10-K

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                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
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                                   FORM 10-K
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(Mark One)

          
    [X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
             OF THE SECURITIES EXCHANGE ACT OF 1934
             FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

                                   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 NO. 0-11674
                             LSI LOGIC CORPORATION
             (Exact name of registrant as specified in its charter)



                          DELAWARE                                                    94-2712976
                                                          
              (State or other jurisdiction of                                       (IRS Employer
               incorporation or organization)                                    Identification No.)


                            1551 MCCARTHY BOULEVARD
                           MILPITAS, CALIFORNIA 95035
              (Address of principal executive offices) (Zip Code)

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 433-8000

          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:



                                                              NAME OF EACH EXCHANGE
              TITLE OF EACH CLASS                              ON WHICH REGISTERED
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         Common Stock, $0.01 par value                       New York Stock Exchange
        Preferred Share Purchase Rights                      New York Stock Exchange


          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                                      NONE
                                (Title of class)

     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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K.  [ ]

     The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based upon the closing price of the Common Stock on March 8,
2002 as reported on the New York Stock Exchange, was approximately $18.58.
Shares of Common Stock held by each executive officer and director and by each
person who owns 5% or more of the outstanding Common Stock have been excluded in
that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.

     As of March 8, 2002, the Registrant had 369,190,586 shares of Common Stock
outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

     Parts of the following document are incorporated by reference into Parts
III, of this Form 10-K Report: Proxy Statement for Registrant's 2002 Annual
Meeting of Stockholders.
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                           FORWARD-LOOKING STATEMENTS

     This Annual Report on Form 10-K contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Actual results could differ materially from
those projected in the forward-looking statements as a result of a number of
risks and uncertainties, including the risk factors set forth below and
elsewhere in this Report. See "Risk Factors" in Part I, Item 1 and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Part II, Item 7 below. Statements made herein are as of the date of the filing
of this Form 10-K with the Securities and Exchange Commission and should not be
relied upon as of any subsequent date. We expressly disclaim any obligation to
update information presented herein, except as may otherwise be required by law.

                                     PART I

ITEM 1.  BUSINESS

GENERAL

     LSI Logic Corporation (together with its subsidiaries collectively referred
to as LSI Logic or the Company and referred to as we, us and our) is a leader in
the design, development, manufacture, and marketing of complex, high-performance
integrated circuits and storage systems. We are focused on the four markets of
consumer products, communications, storage components, and storage area network
systems. Our integrated circuits are used in a wide range of communication
devices, including devices used for wireless, broadband, data networking, and
set-top box applications. We also provide other types of integrated circuit
products and board-level products for use in consumer applications,
high-performance storage controllers, and systems for storage area networks.

     We operate in two segments -- the Semiconductor segment and the Storage
Area Network (SAN) Systems segment -- in which we offer products and services
for a variety of electronic systems applications. Our products are marketed
primarily to original equipment manufacturers (OEMs) who sell products targeted
for applications in four major markets, which are:

     - Consumer Products;

     - Communications;

     - Storage Components; and

     - Storage Area Network Systems.

     In the Semiconductor segment, we use 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
standard products, as well as Redundant Array of Independent Disks (RAID) host
bus adapters and related products; and services. ASICs are designed for specific
applications defined by the customer, whereas standard products are for market
applications that we define. See also "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in Item 7 of Part II herein.

     We have developed methods of designing integrated circuits based on a
library of building blocks of industry-standard electronic functions,
interfaces, and protocols. Among these is our CoreWare design methodology. Our
advanced submicron manufacturing process technologies allow our customers to
combine one or more CoreWare library elements with memory and their own
proprietary logic to integrate a highly complex, system-level solution on a
single chip. (Our G10, G11, G12 and Gflx submicron process technologies are more
fully described in the section on Manufacturing below.) We have developed and
use complementary metal oxide semiconductor (CMOS) process technologies to
manufacture our integrated circuits.

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     In the SAN Systems segment, our enterprise storage systems are designed,
manufactured, and sold by our wholly owned subsidiary -- LSI Logic Storage
Systems, Inc. Our high-performance, highly scalable open storage area network
systems and storage solutions are available through leading original equipment
manufacturers, or OEMs, and a worldwide network of resellers. Products and
solutions distributed through these channels may exclude LSI Logic Storage
Systems' brand identification. When included, LSI Logic Storage Systems brand
identity may appear alone or in tandem with third-party brand identification.

     LSI Logic Corporation was incorporated in California on November 6, 1980,
and was reincorporated in Delaware on June 11, 1987. Our principal offices are
located at 1551 McCarthy Boulevard, Milpitas, California 95035, and our
telephone number at that location is (408) 433-8000. Our home page on the
Internet is at www.lsilogic.com.

BUSINESS STRATEGY

  SEMICONDUCTOR BUSINESS STRATEGY

     Our objective is to continue to be an industry leader in the design and
manufacture of highly integrated, complex integrated circuits and other
electronic components and system-level products that provide our customers with
silicon-based system-level solutions. To achieve this objective, our business
strategy includes the following key elements:

     - Target Growth Markets and Selected Customers.  We concentrate our sales
       and marketing efforts on leading OEM customers in targeted growth
       markets, led by the communications, consumer, storage components, and
       storage area network systems applications. Our engineering expertise is
       focused on developing technologies that will meet the needs of
       leading-edge customers in order to succeed in these market areas.

     - Emphasize CoreWare Methodology and System-on-a-Chip Capability.  Our
       CoreWare design methodology enables the integration of one or more
       pre-designed circuit elements with customer-specified elements and memory
       to create system capabilities on a single chip. This results in higher
       product functionality, higher performance, greater differentiation, and
       faster time to market. We also have used this design methodology to
       develop proprietary standard products.

     - Promote Highly Integrated Design and Manufacturing Technology.  We use
       proprietary and leading third-party electronic design automation, or EDA,
       software design tools. Our design tool environment is highly integrated
       with our manufacturing process requirements so that it will accurately
       simulate product performance. This reduces design time and project cost.
       We continually evaluate and, as appropriate, develop expertise with
       third-party EDA tools from leading and emerging suppliers of such
       products.

     - Provide Flexibility in Design Engineering.  We engage with customers of
       our semiconductor products under various arrangements whereby the extent
       of the engineering support we provide will be determined in accordance
       with the customer's requirements. For example, a customer may primarily
       use its own engineers for substantial development of its product design
       and retain our support for silicon-specific engineering work. We also
       enter into engineering design projects, including those on a "turn-key"
       basis.

     - Maintain High-Quality and Cost-Effective Manufacturing.  We operate our
       own manufacturing facilities in order to control our deployment of
       advanced wafer fabrication technology, our manufacturing costs, and our
       response to customer delivery requirements. We also use independent wafer
       foundry services when appropriate and may seek to fill unused capacity in
       our own foundries by offering such services to third parties. We perform
       substantially all of our packaging, assembly, and final test operations
       through subcontractors in Asia. Our production operations in Gresham,
       Oregon, and Tsukuba, Japan, and our assembly and test subcontractors in
       Asia are ISO-9002 certified, an important international measure for
       quality.

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     - Leverage Alliances with Key Partners.  We are continually seeking to
       establish relationships with key partners in a diverse range of
       semiconductor and storage-system technologies to promote new products,
       services, operating standards, and manufacturing capabilities and to
       avail ourselves of cost efficiencies that may be obtained through
       collaborative development.

     - Develop and Drive Industry Standards to Achieve Market Advantage.  We
       have been a leader in developing and promoting important industry
       standard architectures, functions, protocols, and interfaces. We believe
       that this strategy will enable us to quickly launch new standard-based
       products, allowing our customers to achieve time-to-market and other
       competitive advantages.

     - Operate Worldwide.  We market our products and engage with our customers
       on a worldwide basis through direct sales, marketing, and field technical
       staff and through independent sales representatives and distributors. Our
       network of design centers located in major markets allows us to provide
       customers with highly experienced engineers, to interact with customer
       engineering management and system architects, to develop designs for new
       products, and to provide continuing after-sale customer support.

     SAN SYSTEMS BUSINESS STRATEGY

     - Highly Leveraged Core Competencies.  In the SAN systems market, we
       leverage expertise used to develop our semiconductors, storage
       input/output components, storage management software, and storage systems
       in the development of scalable storage solutions. We use the full scope
       of our technical expertise to design and develop interoperable,
       easy-to-manage, leading price/performance products.

     - Modular Design Philosophy.  Our flexible approach to storage system
       design allows elements of a system to be configured and/or customized
       together or separately to meet customer requirements. Benefits to our
       customers include investment protection, reduced support costs, and a
       common management interface and features. This allows customers to start
       with pilot projects and later scale to full implementation.

     - Flexible Business Models.  Our strategy is to provide flexible,
       customizable solutions with room for value-added components, software,
       and services provided by the channel. Our modular product set allows OEMs
       and resellers to devise a solution to best meet their needs and to
       satisfy customers.

PRODUCTS AND SERVICES

  SEMICONDUCTOR PRODUCTS

     In our semiconductor components business, we design, manufacture and supply
ASICs, standard products, host adapter boards and host adapter boards software
to customers competing in global consumer, communications and storage markets.

     ASICs are semiconductors that are designed for a unique, customer-specified
applications. Standard products, which incorporate our intellectual property
building blocks, are sold directly to customers for incorporation into
system-level products. Both our ASICs and standard products are predominantly
designed and manufactured using our proprietary process technologies.

     Consumer Products.  For the consumer market, we offer a broad array of
products, including both application specific standard products and custom
solutions.

