     | 56.9 |                    |    | $                | 57.6 |               |    | $             | 57.4 |               |    | $ | 114.5 |  |    | $ | 115.5 | 
|                        |  |                       |      |                    |    |                  |      |               |    |               |      |               |    |   |       |  |    |   |       | 
|                        |  | Percentage of revenue |      |                    | 14 | %                |      |               | 15 | %             |      |               | 13 | % |       |  | 15 | % |       |  | 14 | %

Second quarter of 2003 compared to the first quarter of 2003

Selling, general and administrative (SG&A) expenses decreased $0.7
million or 1% during the second quarter of 2003 from the first quarter of 2003
on a consolidated basis. SG&A expenses for the Semiconductor segment decreased
$2.1 million or 5% in the second quarter of 2003 as compared to the first
quarter of 2003. The decrease for the Semiconductor segment is due to the
various cost reduction measures implemented in 2003 (See Note 3 of the Notes).
SG&A expenses for the Storage Systems segment increased $1.4 million or 10%
when comparing the same periods. The increase for the Storage Systems segment
is primarily due to continued increase in partner alliance spending on channel
development.

As a percentage of revenues, consolidated SG&A expenses decreased to 14%
in the second quarter of 2003 from 15% in the first quarter of 2003. For the
Semiconductor segment, SG&A expenses, as a percentage of revenues, decreased to
13% from 16%, and for the Storage Systems segment, increased to 16% in the
second quarter of 2003 as compared to 15% for the first quarter of 2003. The
decrease as a percentage of revenues on a consolidated basis and for the
Semiconductor segment are primarily a result of higher

23



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revenues during the
second quarter of 2003 as compared to the first quarter of 2003. The increase
as a percentage of revenues for the Storage Systems segment is primarily the
result of higher SG&A expenses, offset in part by higher revenues in the second
quarter as compared to the first quarter of 2003.

Three and six months ended June 30, 2003 compared to the same period of
2002

Consolidated SG&A expenses decreased $0.5 million or 1% during the second
quarter of 2003 and decreased $1.0 million or 1% during the first half of 2003
as compared to the same periods of 2002.

SG&A expenses for the Semiconductor segment decreased $4.8 million or 11%
for the three months ended June 30, 2003 and decreased $8.5 million or 9% for
the six months ended June 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).

SG&A expenses for the Storage Systems segment increased $4.3 million or
36% in the second quarter of 2003 and increased $7.5 million or 32% in the
first half of 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.

As a percentage of revenues, SG&A expenses increased to 14% in the second
quarter of 2003 from 13% 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 13% 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 16% from 14% as a result of higher revenues, more than
offset by higher SG&A expenses in the first quarter of 2003 as compared to the
same period of 2002, as discussed above.

As a percentage of revenues, SG&A expenses increased to 15% for the six
months ended June 30, 2003 as compared to 14% for the six months ended June 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 by lower SG&A expenses. For the Storage Systems segment, SG&A
expenses as a percentage of revenues decreased to 15% from 16% as a result of
higher revenues, offset in part by higher SG&A expenses in the first six months
of 2003 as compared to the same period of 2002.

Restructuring of operations and other items:We recorded a charge of
$124.5 million and $160.2 million in restructuring of operations and other
items for the three and six months ended June 30, 2003, respectively. We
recorded a gain of $6.4 million and a charge of $58.7 million in restructuring
of operations and other items for the three and six months ended June 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 terminated 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 six
months ended June 30, 2003, payments related to the February 2003
restructuring actions have consisted of approximately $4.4 million for
severance and termination benefits and $0.4 million for lease and contract
terminations.

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Second quarter of 2003:

In April 2003, we announced a restructuring of our operations that
includes 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 terminated 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 six
months ended June 30, 2003, payments related to the April 2003 restructuring
actions have consisted of approximately $6.6 million for severance and
termination benefits and $0.2 million for lease and contract terminations.