     Consumer standard products.  We design, develop, manufacture and sell
semiconductor devices, software and reference designs for digital video and
audio applications. We enable new digital video and audio applications. We are
focused on providing solutions into rapidly growing applications such as DVD
players, digital set-top boxes, cable modems, broadcast encoders, video editing
systems, as well as emerging applications such as DVD recorders, home servers,
residential gateways and personal video recorders.

     Consumer custom solutions.  We also design, manufacture and sell systems on
a chip (SoC) for consumer applications. We focus on consumer market segments
employing our intellectual property portfolio,

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design methodology and turnkey product offerings (including manufacturing,
assembly and test) to provide a complete solution. Our main focus is in the
video game console market. We plan to expand into digital cameras and
camcorders, portable digital audio and video, personal digital assistant
multimedia products and other emerging multimedia applications where an
effective standard solution is not available.

     In May 2001, LSI Logic acquired C-Cube Microsystems, Inc., a leader in
digital media processing for $893.7 million. The acquisition of C-Cube enhanced
the Company's presence in the worldwide cable modem, cable set-top box, DVD and
other major consumer markets in the semiconductor segment. In addition, the
acquisition enabled LSI Logic to have a strong market presence in the growing
China semiconductor market.

  Storage Components

     Our ASIC and standard product solutions to customers in worldwide storage
component markets make possible data storage and transmission between a host
computer and peripheral devices such as magnetic and optical disk drives,
scanners, printers, and disk and tape-based storage systems. We offer industry
leading standard products including product families in Fibre Channel, SCSI,
SCSI expanders, integrated circuits for motherboard or adapter applications,
host adapter boards, and software. Our storage components also include a product
family of PCI-RAID host adapters featuring IDE, SCSI and Fibre Channel
interfaces, along with software and utilities for storage configuration and
management. We also offer ASIC solutions to customers, who develop Fibre Channel
SAN switches and host adapters, storage systems, and hard disk drive and tape
peripherals. Our Fibre Channel offerings include the GigaBlaze high performance
2Gb/s FC transceiver and the Merlin family of high-performance Fibre Channel
protocol controllers.

     We provide tools, libraries, semiconductor processes and packaging products
that enable our OEM customers to reliably develop high-performance designs for
advanced computer systems. We provide a suite of MIPS cores and ARM processors,
in addition to industry-standard bus interface cores such as USB, IEEE 1394, and
PCI.

  Communications and ASIC Technology

     Reflecting that ASIC technology is the primary method of engagement for LSI
Logic in serving global communications markets, the Company in early 2002
announced the consolidation of its Communications business and its ASIC
technology and product development activities.

     Communications products.  We offer a blend of high-performance,
high-integration and low-power silicon solutions that are pivotal in development
of Internet infrastructure. We develop ASICs using ARM-based processor, digital
signal processor (DSP), high-speed transceiver and mixed-signal cores. LSI Logic
targets the following global communications markets: high speed metropolitan and
wide area networks (WAN), optical networking, wireless communications
infrastructure, wireless local area networks, home networking, residential
broadband gateways, and digital subscriber lines (DSL).

     We develop and market a portfolio of standard, high-speed communications
interfaces for our own standard products and as building block cores in
customer-specific ASIC designs. LSI Logic focuses on serving customers in the
Local Area Network (LAN) enterprise market, the emerging Metro sector and the
Wide Area Network (WAN) telecommunications market.

  ASIC Technology

     Our CoreWare design methodology offers a comprehensive design approach for
creating a system on a chip efficiently, predictably, and rapidly. Our CoreWare
libraries include industry standard, intellectual property building blocks. Our
emphasis on cell-based product lines reflects the market preference for use of
this methodology to develop advanced integrated circuits. Customers obtain
greater flexibility in the design of system-level products using our cell-based
technology. Our CoreWare cells are connected together electronically to form an
entire system on a single chip. These system-on-a-chip solutions can be used in
ASICs or standard products focused on the communications, consumer and storage
markets.

                                        4


     Our ASIC customers utilize our engineering design capabilities in a variety
of ways. Typically, the ASIC design process involves participation by both LSI
Logic and customer engineers.

     We engage our customers early in their new system product development
process and accept large design assignments where we share development costs
with the customer. We provide advice on the product design strategies to
optimize product performance and suitability for the targeted application. In
addition, our capabilities include support in the areas of architecture and
system-level design simulation, verification, and synthesis used in the
development of complex integrated circuits.

     Our software design tool environment supports and automatically performs
key elements of the design process from circuit concept to physical layout of
the circuit design. The design tool environment features a combination of
internally developed proprietary software and third-party tools that are highly
integrated with our manufacturing process requirements. The design environment
includes expanded interface capabilities with a range of third-party tools from
leading EDA vendors and features hardware/software co-verification capability.

     After completion of the ASIC engineering design effort, we produce and test
prototype circuits for shipment to the customer. We then begin volume production
of integrated circuits that have been developed through one or more of the
arrangements described above in accordance with the customer's quantity and
delivery requirements.

  SAN SYSTEMS PRODUCTS

     In the SAN Systems segment, we offer a broad line of network storage that
spans customer enterprises from workgroup to data center. Our product lines
range from intelligent controller and drive modules to complete storage systems.
These offerings allow our products to be integrated on a component basis or
aggregated into a complete storage solution, increasing OEM flexibility in
creating differentiated products. Modular products also allow our indirect
channel partners to customize solutions, bundling our products with value-added
components, software, and services.

     - SAN Storage.  Our MetaStor brand storage systems, distributed by
       StorageTek and LSI Logic sales representatives are based on highly
       available and scalable hardware and software components integrated into
       fully tested storage area networks for the enterprise market.

     - MetaStor E-Series.  The MetaStor E-Series storage systems for storage
       area networks combine fibre channel performance with our proprietary
       Multi-Pathing Architecture to deliver high performance for a wide variety
       of applications. Highly available and fully redundant dual-active
       controllers, efficiently managed with SANtricity Storage Manager
       software, differentiate our storage from that of our competitors.

     The MetaStor E-Series storage family supports all high-use operating
systems, including Windows NT, Solaris(TM), HP-UX, AIX, SGI, IRIX, NetWare and
Linux platforms. Our products allow customers to dynamically increase storage
capacity from 36 gigabytes (billions of information bytes) to as much as 39
terabytes (trillions of information bytes) per system. Customers can expand
storage to their computer applications, maintain redundant records and change
configurations even when their systems are operating. The result is a
growth-oriented, highly available, easy to manage system.

     - SANtricity Storage Manager Software.  This storage management software
       enables users to consolidate storage through the SANshare
       storage-partitioning feature. In addition, this software provides a
       single management interface and remote access capabilities, allowing
       centralized management of all MetaStor storage. An enhanced graphical
       user interface makes the software quite easy to use. Other features
       provide for automatic device discovery and one-button configuration.

     - Network-Attached Storage.  The MetaStor N-Series is a family of
       network-attached storage solutions that enables users to share files
       among a variety of hosts, regardless of operating systems, lowering the
       cost of ownership by consolidating storage and management functions in a
       single, open storage

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       environment. Features include multi-protocol support, a high-performance
       file system, hot recovery point-in-time copies, flexible backup
       solutions, and enterprise-level storage management.

     - Storage Virtualization.  The ContinuStor Director is an intelligent
       storage management system that provides storage virtualization,
       heterogeneous storage, and host support and local and remote mirroring
       capabilities. Storage Virtualization is an emerging method of managing
       storage without regard to its physical characteristics, enabling the
       interoperability of storage devices from different manufacturers in a
       more efficient manner. This generally results in a significant reduction
       of storage management complexity, improvements in capacity utilization
       and more cost-effective business continuance and disaster recovery
       implementations with respect to data storage.

     - Storage Controller Modules.  Designed from the chip-level up, our storage
       controller modules support both Ultra2 SCSI and Fibre Channel interfaces.
       Using LSI Logic ASICs, the controllers deliver superior performance for
       both high-transaction volumes and large data block workloads. Combined
       with our drive modules, each controller module manages scalable capacity
       up to 39 terabytes. Modules can either be rack-mounted or installed
       desk-side configurations. Other features include HotScale technology for
       dynamic system expansion and reconfiguration, redundant dual-active
       controllers and automatic fail-over for maximum data availability.

     - Storage Drive Modules.  Our storage drive modules increase storage
       capacity and performance as needs change. Drive modules use our chip
       capabilities to monitor power, temperature, and fans, and to relay
       information back to the controller. Advanced technology from industry
       disk drive vendors is integrated into the modules to maximize capacity
       and minimize floor space requirements.

     As a major open computing vendor, we deliver storage systems that operate
within the Windows NT, UNIX, Solaris, NetWare, and Linux operating-system
environments. These products are targeted at key data storage applications,
including:

     - Internet servers;

     - Electronic commerce;

     - Data warehousing;

     - On-line transaction processing;

     - Video delivery, editing and production; and

     - Migration of mission critical applications off mainframe computers.

     In 2001, LSI Logic Storage Systems, Inc. enhanced its entire product line
when it introduced the E4600, the E4600HPCx and SANtricity Storage Manager 8.0
software. These new products extend the range of applicability to better serve
market segments that demand the highest levels of connectivity, performance and
storage capacity.

     We offer a toll-free 24 hours-a-day, 7 days-a-week technical support
hotline for customers worldwide using the MetaStor line of network- and
server-attached enterprise storage systems. We also offer a number of flexible
services and support programs that allow customers to choose the level of
telephone and onsite support appropriate to their needs.

MARKETING AND DISTRIBUTION

  SEMICONDUCTOR MARKETING AND DISTRIBUTION

     The highly competitive semiconductor industry is characterized by rapidly
changing technology, short product cycles, and emerging standards. Our marketing
strategy requires that we accurately forecast trends in the evolution of product
and technology development. We must then act upon this knowledge in a timely
manner to develop competitively priced products offering superior performance.
As part of this strategy, we are active in the formulation and adoption of
critical industry standards that influence the design specifications

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of our products. Offering products with superior price and performance
characteristics is essential to satisfy the rapidly changing needs of our
customers in the dynamic communications, consumer and storage markets.

     Our semiconductor products and design services are primarily sold through
our network of direct sales and marketing, field engineering offices and sales
representatives located in North America, Europe, Japan, China and elsewhere in
Asia. Our sites are interconnected by means of advanced computer networking
systems that allow for the continuous, uninterrupted exchange of information
that is vital for the proper execution of our sales and marketing activities.
International sales are subject to risks common to export activities, including
governmental regulations, tariff increases and other trade barriers and currency
fluctuations.

     We rely primarily on direct sales and marketing, but we also work with
independent distributors in North America, Europe, Japan and elsewhere in Asia.
Some of our distributors possess engineering capabilities and design and
purchase both ASICs and standard products from us for resale to their customers.
Other distributors focus solely on the sale of standard products. Our agreements
with distributors generally grant limited rights to return standard product
inventory and obtain credits for price reductions applicable to standard
products held in inventory. We maintain appropriate reserves to account for
these factors. However, owing to the relatively small quantities of products
held in inventory by our distributors, we believe that these arrangements do not
result in material financial exposure for our company.

  SAN SYSTEMS MARKETING AND DISTRIBUTION

     SAN systems products are sold worldwide both on a direct basis to OEMs and
through indirect channels to end-users. The MetaStor brand of scalable SAN
systems is exclusively marketed through a worldwide network of value-added
resellers, system integrators and distributors. We closely manage these
relationships to meet the diverse needs of end-users. Our marketing efforts are
driven by an industry-wide trend toward the implementation of storage area
networks to maximize performance, availability and efficiency.

     Our direct sales force provides customized SAN systems solutions generally
to large, well-known manufacturers of computer equipment. Our product
development strategy focuses on implementing the latest storage technologies to
improve the performance of our hardware and software storage solutions. As a
pioneer in the development of redundant array of independent disks (RAID)
technology, and as a member of the Fibre Channel Industry Association and
Storage Networking Industry Association, we are continually driving industry
standards for fibre channel and SAN solutions.

     In January 2002, the Company and Storage Technology Corporation
(StorageTek) announced an alliance under which StorageTek will become the
worldwide master distributor of co-branded open storage products. Further, the
companies will market a full line of scalable, high performance, high
availability disk storage systems that will be engineered and manufactured by
LSI Logic Storage Systems and sold, installed and supported by StorageTek.

CUSTOMERS

     We seek to leverage our expertise in the fields of communications,
consumer, storage components and SAN systems by marketing our products and
services to market leaders. Our strategic-account focus is on larger, well-known
companies that produce high-volume products incorporating our semiconductors and
storage system products. We recognize that this strategy may result in increased
dependence on a limited number of customers for a substantial portion of our
revenues. It is possible that we will not achieve significant sales volumes from
one or more of the customers we have selected. While this could result in lower
revenues and higher unit costs owing to an under-utilization of our resources,
we believe this strategy provides us with the greatest opportunity to drive
further growth in sales and unit volumes.

     We operate in a rigorous competitive environment and our continued success
requires that we consistently develop and manufacture products that meet the
needs of our customers. There is no assurance that we will achieve significant
sales revenues from one or more of our strategic customers. This could result in
lower revenues for our company.

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     In 2001, Sony accounted for approximately 18% of our consolidated revenues.
No other customer accounted for greater than 10% of consolidated revenues.

MANUFACTURING

  SEMICONDUCTOR MANUFACTURING

     Our semiconductor manufacturing operations convert a design into packaged
silicon chips and support customer requirements for volume production.
Manufacturing begins with fabrication of custom-diffused silicon wafers. Layers
of metal interconnects are deposited onto the wafer and patterned using
customized photo masks. Wafers are then tested and cut into die. Die that pass
initial tests are then sent to the assembly process where the fabricated
circuits are assembled into plastic package or laminate substrate ball grid
array. The finished devices undergo additional testing and quality assurance
before shipment. Dedicated computer systems are used in this comprehensive
testing sequence. The test programs use the basic functional test criteria from
the design simulation. The customer specifies the functional test criteria for
ASIC circuits.

     We own and operate manufacturing operations in the United States, Japan,
and Hong Kong. In January 2002, we announced a restructuring of the Japan
manufacturing facility. In addition, we utilize external wafer foundries located
in Taiwan and Malaysia. We use high-performance CMOS process technologies in the
volume manufacture of our products. The production operations are fully
computer-integrated to increase efficiency and reduce costs.

     Semiconductor process technologies are identified in terms of the size of
channel length within the transistors, measured in millionths of a meter called
"microns." The measurement of the channel length is expressed in two ways:
effective electrical channel length and drawn gate length. The effective
electrical channel length is smaller than the drawn gate length. In this Report
on Form 10-K, we use the electrical effective channel length to identify our
process technologies.

     Our advanced submicron manufacturing processes are capable of producing
products with an effective electrical channel length within each transistor as
small as 0.13-micron in our G12 technology. Our 0.18-micron (G11 process
technology) allows up to 24 million usable gates on a single chip. Our G10
process technology is capable of producing 0.25-micron effective channel length
products. We have a joint development technology for Gflx, a new flexible
process technology capable of combining all of the system functions to create
totally new classes of products on a single chip. The Gflx technology is more
than twice as dense as the previous generation G12 process technology, allowing
designers to incorporate added functions onto a single chip. The 0.10-micron
effective channel length Gflx process technology offers 78 million usable logic
gates. These advanced process technologies allow for greater circuit density and
increased functionality on a single chip.

     A majority of our wafers are fabricated in our factories in Gresham, Oregon
and Tsukuba, Japan. The rest of the wafers are manufactured at our external
wafer foundries in Taiwan and Malaysia. The factories in Gresham and Tsukuba are
ISO-9002 certified -- an important internationally recognized standard for
quality. In July 1999, the older of the two Tsukuba factories, which produced
0.38-micron products, was closed after eleven years of service. This action was
taken as part of a comprehensive restructuring and cost reduction plan commenced
in 1998. In January 2002, the Company announced a restructuring of the Japan
manufacturing facility. In October 2001, the manufacturing facility in Colorado
Springs, Colorado, which produced 0.65-micron, 0.54-micron and 0.25-micron
wafers, was closed after ten years of service. This action was taken as part of
a comprehensive restructuring and cost reduction plan that commenced in April
2001.

     Our newest manufacturing facility is located in Gresham, Oregon on 325
acres outside of Portland. This facility is equipped for advanced manufacturing
operations and is designed to accommodate our expansion requirements well into
the foreseeable future. The plant is equipped to produce eight-inch wafers
hosting products manufactured to the G10, G11, G12, and Gflx processes.

     On April 4, 2001, we announced a co-development and foundry supply
agreement with Taiwan Semiconductor Manufacturing Company Ltd. (TSMC). This
agreement is part of our strategy to "outsource," that is to procure a larger
portion of our wafer requirements from external sources. As a result of our

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joint development efforts with TSMC we anticipate purchasing, consistent with
our "outsourcing" strategy, such portion of our wafer volume requirements based
on the 0.13-micron process technology that we do not manufacture ourselves. In
addition, we anticipate being able to defer the need to expand our manufacturing
capacity for the 0.13-micron technology beyond the time when products designed
for that technology would begin volume production. We also anticipate
collaborating with TSMC on further advancement in wafer fabrication technology.

     Our fixed costs for manufacturing are high and are expected to remain high
because we must continually make significant capital expenditures and add new
advanced capacity in order to remain competitive. If demand for our products
does not absorb the additional capacity, the increase in fixed costs and
operating expenses related to increases in production capacity may result in a
material adverse impact on our operating results and financial condition.
(Additional risk factors are set forth in the Risk Factors section below.)

     We offer a wide range of packaging solutions for system-on-a-chip designs.
We have also developed a high-performance, high-density interconnect packaging
technology, known as flip chip, which essentially replaces the wires that
connect the edge of the die to a package with solder bumps spread over the
entire external surface of the die. This technology enables us to reach
exceptional performance and lead-count levels in packages required for process
technologies of 0.18 micron and below. We also offer a mini-ball grid array
package that features a smaller package size without sacrificing electrical and
thermal performance. We also offer a wide array of plastic wire-bond packaging
options.

     Final assembly (i.e., assembly in a plastic or laminate substrate package)
and test operations are conducted by our Hong Kong affiliate through independent
subcontractors in the Philippines, Malaysia, South Korea, Taiwan, and Hong Kong.
We also utilize subcontractors in Thailand for the assembly and test of our host
adapter boards.

     Both manufacturing and sales of our semiconductor products may be impacted
by political and economic conditions abroad. Protectionist trade legislation in
either the United States or foreign countries, such as a change in the current
tariff structures, export compliance laws or other trade policies, could
adversely affect our ability to manufacture or sell products in or into foreign
markets. We cannot guarantee that current arrangements with our component
suppliers or assembly, testing and packaging subcontractors will continue, and
we do not maintain an extensive inventory of assembled components. The failure
to secure assembly and test capacity could affect our sales and result in a
material adverse impact on our operating results and financial condition.