In June 2003, we announced the decision to sell the Tsukuba, Japan
manufacturing facility. As a result, a charge of $72.9 million was recorded in
the Semiconductor segment to write down fixed assets to their fair market
value, which has been reclassified 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. During the six
months ended June 30, 2003, there have been no payments related to the amounts
accrued for severance and other exit costs under the June 2003 restructuring
actions.

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.

The fair value of assets determined to be impaired was the result of the
use of management estimates and independent appraisals. 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. Assets held for sale of $60.4 million and $74.2 million were included as
a component of prepaid expenses and other current assets as of June 30, 2003
and December 31, 2002, respectively. Assets classified as held for sale are
not depreciated.

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

|                                                 |  |                |        |               |  |          |        |            |  |               |         |          |  |            |        |  |  |   |         |  |  |   |          |   |  |   |        | 
|------------------------------------------------ |  | -------------- | ------ | ------------- |  | -------- | ------ | ---------- |  | ------------- | ------- | -------- |  | ---------- | ------ |  |  | - | ------- |  |  | - | -------- | - |  | - | ------ | 
|                                                 |  | Balance at     |        | Restructuring |  | Utilized |        | Balance at |  | Restructuring |         | Utilized |  | Balance at
|                                                 |  | December       |        | Expense       |  | during   |        | March 31,  |  | Expense       |         | during   |  | June 30,  
|                                                 |  | 31, 2002       |        | Q1 2003       |  | Q1 2003  |        | 2003       |  | Q2 2003       |         | Q2 2003  |  | 2003      
|                                                 |  |                |        |               |  |          |        |            |  |               |         |          |  |           
|                                                 |  | (In thousands)
|Write-down of excess assets (a)                  |  | $              | 6,008  |               |  | $        | 29,754 |            |  | $             | (30,021 | )        |  | $          | 5,741  |  |  | $ | 96,805  |  |  | $ | (97,917  | ) |  | $ | 4,629  | 
|Lease terminations and
maintenance contracts (b) |  |                | 6,757  |               |  |          | 1,396  |            |  |               | (1,172  | )        |  |            | 6,981  |  |  |   | 18,762  |  |  |   | (1,425   | ) |  |   | 24,318 | 
|Facility closure and other
exit costs (c)        |  |                | 8,129  |               |  |          |       |            |  |               | (2,520  | )        |  |            | 5,609  |  |  |   | 498     |  |  |   | (2,040   | ) |  |   | 4,067  | 
|Payments to employees for
severance (d)          |  |                | 1,391  |               |  |          | 4,516  |            |  |               | (4,493  | )        |  |            | 1,414  |  |  |   | 10,637  |  |  |   | (7,116   | ) |  |   | 4,935  | 
|                                                 |  |                |        |               |  |          |        |            |  |               |         |          |  |            |        |  |  |   |         |  |  |   |          |   |  |   |        | 
|Total                                            |  | $              | 22,285 |               |  | $        | 35,666 |            |  | $             | (38,206 | )        |  | $          | 19,745 |  |  | $ | 126,702 |  |  | $ | (108,498 | ) |  | $ | 37,949 | 
|                                                 |  |                |        |               |  |          |        |            |  |               |         |          |  |            |        |  |  |   |         |  |  |   |          |   |  |   |        | 



|(a) |  | The amounts utilized in 2003 reflect $126.6 million of non-cash
write-downs of amortizable intangible and other long-lived assets in the
U.S due to impairment, and $1.4 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 $4.6 million balance as of June 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
2010.                                                                                                                                                                                                                                                                                                                                                                            
|   
|(c) |  | Amounts utilized represent cash payments. The balance remaining for
facility closure and other exit costs will be paid during 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

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|(d) |  | Amounts utilized represent cash severance payments to approximately 470
employees during the six months ended June 30, 2003. The balance remaining
for severance will be paid during 2003.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The restructuring actions discussed above are expected to result in
savings of approximately $15 million to $20 million in total costs and expenses
per quarter in 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 $8.9 million for the three months
ended June 30, 2003, $10.5 million for the first quarter of 2003 and $23.8
million for the three months ended June 30, 2002. For the six months ended June
30, 2003 and 2002, the amortization of non-cash deferred stock compensation was
$19.4 million and $50.8 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 $19.3
million and $20.1 million for the second quarter of 2003 and first 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 certain acquired
intangible assets during the first quarter of 2003, as discussed below.

Amortization of intangible assets was $19.1 million for the three months
ended June 30, 2002. For the six months ended June 30, 2003 and 2002,
amortization of intangible assets was $39.4 million and $38.3 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 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. As of June 30, 2003, we had approximately $219.1 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. See our Annual Report on Form 10-K
for further discussion.

Interest expense:Interest expense decreased by $1.5 million to $7.3
million in the second quarter of 2003 from $8.8 million in the first quarter of
2003. Interest expense decreased by $8.2 million to $7.3 million during the
three months ended June 30, 2003 from $15.5 million during the same period in
2002. Interest expense decreased $15.2 million to $16.1 million in the first
half of 2003 from $31.3 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) during the third and fourth quarters of 2002 and the
repurchase of an additional $288.0 million of Convertible Notes during the
second quarter of 2003. Our effective interest rate payable continued to be
reduced 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. The reductions to interest expense from the items noted
above were partly offset by interest expense incurred on the $350 million of
4% Convertible Notes issued on May 12, 2003.

Interest income and other, net:Interest income and other, net, was $3.4
million in the second quarter of 2003, $6.8 million in the first quarter of
2003 and $2.6 million in the second quarter of 2002. Interest income decreased
to $7.1 million in the second quarter of 2003 from $12.4 million in the first
quarter of 2003. The decrease in interest income is mainly due to lower
returns on our short-term investments. Other expense, net of $3.7 million in
the second quarter of 2003 included a write-down of three investments in equity
securities by $2.1 million due to impairment considered to be other than
temporary (see Note 4 of the Notes), a net loss on the repurchase of
Convertible Notes of $2.0 million, and currency option premium expenses, offset
in part by net foreign exchange gains and gains on sale of assets. In the
first quarter of 2003, we wrote-down two investments in equity securities by
$7.1 million.

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Interest income and other, net increased to $10.1 million in the first
half of 2003 from $6.3 million in the same period of 2002. Interest income
increased by $7.5 million to $19.4 million in the first half of 2003 from $11.9
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 first half of
2003. Other expense, net of $9.3 million in the first half of 2003 included
write-downs of investments in equity securities by $9.1 million due to
impairment considered to be other than temporary (see Note 4 of the Notes), a
net loss on the repurchase of Convertible Notes of $2.0 million, and currency
option premium expenses, offset in part by net foreign exchange gains, gains on
sale of assets and other miscellaneous expenses that were individually
insignificant. Other expense, net of $5.6 million in the first half of 2002
included net foreign exchange losses, currency option premium expenses, losses
on sale of assets and other miscellaneous expenses that were individually
insignificant.

Provision for income taxes:During the three and six months ended June
30, 2003, we recorded an income tax expense of $6.0 million and $12.0 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 June 30, 2002, we recorded an income tax expense of $6
million. The expense relates to income taxes for certain foreign subsidiaries.
For the six months ended June 30, 2002, we recorded a net income tax benefit
of $12.3 million. The net benefit is comprised of a one-time benefit of $22.5
million resulting from a net operating loss carryback provided by a law change
in 2002, reduced by $10.2 million of income taxes incurred by certain foreign
subsidiaries.

FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY

Cash, cash equivalents and short-term investments increased to $1.1
billion at June 30, 2003, from $990 million at December 31, 2002. The increase
is primarily due to net cash inflows from our operating activities as described
below.