     Development of advanced manufacturing technologies in the semiconductor
industry frequently requires that critical selections be made as to those
vendors from which essential equipment (including future enhancements) and
after-sales services and support will be purchased. Some of our equipment
selections require that we procure certain specific types of materials or
components specifically designed to our specifications. Therefore, when we
implement specific technology choices, we may become dependent upon certain
sole-source vendors. Accordingly, our capability to switch to other technologies
and vendors may be substantially restricted and a switch may involve significant
expense and could delay our technology advancements and decrease manufacturing
capabilities.

     The semiconductor equipment and materials industries also include a number
of vendors that are relatively small and have limited resources. Several of
these vendors supply us with equipment and/or services. We do not have long-term
supply or service agreements with vendors of certain critical items, and
shortages could occur in various essential materials due to interruption of
supply or increased demand in the industry. Given the limited number of
suppliers of certain of the materials and components used in our products, if we
experience difficulty in obtaining essential materials in the future we cannot
be assured that alternative suppliers will be available to meet our needs. Such
disruptions could materially affect our operations, which could have a material
adverse impact on our operating results and financial condition.

     The primary raw materials used in the manufacturing of semiconductors
include raw wafers and certain chemicals used in the processing of
semiconductors. The raw wafers are obtained primarily from suppliers in Japan
and their U.S. subsidiaries, whereas other material inputs are obtained on a
local basis. Our operations

                                        9


also depend upon a continuing adequate supply of electricity, natural gas and
water. These energy sources have historically been available on a continuous
basis and in adequate quantities for our needs. However, given the recent power
shortage in California, it is possible that other areas of the country,
including Oregon, may experience similar shortages. An interruption in the
supply of raw materials or energy inputs for any reason would have an adverse
effect on our manufacturing operations.

     Our manufacturing facilities incorporate sophisticated computer integrated
manufacturing systems, which depend upon a mix of our proprietary software and
systems and software purchased from third parties. Failure of these systems
would cause a disruption in the manufacturing process and could result in a
delay in completion and shipment of products.

  SAN SYSTEMS MANUFACTURING

     The manufacturing of SAN systems products involves the assembly and testing
of components, including our semiconductors, which are then integrated into
final products.

     SAN systems product and manufacturing designs are highly modularized for
flexibility. Our manufacturing operations include Configure to Order and
Assemble to Order capabilities. These processes have been implemented in an
effort to reduce requisite lead times for the delivery of product.

     - US Manufacturing.  Our US manufacturing facility in Wichita, Kansas,
       assembles and tests high performance array controllers, rack-mount
       modules and complete storage systems.

     ISO-9001 certification at our Kansas manufacturing facility has been
maintained since April 1992. This facility is currently certified ISO 9001:2000
compliant as of October 2001. Product quality is achieved through employee
training, automated testing, and sample auditing. Supply line management extends
quality through the component and subassembly supplier base with continuous
reporting and supplier/product qualification programs.

     - European Manufacturing.  The Company maintains a manufacturing facility
       in Cork, Ireland through an agreement with Flextronics International Ltd.
       This facility is capable of assembly and testing of high performance
       array controllers, rack-mount modules and complete storage systems.

     The Irish site was established to provide flexibility in satisfying
European demand and to serve as a backup site in the event natural or human-made
disasters affect the manufacturing capacity of the Wichita, Kansas facility. The
Irish site is certified as ISO 9001:2000 compliant as of December 2001.

     Our SAN systems manufacturing operations are based primarily on an
integrated Enterprise Resource Planning (ERP) manufacturing application system
purchased from a third party. This ERP system is augmented with several of our
proprietary software tools that support the production process through automated
product configuration and automated electronic testing. Failure of these systems
would cause a disruption in the manufacturing process and could result in delays
of product shipments and/or customer billings.

     Our manufacturing facility in Wichita, Kansas depends upon a continuous
supply of electricity from a single utility provider. Any natural or manmade
disruptions could materially affect our operating results and financial
condition.

BACKLOG

  SEMICONDUCTOR BACKLOG

     In the Semiconductor segment, we generally do not have long-term volume
purchase contracts with our customers. Instead, customers place purchase orders
that are subject to acceptance by us. The timing of the design activities for
which we receive payment and the placement of orders included in our backlog at
any particular time is generally within the control of the customer. For
example, there could be a significant time lag between the commencement of
design work and the delivery of a purchase order for the units of a developed
product. Also, customers may from time to time revise delivery quantities or
delivery schedules to

                                        10


reflect their changing needs. For these reasons, our backlog as of any
particular date is not a meaningful indicator of future sales.

  SAN SYSTEMS BACKLOG

     In the SAN Systems segment, our large customers who are original equipment
manufacturers place orders that are subject to acceptance by us in accordance
with their requirements and our delivery lead time capabilities. In our reseller
channel, we typically receive requests for product to be delivered within two
weeks or less. Accordingly, our backlog as of any particular date is not a
meaningful indicator of future sales.

COMPETITION

  SEMICONDUCTOR COMPETITORS

     The semiconductor industry is intensely competitive and characterized by
constant technological change, rapid product obsolescence, evolving industry
standards and price erosion. Many of our competitors are larger, diversified
companies with substantially greater financial resources. Some of these also are
customers who have internal semiconductor design and manufacturing capacity. We
also compete with smaller and emerging companies whose strategy is to sell
products into specialized markets or to provide a portion of the products and
services that we offer.

     Our major competitors include large domestic companies such as IBM
Corporation, Agere Systems, Inc., Texas Instruments, Inc., and Agilent
Technologies, Inc. Other competitors in strategic markets include Adaptec, Inc.,
QLogic Corporation, PMC-Sierra, Inc., Broadcom Corporation, and Conexant
Systems, Inc.

     We also face competition from certain large foreign corporations, including
Philips Electronics, N.V., ST Microelectronics, S.A., and Toshiba Corporation.

     The principal competitive factors in the industry include:

     - design capabilities;

     - differentiating product features;

     - product performance characteristics;

     - time to market;

     - price;

     - manufacturing processes; and

     - utilization of emerging industry standards.

     We believe that we presently compete favorably with respect to these
factors. It is possible, however, that other custom design solutions will be
developed by our competitors that could have a material adverse impact on our
competitive position. Our competitors may also decide from time to time to
aggressively lower prices of products that compete with us in order to sell
related products or achieve strategic goals. Strategic pricing by competitors
can place strong pricing pressure on our products in certain transactions,
resulting in lower selling prices and lower gross profit margins for those
transactions.

     The markets into which we sell our semiconductor products are subject to
severe price competition. We expect to continue to experience declines in the
selling prices of our semiconductor products over the life cycle of each
product. In order to offset or partially offset declines in the selling prices
of our products, we must continue to reduce the costs of products through
product design changes, manufacturing process changes, and yield improvements.
We do not believe that we can continually achieve cost reductions that fully
offset the price declines of our products, and therefore gross profit margin
percentages will generally decline for existing products over their life cycles.

                                        11


     We are increasingly emphasizing our CoreWare design methodology and
system-on-a-chip capability. Competitive factors that are important to the
success of this strategy include:

     - selection, quantity and quality of our CoreWare library elements;

     - our ability to offer our customers systems level expertise; and

     - quality of software to support system-level integration.

     Although there are other companies that offer similar types of products and
related services, we believe that we currently compete favorably with those
companies. However, competition in this area is increasing, and there is no
assurance that our CoreWare methodology approach and product offerings will
continue to receive market acceptance. Customers in our targeted markets
frequently require system-level solutions. Our ability to deliver complete
solutions may also require that we succeed in obtaining licenses to necessary
software and integrating this software with our semiconductors.

  SAN SYSTEMS COMPETITORS

     The SAN systems market is characterized by many of the same pressures found
in the semiconductor industry. We believe that important competitive factors in
the storage-systems market include the following:

     - product performance and price;

     - support for new industry and customer standards;

     - scalability;

     - interoperability with other network devices;

     - features and functionality;

     - availability;

     - reliability, technical service, and support;

     - quality of system integration;

     - existence and accessibility of differentiating features; and

     - quality and availability of supporting software.

     Our failure to compete successfully with respect to any of these or other
factors could have a material adverse effect on our results of operations and
financial condition. Our SAN systems products compete primarily with products
from independent storage providers such as EMC Corporation, Hitachi Data Systems
Corporation and MTI Technology Corporation. In addition, many of our current and
potential customers in this market have internal storage divisions that produce
products that compete directly or indirectly with our storage-system products.
There is no assurance that these customers, which include Hewlett-Packard
Company, IBM Corporation, Sun Microsystems, Inc., Silicon Graphics and NCR, will
continue to purchase our storage systems products.

PATENTS, TRADEMARKS AND LICENSES

     The Company has filed a number of patent applications and currently holds
numerous patents, expiring from 2002 to 2021, relating to certain of our
products and technologies in both the Semiconductor and the SAN Systems
segments. In both segments, we also maintain trademarks for certain of our
products and services and claim copyright protection for certain proprietary
software and documentation. Patents, trademarks, and other forms of protection
for our intellectual property are important, but we believe our future success
principally depends upon the technical competence and creative skills of our
personnel.

     In the Semiconductor segment, we also protect our trade secret and other
proprietary information through agreements with our customers, suppliers,
employees, and consultants and through other security measures. We have entered
into certain cross-license agreements that generally provide for the
non-exclusive

                                        12


licensing of rights to design, manufacture, and sell products and, in some
cases, for cross-licensing of future improvements developed by either party.