Working capital.Working capital decreased by $71.5 million to $1.16
billion at June 30, 2003, from $1.23 billion as of December 31, 2002. Working
capital in the first six months of the current year was impacted by the
following activities:



| |                                                                       |  | Current portion of long-term obligations increased by $173.3 million
due to the reclassification of the 1999 Convertible Subordinated Notes,
which are due in March 2004, along with the unamortized gain on the
termination of the associated interest rate swap from long-term to
current liabilities, net of the 1999 Convertible Subordinated Notes
repurchased in the second quarter of 2003;
| | ---------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |                                                                       |  | Other accrued liabilities increased by $16.3 million primarily as a
result of additions to the restructuring reserve for lease exit costs
and severance;                                                                                                                                                                                                                                          
|
| |                                                                       |  | Higher income taxes payable due to the timing of tax payments made
and income tax provision recorded in the first half of 2003;                                                                                                                                                                                                                                                                   
|
| |                                                                       |  | Accounts receivable decreased by $7.6 million from $248.6 million at
December 31, 2002, to $241.1 million at June 30, 2003. This decrease is
attributable to timing differences in collections in the current quarter
compared to the fourth quarter of 2002 and lower revenue in the second
quarter of 2003 compared to the fourth quarter of 2002; and                                          
|
| |                                                                       |  | Higher accounts payable due to timing of payments.                                                                                                                                                                                                                                                                                                                                                
|
| | The decrease in working capital was offset, in part, by the following:
|
| |                                                                       |  | Cash, cash equivalents and short-term investments increased by $124.8
million at June 30, 2003, as compared to December 31, 2002;                                                                                                                                                                                                                                                                 
|
| |                                                                       |  | Inventories increased by $10.9 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;                                                                                                                                                                                                    

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| |  |  | Lower accrued salaries, wages and benefits due to timing differences
in payment of salaries; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Prepaid expenses and other current assets increased by $6.5 million,
primarily due to the increase in current portion of the collateral for
the equipment operating lease agreement entered into in the first
quarter (see Note 12 of the Notes) and an increase in prepaid software
maintenance contracts. These increases were offset in part by
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).

Cash and cash equivalents generated from operating activities.During the
first six months of 2003, we generated $104.1 million of net cash and cash
equivalents from operating activities compared to $9.9 million used in the same
period of 2002. Cash and cash equivalents generated by operating activities
for the first six months of 2003 were the result of the following:



| |  |  | Income of approximately $22.9 million when excluding gains, losses
and charges that are either non-cash in nature or not related to
operating activities from our net loss of $284.5 million for the six
months ended June 30, 2003. 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 June 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.                                                                                                                                                                                              

Cash and cash equivalents provided by investing activities.Cash and cash
equivalents provided by investing activities was $41.0 million in the first six
months of 2003, compared to $331.7 million used in the same period in 2002. The
primary investing activities during the first six months of 2003 were as
follows:



| |  |  | Sales and maturities of debt and equity securities available for
sale, net of purchases in 2003;                                                                                                                                                                                                                                                                                                                     
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Proceeds from the sale-leaseback transaction entered into during the
first quarter of 2003 (see Note 12 of the Notes). Net purchases of
property and equipment during the first half of 2003. These items were
offset by higher non-current assets and deposits in the first half of
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 $100 million in 2003.

As of June 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 June 30, 2003.

We guarantee residual values of equipment on these leases. As of June 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 provided by financing activities. Cash and cash
equivalents provided by financing activities during the six months ended June
30, 2003 were $38.6 million compared to $26.4 million in the same period in
2002. The increase is attributable to net cash received on issuance of the
2003 Convertible Subordinated Notes, offset by cash paid to repurchase portions
of the 1999 and 2000 Convertible Subordinated Notes and lower cash received on
issuance of common stock under our employee stock purchase plan.

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

28



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##### Table of Contents



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 $10.6 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, 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. 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 unamortized gain on the
terminated Swaps (see Note 5 of the Notes).

As of June 30, 2003, we also have Convertible Subordinated Notes of $172
million due in March 2004, $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.

The following table summarizes our contractual obligations at June 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 |       | $                | 171.9                  |             |  | $           | 250.0 |               |  | $     | 490.0         |       |  | $ | 350.0 |       |  | $ | 1,261.9 |        
|Operating lease obligations    |       |                  | 149.7                  |             |  |             | 222.6 |               |  |       | 55.7          |       |  |   | 12.9  |       |  |   | 440.9   |        
|Capital lease obligations      |       |                  | 0.4                    |             |  |             | 0.4   |               |  |       |              |       |  |   |      |       |  |   | 0.8     |        
|                               |       |                  |                        |             |  |             |       |               |  |       |               |       |  |   |       |       |  |   |         |        
|                               | Total |                  | $                      | 322.0       |  |             | $     | 473.0         |  |       | $             | 545.7 |  |   | $     | 362.9 |  |   | $       | 1,703.6 | 
|                               |       |                  |                        |             |  |             |       |               |  |       |               |       |  |   |       |       |  |   |         |        

29



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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 must be applied for the first interim or annual period
beginning after June 15, 2003. On March 28, 2003, we entered into new
operating leases to refinance our old leases. See Note 12 of the Notes. We
refinanced these leases in a manner that best met our capital financing
strategy and our cost of capital objectives and the new leases are not subject
to the consolidation provisions of FIN 46. We believe 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. We believe that the adoption of this standard will not
have a material impact on our 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. We believe that the adoption of this standard
will 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.

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:

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| |  |  | Fluctuations in timing and volumes of customer demand;                                                                             
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The rate of depletion of customer inventory buildup;                                                                               
|
| |  |  | Loss of a significant customer;                                                                                                    
|
| |  |  | The Companys achievement of revenue objectives and other financial
targets;                                                       
|
| |  |  | The development of new products;                                                                                                   
|
| |  |  | The timing and success of new product introductions;                                                                               
|
| |  |  | The continued availability of appropriate levels of manufacturing
capacity;                                                        
|
| |  |  | The realization of benefits from the Companys strategic relationships;                                                            
|
| |  |  | Competing technologies, R&D investments, products and other competitive
factors;                                                   
|
| |  |  | Disruptions in general economic activity due to worsening global
business and geopolitical conditions;                             
|
| |  |  | The extent to which the Company may not realize the cost savings it
expects from the reduction in workforce and operating expenses;
|
| |  |  | Cyclical nature of the Semiconductor industry and the markets addressed
by our products; and                                       
|
| |  |  | The unpredictability of the economy and other factors beyond the
Companys control.                                                

Our operating results could also be impacted by sudden fluctuations in
customer requirements, foreign currency exchange rate fluctuations and other
economic conditions affecting customer demand and the cost of operations in one
or more of the global markets in which we do business. We operate in a
technologically advanced, rapidly changing and highly competitive environment.
While we cannot predict what effect these various factors may have on our
financial results, the aggregate effect of these and other factors could result
in significant volatility in our future performance. To the extent our
performance may not meet expectations published by external sources, public
reaction could result in a sudden and significantly adverse impact on the
market price of our securities, particularly on a short-term basis.

We have international subsidiaries and distributors that operate and sell
our products globally. Further, we purchase a substantial portion of our raw
materials and manufacturing equipment from foreign suppliers and incur labor
and other operating costs in foreign currencies, particularly in our Japanese
manufacturing facilities. As a result, we are exposed to the risk of changes
in foreign currency exchange rates or declining economic conditions in these
countries. We utilize forward exchange contracts and purchased currency option
contracts to manage our exposure associated with net asset and liability
positions and cash flows denominated in non-functional currencies. (See Note 5
of the Notes.) There is no assurance that these hedging transactions will
eliminate exposure to currency rate fluctuations and this could affect our
operating results.

Our corporate headquarters and some of our manufacturing facilities are
located near major earthquake faults. As a result, in the event of a major
earthquake, we could suffer damages that could significantly and adversely
affect our operating results and financial condition.