     We continue to expand our portfolio of patents and trademarks. We offer a
staged incentive to engineers to identify, document and submit invention
disclosures. We have developed an internal review procedure to maintain a high
level of disclosure quality and to establish priorities and plans for filings
both in the United States and abroad. The review process is based solely on
engineering and management judgment, with no assurance that a specific filing
will issue, or if issued, will deliver any lasting value to us. There is no
assurance that the rights granted under any patents will provide competitive
advantages to us or will be adequate to safeguard and maintain our proprietary
rights. Moreover, the laws of certain countries in which our products are or may
be manufactured or sold may not protect our products and intellectual property
rights to the same extent as the U.S. legal system.

     As is typical in the high technology industry, from time to time we have
received communications from other parties asserting that certain of our
products, processes, technologies or information infringe upon their patent
rights, copyrights, trademark rights or other intellectual property rights. We
regularly evaluate such assertions. In light of industry practice, we believe
with respect to existing or future claims that any licenses or other rights that
may be necessary can generally be obtained on commercially reasonable terms.
Nevertheless, there is no assurance that licenses will be obtained on acceptable
terms or that a claim will not result in litigation or other administrative
proceedings.

     In the SAN Systems segment, we own a portfolio of patents and patent
applications concerning a variety of storage technologies. We also maintain
trademarks for certain of our products and services and claim copyright
protection for certain proprietary software and documentation. Similar to the
Semiconductor segment, we protect our trade secrets and other proprietary
information through agreements and other security measures, and have implemented
internal procedures to identify patentable inventions and pursue protection in
selected jurisdictions.

     Please see Item 3, Legal Proceedings for information regarding pending
patent litigation against LSI; please also refer to the additional risk factors
set forth in the Risk Factors section; and Note 12 of the Notes to Consolidated
Financial Statements for additional information.

RESEARCH AND DEVELOPMENT

     Our industry is characterized by rapid changes in products, design tools,
and process technologies. We must continue to improve our existing products,
design-tool environment and process technologies and to develop new ones in a
cost-effective manner to meet changing customer requirements and emerging
industry standards. If we are not able to successfully introduce new products,
design tools and process technologies or to achieve volume production of
products at acceptable yields using new manufacturing processes, there could be
a material adverse impact on our operating results and financial condition.

     We operate research and development facilities in California, Colorado,
Oregon and Kansas. The following table shows our expenditures on research and
development activities for each of the last three fiscal years (in thousands).



YEAR                                                         AMOUNT    PERCENT OF REVENUE
- ----                                                        --------   ------------------
                                                                 
2001......................................................  $503,108           28%
2000......................................................  $378,936           14%
1999......................................................  $297,554           14%


     Research and development expenses primarily consist of salaries and related
costs of employees engaged in ongoing research, design and development
activities and subcontracting costs.

                                        13


WORKING CAPITAL

     Information regarding our working capital practices is incorporated herein
by reference from Item 7 of Part II hereof under the heading "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Financial Condition and Liquidity".

FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS

     This information is included in Note 11 ("Segment Reporting") of Notes to
Financial Statements and Supplementary Data, which information is incorporated
herein by reference to Item 8 of Part II hereof.

ENVIRONMENTAL REGULATION

     Federal, state and local regulations, in addition to those of other
nations, impose various environmental controls on the use and discharge of
certain chemicals and gases used in semiconductor processing. Our facilities
have been designed to comply with these regulations, and we believe that our
activities conform to current environmental regulations. However, increasing
public attention has been focused on the environmental impact of electronics and
semiconductor manufacturing operations. While to date we have not experienced
any material adverse impact on our business from environmental regulations, we
cannot assure you that such regulations will not be amended so as to impose
expensive obligations on us in the future. In addition, violations of
environmental regulations or impermissible discharges of hazardous substances
could result in the necessity for the following actions:

     - additional capital improvements to comply with such regulations or to
       restrict discharges;

     - liability to our employees and/or third parties; and/or

     - business interruptions as a consequence of permit suspensions or
       revocations or as a consequence of the granting of injunctions requested
       by governmental agencies or private parties.

EMPLOYEES

     As of December 31, 2001, we had 6,737 full-time employees.

     In January 2002, the Company announced a series of restructuring actions to
tailor the Company to its current lower level of revenues. These actions
included reducing the worldwide workforce by approximately 1,400 positions or 20
percent of the Company's workforce.

     Our future success depends upon the continued service of our key technical
and management personnel and on our ability to continue to attract and retain
qualified employees, particularly those highly skilled design, process, and test
engineers involved in the manufacture of existing products and the development
of new products and processes. We currently have favorable employee relations,
but the competition for such personnel is intense, and the loss of key employees
or the inability to hire such employees when needed could have a material
adverse input on our business and financial condition.

SEASONALITY

     The Company's business is largely focused on the communications and
consumer products markets. As a result, the Company's results may follow a
seasonal pattern, with stronger growth in the second half of the year,
reflecting the buying patterns of the Company's customers.

                                        14


                                  RISK FACTORS

     Keep these risk factors in mind when you read "forward-looking" statements
elsewhere in this Form 10-K and in the documents incorporated herein by
reference. These are statements that relate to our expectations for future
events and time periods. Generally, the words, "anticipate," "expect," "intend'
and similar expressions identify forward-looking statements. Forward-looking
statements involve risks and uncertainties, and actual results could differ
materially from those anticipated in the forward-looking statements.

     We operate in a cyclical industry and a general economic downturn may
reduce our revenues.  The semiconductor industry is cyclical in nature and is
characterized by wide fluctuations in product supply and demand. In 2001, the
economic growth in the United States slowed significantly, which in turn, led to
a severe downturn in the semiconductor industry. During a period of industry
overcapacity, profitability can drop sharply as factory utilization declines and
high fixed costs of operating wafer fabrication facilities are spread over a
lower net revenue base. The Company's overall business bottomed in 2001 and the
Company is on track to restore profitability in the near future. However, any
additional terrorist activities may adversely affect the U.S. economy. In turn,
we may face interruption of production and services due to increased security
measures in light of recent terrorist activities, which may affect the recovery
of the Company in 2002 and adversely impact its operating results and financial
condition.

     Our product and process development activities occur in a highly
competitive environment characterized by rapid technological change.  The
Semiconductor and SAN Systems segments in which we conduct business are
characterized by rapid technological change, short product cycles and evolving
industry standards. We believe our future success depends, in part, on our
ability to improve on existing technologies and to develop and implement new
ones in order to continue to reduce semiconductor chip size and improve product
performance and manufacturing yields. We must also be able to adopt and
implement emerging industry standards and to adapt products and processes to
technological changes. If we are not able to implement new process technologies
successfully or to achieve volume production of new products at acceptable
yields, our operating results and financial condition will be adversely
impacted.

     In addition, we must continue to develop and introduce new products that
compete effectively on the basis of price and performance and that satisfy
customer requirements. We continue to emphasize engineering development and
acquisition of CoreWare building blocks and integration of our CoreWare
libraries into our design capabilities. Our cores and standard products are
intended to be based upon industry standard functions, interfaces and protocols
so that they are useful in a wide variety of systems applications. Development
of new products and cores often requires long-term forecasting of market trends,
development and implementation of new or changing technologies and a substantial
capital commitment. We cannot assure you that the cores or standard products
that we select for investment of our financial and engineering resources will be
developed or acquired in a timely manner or will enjoy market acceptance.

     We operate highly complex and costly manufacturing facilities.  The
manufacture and introduction of our products is a complicated process. We
confront challenges in the manufacturing process that require us to:

     - maintain a competitive manufacturing cost structure;

     - implement the latest process technologies required to manufacture new
       products;

     - exercise stringent quality control measures to ensure high yields;

     - effectively manage the subcontractors engaged in the test and assembly of
       products; and

     - update equipment and facilities as required for leading edge production
       capabilities.

     We do not control the timing or size of orders for our products.  We
generally do not have long-term volume production contracts with our customers.
There is a risk that we will be unable to meet sudden increases in demand beyond
our current manufacturing capacity, which may result in additional capital
expenditures and production costs. On the other hand, order volumes below
anticipated levels may result in the under-utilization of our manufacturing
facilities, resulting in higher per unit costs, which could adversely affect our
operating results and financial condition.

                                        15


     Our manufacturing facilities are subject to disruption.  Our newest wafer
fabrication site located in Gresham, Oregon is a highly complex,
state-of-the-art facility. Anticipated production rates depend upon the reliable
operation and effective integration of a variety of hardware and software
components. There is no assurance that all of these components will be fully
functional or successfully integrated on time or that the facility will achieve
the forecasted yield targets. The capital expenditures required to bring the
facility to full operating capacity may be greater than we anticipate and result
in lower margins.

     Operations at any of our primary manufacturing facilities, or at any of our
test and assembly subcontractors, may be disrupted for reasons beyond our
control, including work stoppages, fire, earthquake, floods or other natural
disasters. Recently, California experienced a power shortage. Any future
shortages could subject us to electrical "blackouts" or other unscheduled
interruption of electrical power.

     We outsource a substantial portion of wafers manufactured.  The Company has
developed outsourcing arrangements for the manufacture of some of its products
based on a process technology that the Company does not possess. There is no
assurance that the third party manufacturer will be able to produce and deliver
wafers that meet the Company's specifications or that it will be able to provide
successfully the process technology it has committed. If the third party is not
able to deliver products and process technology on a timely and reliable basis,
the Company's results of operations could be adversely affected.

     We have significant capital requirements to maintain and grow our
business.  In order to remain competitive, we must continue to make significant
investments in new facilities and capital equipment. During 2002, we anticipate
that we will spend less than $200 million on capital assets and that we will be
required to spend potentially larger amounts thereafter. In addition, the high
level of capital expenditures required to remain competitive results in
relatively high fixed costs. If demand for our products does not absorb
additional capacity, the fixed costs and operating expenses related to increases
in our production capacity could have a material adverse impact on our operating
results and financial condition.