We operate in an industry sector where the value of securities is highly
volatile and may be influenced by economic and other factors beyond our
control. We believe that our future operating results will continue to be
subject to quarterly variations based upon a wide variety of factors.

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.

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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 June 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 in the first half of 2003) affecting our floating-rate
financial instruments as of June 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 six months ended June 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.




Item 4. Controls and Procedures

We maintain disclosure controls and procedures and internal accounting
controls designed to ensure that information required to be disclosed in our
filings under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commissions rules and forms. Our principal executive and financial
officers have evaluated our disclosure controls and procedures pursuant to Rule
13a-14 promulgated under the Securities Exchange Act within 90 days prior to
the filing of this Quarterly Report on Form 10-Q and, based upon such
evaluations, have determined that such disclosure controls and procedures are
effective to alert them on a timely basis to material information relating to
our company required to be disclosed in our filings with the Securities and
Exchange Commission. Subsequent to our evaluation, there were no significant
changes in internal controls or other factors that could significantly affect
our internal controls, including any corrective actions with regard to
significant deficiencies and material weaknesses. We are aware that any system
of controls, however well designed and operated, can only provide reasonable,
and not absolute, assurance that the objectives of the system are met, and that
maintenance of disclosure controls and procedures is an ongoing process that
may change over time.

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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 May 16, 2003, the Company closed the sale of $350 million of its
Convertible Subordinated notes due in 2010 in a private placement to an initial
purchaser pursuant to Section 4(2) and rule 506 under the Securities Act of
1933. The initial purchaser subsequently resold the notes to qualified
institutional buyers pursuant to rule 144A promulgated under the Securities Act
of 1933. The notes will initially be convertible into common stock at a
conversion price of approximately $13.42 per share. For additional
information, see Note 12 of the Notes to the Unaudited Consolidated Financial
Statements in Part I, Item 1.




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

The Annual Meeting of Stockholders of LSI Logic Corporation was held on
May 1, 2003 in San Jose, California. Proxies representing 347,937,299 shares of
common stock or 93% of the total outstanding shares were voted at the meeting.
The table below presents the voting results of election of the Companys Board
of Directors:

|                    |  |           |             |                |  |  |            | 
|------------------- |  | --------- | ----------- | -------------- |  |  | ---------- | 
|                    |  | Votes For |             | Votes Withheld
|                    |  |           |             |               
|T.Z. Chu            |  |           | 326,446,049 |                |  |  | 21,491,250 | 
|Wilfred J. Corrigan |  |           | 337,055,349 |                |  |  | 10,881,950 | 
|Malcolm R. Currie   |  |           | 326,926,849 |                |  |  | 21,010,450 | 
|James H. Keyes      |  |           | 326,641,963 |                |  |  | 21,295,336 | 
|R. Douglas Norby    |  |           | 337,405,731 |                |  |  | 10,531,568 | 
|Matthew J. ORourke |  |           | 326,433,843 |                |  |  | 21,503,456 | 
|Gregorio Reyes      |  |           | 277,286,729 |                |  |  | 70,650,570 | 
|Larry W. Sonsini    |  |           | 328,038,665 |                |  |  | 19,898,634 | 

The stockholders approved an amendment to the Amended 1995 Director Option
Plan to increase the number of shares of common stock reserved for issuance
thereunder by 1,000,000. The proposal received 227,097,283 affirmative votes,
118,359,080 negative votes, 2,480,944 abstentions and zero broker non-votes.

The stockholders approved the adoption of the 2003 Equity Incentive Plan
and approved reservation of 11,000,000 shares of common stock under the Plan.
The proposal received 231,422,280 affirmative votes, 113,956,148 negative
votes, 2,558,869 abstentions and zero broker non-votes.

The stockholders approved the appointment of PricewaterhouseCoopers LLP as
independent accountants of the Company for the fiscal year 2003. The proposal
received 335,628,871 affirmative votes, 10,021,985 negative votes, 2,282,110
abstentions and zero broker non-votes.