     We finance our capital expenditure needs from operating cash flows, bank
financing and capital market financing. As of December 31, 2001, we had
convertible notes outstanding of approximately $1.3 billion. As of December 31,
2001, we have two operating leases financed by several commercial banks. We may
need to seek additional equity or debt financing from time to time, including
issuance of warrants and 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.

     We are exposed to fluctuations in foreign currency exchange rates.  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 do business in Europe and face risks associated with the Euro.  A new
European currency was implemented in January 1999 to replace the separate
currencies of eleven western European countries, and beginning in January 2002,
was the only effective currency in these countries. This has required changes in
our operations as we modified systems and commercial arrangements to deal with
the new currency.

     We procure parts and raw materials from limited domestic and foreign
sources.  We use a wide range of parts and raw materials in the production of
our semiconductors, host adapter boards, and storage systems, including silicon
wafers, processing chemicals, and electronic and mechanical components. We do
not generally have guaranteed supply arrangements with our suppliers and do not
maintain an extensive inventory of parts and materials for manufacturing. We
purchase some of these parts and materials from a limited number of vendors and
some from a single supplier. On occasion, we have experienced difficulty in
securing an adequate volume and quality of parts and materials. There is no
assurance that, if we have difficulty in obtaining parts or materials in the
future, alternative suppliers will be available, or that these suppliers will
provide parts and materials in a timely manner or on favorable terms. As a
result, we may be adversely affected by delays in new and current product
shipments. If we cannot obtain adequate materials for

                                        16


manufacture of our products, there could be a material adverse impact on our
operating results and financial condition.

     We operate in highly competitive markets.  We compete in markets that are
intensely competitive and that exhibit both rapid technological change and
continual price erosion. Our competitors include many large domestic and foreign
companies that have substantially greater financial, technical and management
resources than we do. Several major diversified electronics companies offer ASIC
products and/or other standard products that are competitive with our product
lines. Other competitors are specialized, rapidly growing companies that sell
products into the same markets that we target. Some of our large customers may
develop internal design and production capabilities to manufacture their own
products, thereby displacing our products. There is no assurance that the price
and performance of our products will be superior relative to the products of our
competitors. As a result, we may experience a loss of competitive position that
could result in lower prices, fewer customer orders, reduced revenues, reduced
gross profit margins and loss of market share. To remain competitive, we
continually evaluate our worldwide operations, looking for additional cost
savings and technological improvements.

     Our future competitive performance depends on a number of factors,
including our ability to:

     - properly identify target markets;

     - accurately identify emerging technological trends and demand for product
       features and performance characteristics;

     - develop and maintain competitive products;

     - enhance our products by adding innovative features that differentiate our
       products from those of our competitors;

     - bring products to market on a timely basis at competitive prices;

     - respond effectively to new technological changes or new product
       announcements by others;

     - adapt products and processes to technological changes; and

     - adopt and/or set emerging industry standards.

     We may not meet our design, development and introduction schedules for new
products or enhancements to our existing and future products. In addition, our
products may not achieve market acceptance or sell at favorable prices.

     We are dependent on a limited number of customers.  We are increasingly
dependent on a limited number of customers for a substantial portion of revenues
as a result of our strategy to focus our marketing and selling efforts on
select, large-volume customers. One customer represented 18% of our total
consolidated revenues for the year ended December 31, 2001. In the Semiconductor
segment, one customer represented 21% of total Semiconductor revenues for the
year ended December 31, 2001. In the SAN Systems segment, there were two
customers with revenues representing 21% each, and one customer with revenues
representing 13% of total SAN Systems revenues for the year ended December 31,
2001.

     Our operating results and financial condition could be affected if:

     - we do not win new product designs from major customers;

     - major customers reduce or cancel their existing business with us;

     - major customers make significant changes in scheduled deliveries; or

     - there are declines in the prices of products that we sell to these
       customers.

     We utilize indirect channels of distribution over which we exercise limited
control.  We derive a material percentage of product revenues from independent
reseller and distributor channels. Our financial results could be adversely
affected if our relationship with these resellers or distributors were to
deteriorate or if the financial condition of these resellers or distributors
were to decline. Given the current economic environment, the risk of

                                        17


distributors going out of business is significantly increased. In addition, as
our business grows, we may have an increased reliance on indirect channels of
distribution. There can be no assurance that we will be successful in
maintaining or expanding these indirect channels of distribution. This could
result in the loss of certain sales opportunities. Furthermore, the partial
reliance on indirect channels of distribution may reduce our visibility with
respect to future business, thereby making it more difficult to accurately
forecast orders.

     Our Company operations are affected by cyclical fluctuations.  The
Semiconductor and SAN Systems segments in which we compete are subject to
cyclical fluctuations in demand. In 2001, we experienced declines in sales or
the prices of our products as a result of the following:

     - rapid technological change, product obsolescence, and price erosion in
       our products;

     - maturing product cycles in our products or products sold by our
       customers;

     - increases in worldwide manufacturing capacity for semiconductors,
       resulting in declining prices; reduced product demand;

     - excess inventory within the supply chain; and

     - decline of the United States and worldwide economy, causing declines in
       our product markets or the markets of our suppliers and customers.

     The semiconductor industry has in the past experienced periods of rapid
expansion of production capacity. Even when the demand for our products remains
constant, the availability of additional excess production capacity in the
industry creates competitive pressure that can degrade pricing levels, which can
reduce revenues. Furthermore, customers who benefit from shorter lead times may
defer some purchases to future periods, which could affect our demand and
revenues for the short term. As a result, we may experience downturns or
fluctuations in demand in the future and experience adverse effects on our
operating results and financial condition.

     We engage in acquisitions and alliances giving rise to economic and
technological risks.  We intend to continue to make investments in companies,
products and technologies, either through acquisitions or investment alliances.
Acquisitions and investment activities often involve risks, including the need
to:

     - acquire timely access to needed capital for investments related to
       acquisitions and alliances;

     - conduct acquisitions that are timely relative to existing business
       opportunities;

     - successfully prevail over competing bidders for target acquisitions at an
       acceptable price;

     - invest in companies and technologies that contribute to the growth of our
       business;

     - retain the key employees of the acquired operation;

     - incorporate acquired operations into our business and maintain uniform
       standards, controls, and procedures; and

     - develop the capabilities necessary to exploit newly acquired
       technologies.

     Mergers and acquisitions of high-technology companies bear inherent risks.
No assurance can be given that our previous or future acquisitions will be
successful and will not materially adversely affect our business, operating
results or financial condition. We must manage any growth effectively. Failure
to manage growth effectively and to integrate acquisitions could adversely
affect our operating results and financial condition.

     There is uncertainty associated with our research and development
investments.  Our research and development activities are intended to maintain
and enhance our competitive position by utilizing the latest advances in the
design and manufacture of semiconductors and storage systems including
networking, communications and storage technologies. Technical innovations are
inherently complex and require long development cycles and the commitment of
extensive engineering resources. We must incur substantial research and
development costs to confirm the technical feasibility and commercial viability
of a product that in the end may not be successful. If we are not able to
successfully and timely complete our research and

                                        18


development programs, we may face competitive disadvantages. There is no
assurance that we will recover the development costs associated with such
programs or that we will be able to secure the financial resources necessary to
fund future research and development efforts.

     The price of our securities may be subject to wide fluctuations.  Our stock
has experienced substantial price volatility, particularly as a result of
quarterly variations in results, the published expectation of analysts, and as a
result of announcements by our competitors and us. In addition, the stock market
has experienced price and volume fluctuations that have affected the market
price of many technology companies, in particular, and that have often been
unrelated to the operating performance of such companies. In addition, the price
of our securities may also be affected by general global, economic and market
conditions, and the cost of operations in one or more of our product markets.
While we cannot predict the individual effect that these factors may have on the
price or our securities, these factors, either individually or in the aggregate,
could result in significant variations in price during any given period of time.
These fluctuations in our stock price also impact the price of our outstanding
convertible securities and the likelihood of the convertible securities being
converted into cash or equity. If we are required to redeem any of the
convertible securities for cash it may affect our liquidity position.

     Our global operations expose the Company to numerous international business
risks.  We have substantial business activities in Asia and Europe. Both
manufacturing and sales of our products may be adversely impacted by changes in
political and economic conditions abroad. A change in the current tax laws,
tariff structures, export laws, regulatory requirements or trade policies in
either the United States or foreign countries could adversely impact our ability
to manufacture or sell our products in foreign markets. Moreover, a significant
decrease in sales by our customers to end users in either Asia or Europe could
result in a decline in orders.

     We subcontract test and assembly functions to independent companies located
in Asia. A reduction in the number or capacity of qualified subcontractors or a
substantial increase in pricing could cause longer lead times, delays in the
delivery of products to customers, or increased costs.

     The high technology industry in which we operate is prone to intellectual
property litigation.  Our success is dependent in part on our technology and
other proprietary rights, and we believe that there is value in the protection
afforded by our patents, patent applications and trademarks. However, the
industry is characterized by rapidly changing technology and our future success
depends primarily on the technical competence and creative skills of our
personnel, rather than on patent and trademark protection.

     As is typical in the high technology industry, from time to time we have
received communications from other parties asserting that certain of our
products, processes, technologies or information infringe upon their patent
rights, copyrights, trademark rights or other intellectual property rights. We
regularly evaluate such assertions. In light of industry practice, we believe
with respect to existing or future claims that any licenses or other rights that
may be necessary can generally be obtained on commercially reasonable terms.
Nevertheless, there is no assurance that licenses will be obtained on acceptable
terms or that a claim will not result in litigation or other administrative
proceedings. Resolution of whether the Company's product or intellectual
property has infringed on valid rights held by others could have a material
adverse effect on the Company's financial position or results of operation and
may require material changed in production processes and products

     See Item 3 "Legal Proceedings" contained in Part I of this Report.

     We must attract and retain key employees in a highly competitive
environment.  Our employees are vital to our success and our key management,
engineering and other employees are difficult to replace. We do not generally
have employment contracts with our key employees. We do, however, maintain key
person life insurance for one of our employees. The expansion of high technology
companies in Silicon Valley, Colorado, Oregon and elsewhere where we operate our
business has increased demand and competition for qualified personnel, and
despite the economic slowdown, competition for these personnel is intense. Our
continued growth and future operating results will depend upon our ability to
attract, hire and retain significant numbers of qualified employees.

                                        19


     See also the Critical Accounting Policies contained in Part II, Item 7 of
the Management's Discussion and Analysis of Financial Condition and Results of
Operations.

ITEM 2.  PROPERTIES

     The Company's Milpitas facilities are leased and contain the Company's
corporate executive headquarters (for both the Semiconductor segment and the SAN
Systems segment), administration and engineering offices. The Company maintains
leased facilities in Fremont California, housing engineering offices, logistics
and warehouses.

     The Company owns the land and buildings housing its manufacturing
facilities for the Semiconductor segment in Gresham, Oregon, Tsukuba, Japan,
Fort Collins, Colorado, and owns the manufacturing control, assembly and test
facilities in Tsuen Wan, Hong Kong.

     In April 2001, the Company announced the closure of its Colorado Springs
fabrication facility in August 2001. In May 2001, the Company entered into a
definitive agreement to sell the facility to a third party. On August 1, 2001,
the Company announced the termination of the agreement to sell the facility. The
Company closed the facility in October 2001 and intends to dispose the assets
within the next 12 months.

     In September 2001, the Company announced the consolidation of its U.S.
manufacturing operations at Gresham, Oregon, and the transfer of process
research and development from Santa Clara, California, to Gresham, Oregon. As a
result, the Company closed the Santa Clara manufacturing facility. The lease for
this facility will expire in 2003. The Company does not plan on subleasing this
facility at this time.

     In the SAN Systems segment, the Company owns the manufacturing and
executive offices site in Wichita, Kansas.

     In addition, we maintain leased sales and engineering offices, regional
office space for our field sales, marketing and design center offices for both
our Semiconductor segment and our SAN Systems segment at various locations in
North America, Europe, Japan and elsewhere in Asia. We also maintain design
centers at various distributor locations. We also maintain leased executive
offices, design centers and sales offices in Bracknell, UK and Tokyo, Japan.
Leased facilities described above are subject to operating leases that expire in
2002 through 2011. (See Note 12 of Notes to Consolidated Financial Statements.)

     We have plans to acquire additional equipment for some of the above
facilities, but we believe that our existing facilities and equipment are well
maintained, in good operating condition, suitable for our operations and are
adequate to meet our current requirements.

ITEM 3.  LEGAL PROCEEDINGS

     In late 1995, a lawsuit was filed by certain former shareholders of our
Canadian subsidiary ("LSI Canada") in the Court of Queen's Bench of Alberta,
Judicial District of Calgary (the "Court") in which the question of LSI Canada's
value at September 7, 1995 is to be determined. At present, parties representing
approximately 580,000 shares are contesting the value of $4.00 (Canadian) that
was paid to the other former shareholders of LSI Canada at the time all shares
of LSI Canada not then owned by the Company were acquired by the Company.
Following a hearing held in March 2001, the Court dismissed the motion of the
former shareholders that challenged the proprietary of the fair value
proceedings initiated by LSI Canada and the jurisdiction of the Court to
adjudicate the matter. In addition, the Court ruled that the portions of the
application of the former shareholders to initiate a claim based upon
allegations that our actions and certain named (former) directors and a (former)
officer of LSI Canada were oppressive of the rights of minority shareholders of
LSI Canada were to be struck and the balance of the claims were stayed. The
Court also directed all of the litigants to recommence preparation for trial in
the fair value proceeding and advised the litigants of the Court's intention to
schedule a date for trial of that matter as soon as practicable. While we cannot
give any assurances regarding the resolution of these matters, we believe that
the final outcome will not have a material adverse effect on our consolidated
results of operations or financial condition. No assurance can be given,
however, that these matters will be resolved without our becoming obligated to
make payments

                                        20


or to pay other costs to the opposing parties, with the potential for having an
adverse effect on our financial position or results of operations.

     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 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. In September 1999, we 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. In December 2001, the court held a
hearing on Cypress Semiconductor's and plaintiff's cross-motions for summary
judgment with respect to the 4,390,586 patent. In February 2002, the court
denied Cypress Semiconductor's motion for summary judgment. The court also
granted the plaintiff's cross motion in part with respect to Cypress
Semiconductor and denied the cross-motion with respect to all other defendants.
These activities are ongoing, and as yet, no trial date has been set. While we
cannot make any assurance regarding the eventual resolution of this matter, we
do not believe it will have a material adverse effect on our consolidated
results of operations or financial condition.

     U.S. Philips Corporation, a subsidiary of Royal Philips Electronics of
Netherlands, 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.
While we cannot make any assurance regarding the eventual resolution of this
matter, we do not believe it will have a material adverse effect on our
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 position.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     Not applicable.

EXECUTIVE OFFICERS OF THE COMPANY

     The executive officers of the Company, who are elected by and serve at the
discretion of the Board of Directors, are as follows:



NAME                              AGE                      POSITION
- ----                              ---                      --------
                                  
Wilfred J. Corrigan.............  64    Chairman and Chief Executive Officer
John D'Errico...................  58    Executive Vice President, Storage Components
Thomas Georgens.................  42    Executive Vice President, SAN Systems
Jon R. Gibson...................  54    Vice President, Human Resources
Bryon Look......................  48    Executive Vice President and Chief Financial
                                        Officer
W. Richard Marz.................  58    Executive Vice President, Communications & ASIC
                                        Technology
David G. Pursel.................  56    Vice President, General Counsel and Secretary
Giuseppe Staffaroni.............  50    Executive Vice President, Consumer Products
Frank A. Tornaghi...............  47    Executive Vice President, Worldwide Sales
Joseph M. Zelayeta..............  55    Executive Vice President, Worldwide Operations


     Mr. Corrigan has been associated with the Company in his present position
for more than the past five years.

                                        21


     John D'Errico was named Executive Vice President, Storage Components in
August 2000. From August 1998 to August 2000, he was Vice President, Colorado
Operations. Mr. D'Errico joined us in 1984 and has held various senior
management and executive positions at our manufacturing facilities in the U.S.
and Japan. Mr. D'Errico served as Vice President and General Manager, Pan-Asia
from April 1997 to August 1998, and Vice President, JSI from July 1994 to April
1997.

     Thomas Georgens was named Executive Vice President, SAN Systems, in
November 2000. In August 1998, upon the acquisition of Symbios, Inc., a storage
company, he was named Senior Vice President and General Manager, SAN Systems.
Mr. Georgens joined Symbios in 1996, where he served as Vice President and
General Manager of Storage Systems until its acquisition by LSI Logic.

     Jon Gibson was named Vice President, Human Resources in November, 2001. He
joined LSI in September 1984, as Employee Relations Manager. Mr. Gibson was
named Director of Human Resources in October 1987. From March 1999 until
November 2001, Mr. Gibson served as Senior Director of Human Resources.

     Bryon Look was named Executive Vice President and Chief Financial Officer
in November 2000. Mr. Look joined us in March 1997 as Vice President, Corporate
Development and Strategic Planning. Prior to joining LSI, during a 21-year
career at Hewlett-Packard Company, a computer company, he held a variety of
management positions in finance and research and development, with the most
recent position being Manager of Business Development for Hewlett-Packard's
Corporate Development department.

     W. Richard Marz joined the Company in September 1995 as Senior Vice
President, North American Marketing and Sales, and was named Executive Vice
President, Geographic Markets in May 1996, a position he held until July, 2001.
In July 2001, he was named Executive Vice President, ASIC Technology. In January
2002, he was named Executive Vice President, Communications and ASIC Technology.

     David G. Pursel was named Vice President, General Counsel and Secretary in
June 2000. He joined LSI Logic in February 1996 as Associate General Counsel,
Chief Intellectual Property Counsel, and Assistant Secretary.

     Giuseppe Staffaroni was named Executive Vice President, Consumer Products
in January 2002. Prior to that he was named Executive Vice President Broadband
Communications Group, in November 2000, having served as Vice President and
General Manager of the Broadband Communications Group since November 1999. Mr.
Staffaroni joined LSI Logic in 1990 as Director of Engineering in the Company's
Milan, Italy design center. From January 1996 to October 1997, he was Director
of Marketing, and from November 1997 to October 1999, he was Vice President and
General Manager of the Communications Product Division. Prior to joining LSI
Logic, Mr. Staffaroni held management positions at Texas Instruments and AT&T
Microelectronics.

     Frank A. Tornaghi was named Executive Vice President, Worldwide Sales in
July 2001. Since joining the Company in 1984, Mr. Tornaghi has held several
management positions in sales at LSI Logic and was named a vice president in
1993. Most recently, he served as Vice President, North America Sales, from May
1993 to July 2001.