33



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##### Table of Contents






Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

|      |  |                                                                                                                                                     
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------
|4.5   |  | Indenture, dated May 16, 2003, between LSI Logic Corporation and U.S. Bank National Association.                                                    
|      |  |                                                                                                                                                     
|10.45 |  | Registration Rights Agreement, dated May 16, 2003, between LSI Logic Corporation and Morgan
Stanley & Co. Incorporated.                             
|      |  |                                                                                                                                                     
|99.1  |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
|      |  |                                                                                                                                                     
|99.2  |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *

* Furnished not filed.

(b) Reports on Form 8-K

On April 23, 2003, the Company furnished a Form 8-K pursuant to Items 5
and 12 to report information regarding its financial results for the fiscal
quarter ended March 31, 2003 set forth in the Registrants news release dated
April 23, 2003.

On May 13, 2003, the Company filed a Form 8-K pursuant to items 5 and 7 to
report information regarding its offering of convertible subordinated notes and
the simultaneous entering into of call spread options set forth in the
Registrants news release dated May 12, 2003.

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##### Table of Contents






SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

|                      |  |                       |  |                           
|--------------------- |  | --------------------- |  | --------------------------
|                      |  | LSI LOGIC CORPORATION
|                      |  | (Registrant)         
|                      |  |                       |  |                           
|Date: August 13, 2003 |  | By                    |  | /s/ Bryon Look            
|                      |  |                       |  |                           
|                      |  |                       |  | Bryon Look                
|                      |  |                       |  | Executive Vice President &
|                      |  |                       |  | Chief Financial Officer   

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##### Table of Contents






CERTIFICATION OF CHIEF EXECUTIVE OFFICER
AS ADOPTED PURSUANT TO
SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002

I, Wilfred J. Corrigan, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of LSI Logic
Corporation;                                                                                                                                                                                                                                                  
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:                                                                                                     



| | a. |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the Evaluation Date); and                                                                                                  
|
| | c. |  | presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit
committee of the registrants board of directors:
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to
record, process, summarize and report financial data and have identified
for the registrants auditors any material weaknesses in internal
controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal
controls; and                                                                                                                                        



|6. |  | The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: August 13, 2003

|       |  |                                   
|------ |  | ----------------------------------
|By:    |  | /s/ Wilfred J. Corrigan           
|       | 
|Name:  |  | Wilfred J. Corrigan               
|Title: |  | Chairman & Chief Executive Officer

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CERTIFICATION OF CHIEF FINANCIAL OFFICER
AS ADOPTED PURSUANT TO
SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002

I, Bryon Look, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of LSI Logic
Corporation;                                                                                                                                                                                                                                                  
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:                                                                                                     



| | a. |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the Evaluation Date); and                                                                                                  
|
| | c. |  | presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit
committee of the registrants board of directors:
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to
record, process, summarize and report financial data and have identified
for the registrants auditors any material weaknesses in internal
controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal
controls; and                                                                                                                                        



|6. |  | The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: August 13, 2003

|       |  |                                                   
|------ |  | --------------------------------------------------
|By:    |  | /s/ Bryon Look                                    
|       | 
|Name:  |  | Bryon Look                                        
|Title: |  | Executive Vice President & Chief Financial Officer

37



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##### Table of Contents






INDEX TO EXHIBITS

|      |  |                                                                                                                                                     
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------
|4.5   |  | Indenture, dated May 16, 2003, between LSI Logic Corporation and U.S. Bank National Association.                                                    
|      |  |                                                                                                                                                     
|10.45 |  | Registration Rights Agreement, dated May 16, 2003, between LSI Logic Corporation and Morgan
Stanley & Co. Incorporated.                             
|      |  |                                                                                                                                                     
|99.1  |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
|      |  |                                                                                                                                                     
|99.2  |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *

* Furnished not filed.

38