     Joseph M. Zelayeta was named Executive Vice President, Worldwide
Operations, in September 1997. Mr. Zelayeta joined the Company in 1981. From
August 1995 to September 1997, he served as Senior Vice President of Research
and Development, and General Manager of U.S. Operations.

     There are no family relationships between any executive officers and
directors.

                                        22


                                    PART II

ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

     On January 25, 2000, we announced a two-for-one stock split, which was
declared by the Board of Directors as a 100% stock dividend payable to
stockholders of record on February 4, 2000, as one new share of common stock for
each share held on that date. The newly issued common stock shares were
distributed on February 16, 2000. In the following table, market prices of our
common stock have been restated to give retroactive recognition to the
two-for-one common stock split.

     Our stock trades on the New York Stock Exchange under the symbol "LSI." The
high and low sales prices for the stock for each full quarterly period within
the two most recent fiscal years as reported on the Exchange are:



                                                              2001             2000
                                                         --------------   --------------
                                                                    
First Quarter..........................................  $15.73 - 24.99   $30.00 - 88.25
Second Quarter.........................................  $13.97 - 22.76   $43.00 - 74.94
Third Quarter..........................................  $10.80 - 24.81   $28.88 - 60.00
Fourth Quarter.........................................  $11.19 - 19.24   $16.43 - 32.63
                                                         --------------   --------------
Year...................................................  $10.80 - 24.99   $16.43 - 88.25
                                                         ==============   ==============


     At March 8, 2002, there were approximately 4,408 owners of record of our
common stock.

     We have never paid cash dividends on our common stock. It is presently our
policy to reinvest our earnings internally, and we do not anticipate paying any
cash dividends to stockholders in the foreseeable future.

                                        23


ITEM 6.  SELECTED FINANCIAL DATA

                         FIVE YEAR CONSOLIDATED SUMMARY



                                                                            YEAR ENDED DECEMBER 31,
                                                        ---------------------------------------------------------------
                                                           2001          2000         1999         1998         1997
                                                        -----------   ----------   ----------   ----------   ----------
                                                                   (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                                                                              
Revenues..............................................  $ 1,784,923   $2,737,667   $2,089,444   $1,516,891   $1,322,626
                                                        -----------   ----------   ----------   ----------   ----------
Costs and expenses:
  Cost of revenues....................................    1,160,432    1,557,232    1,286,844      884,598      694,274
  Additional excess inventory and related charges.....      210,564       11,100           --           --           --
                                                        -----------   ----------   ----------   ----------   ----------
    Total cost of revenues............................    1,370,996    1,568,332    1,286,844      884,598      694,274
  Research and development............................      503,108      378,936      297,554      291,125      229,735
  Selling, general and administrative.................      307,310      306,962      257,712      226,258      196,359
  Acquired in-process research and development........       96,600       77,438        4,600      145,500        2,850
  Restructuring of operations and other non-recurring
    items, net........................................      219,639        2,781       (2,063)      75,400           --
  Amortization of non-cash deferred stock
    compensation......................................      104,627       41,113           --           --           --
  Amortization of intangibles.........................      188,251       72,648       46,625       22,369        4,472
                                                        -----------   ----------   ----------   ----------   ----------
    Total costs and expenses..........................    2,790,531    2,448,210    1,891,272    1,645,250    1,127,690
                                                        -----------   ----------   ----------   ----------   ----------
(Loss)/income from operations.........................   (1,005,608)     289,457      198,172     (128,359)     194,936
Interest expense......................................      (44,578)     (41,573)     (39,988)      (8,865)      (1,860)
Interest income and other, net........................       14,529       51,766       17,640       (8,952)      34,891
Gain on sale of equity securities.....................        5,302       80,100       48,393       16,671           --
                                                        -----------   ----------   ----------   ----------   ----------
(Loss)/income before income taxes, minority interest
  and cumulative effect of change in accounting
  principle...........................................   (1,030,355)     379,750      224,217     (129,505)     227,967
(Benefit)/provision for income taxes..................      (39,198)     142,959       65,030        9,905       60,819
                                                        -----------   ----------   ----------   ----------   ----------
(Loss)/income before minority interest and cumulative
  effect of change in accounting principle............     (991,157)     236,791      159,187     (139,410)     167,148
Minority interest in net income of subsidiary.........          798          191          239           68          727
                                                        -----------   ----------   ----------   ----------   ----------
(Loss)/income before cumulative effect of change in
  accounting principle................................     (991,955)     236,600      158,948     (139,478)     166,421
Cumulative effect of change in accounting principle...           --           --      (91,774)          --       (1,440)
                                                        -----------   ----------   ----------   ----------   ----------
Net (loss)/income.....................................  $  (991,955)  $  236,600   $   67,174   $ (139,478)  $  164,981
                                                        ===========   ==========   ==========   ==========   ==========
Basic earnings per share:
    (Loss)/income before cumulative effect of change
      in accounting principle.........................  $     (2.84)  $     0.76   $     0.54   $    (0.49)  $     0.59
    Cumulative effect of change in accounting
      principle.......................................           --           --        (0.31)          --           --
                                                        -----------   ----------   ----------   ----------   ----------
    Net (loss)/income.................................  $     (2.84)  $     0.76   $     0.23   $    (0.49)  $     0.59
                                                        ===========   ==========   ==========   ==========   ==========
Diluted earnings per share:
    (Loss)/income before cumulative effect of change
      in accounting principle.........................  $     (2.84)  $     0.70   $     0.51   $    (0.49)  $     0.57
    Cumulative effect of change in accounting
      principle.......................................           --           --        (0.28)          --           --
                                                        -----------   ----------   ----------   ----------   ----------
    Net (loss)/income.................................  $     (2.84)  $     0.70   $     0.23   $    (0.49)  $     0.57
                                                        ===========   ==========   ==========   ==========   ==========
Year-end status:
  Total assets........................................  $ 4,625,772   $4,197,487   $3,206,605   $2,823,805   $2,155,365
  Long-term obligations...............................  $ 1,630,367   $1,067,704   $  926,228   $  883,649   $  166,239
  Stockholders' equity................................  $ 2,479,885   $2,498,137   $1,855,832   $1,524,473   $1,586,382
                                                        -----------   ----------   ----------   ----------   ----------


     The Company's fiscal years ended on December 31 in 2001, 2000, 1999, 1998
and 1997. During 2001, the Company recorded a $97 million in-process research
and development ("IPR&D") charge associated with the acquisitions of C-Cube and
AMI, which were effective on May 11, 2001 and August 31, 2001, respectively. In
addition, the Company recorded $220 million in restructuring of operations and
other non-recurring items, net and $105 million in amortization of non-cash
deferred stock compensation. (See Notes 2

                                        24


and 4 of the Notes to the Consolidated Financial Statements.) During 2000, the
Company recorded a $77 million IPR&D charge associated with the acquisitions of
ParaVoice, DataPath, IntraServer and the purchases of divisions of NeoMagic and
Cacheware. In addition, the Company recorded $41 million in non-cash deferred
stock compensation as a result of the adoption of FASB interpretation ("FIN")
No. 44, "Accounting for Certain Transactions Involving Stock Compensation,"
which was effective July 1, 2000. (See Note 2 of the Notes to the Consolidated
Financial Statements.) During 1999, the Company expensed an unamortized
preproduction balance of $92 million, net of taxes, associated with the
manufacturing facility in Gresham, Oregon and has presented it as a cumulative
effect of a change in accounting principle in accordance with SOP No. 98-5,
"Reporting on the Costs of Start-up Activities." (See Note 1 of the Notes to the
Consolidated Financial Statements.) During 1998, the Company reported a charge
for restructuring of operations and other non-recurring items, net of $75
million and a $146 million IPR&D charge related to the acquisition of Symbios on
August 6, 1998.

                                        25


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

     We operate in an industry sector where stock values are 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. See additional discussion
contained in "Risk Factors" set forth in Part I, Item 1 of this Annual Report on
Form 10-K for the year ended December 31, 2001, which is incorporated by
reference into this Part II, Item 7.

     Statements in this discussion and analysis include forward-looking
information within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities and Exchange Act of 1934, as amended.
These statements involve known and unknown risks and uncertainties. Our actual
results in future periods may be significantly different from any future
performance suggested in this report. Risks and uncertainties that may affect
our results may include, among others:

FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS

     - The current economic downturn;

     - Cyclical nature of both the Semiconductor and SAN Systems industries and
       the markets addressed by our products;

     - Availability and extent of utilization of manufacturing capacity;

     - Price erosion;

     - Competitive factors;

     - Timing of new product introductions;

     - Changes in product mix;

     - Fluctuations in manufacturing yields;

     - Product obsolescence;

     - Business and product market cycles;

     - Economic and technological risks associated with our acquisition and
       alliance activities; and

     - The ability to develop and implement new technologies.

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

     We have international subsidiaries and distributors that operate and sell
our products globally. Further, we purchase a substantial portion of our raw
materials and manufacturing equipment from foreign suppliers and incur labor and
other operating costs in foreign currencies, particularly in our Japanese
manufacturing facilities. As a result, we are exposed to the risk of changes in
foreign currency exchange rates or declining economic conditions in these
countries. We utilize forward exchange and purchased currency option contracts
to manage our exposure associated with net asset and liability positions and
cash flows denominated in non-functional currencies. (See Note 6 of the Notes to
the Consolidated Financial Statements, hereafter referred

                                        26


to as the Notes.) There is no assurance that these hedging transactions will
eliminate exposure to currency rate fluctuations that could affect our operating
results.

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

     Where more than one significant factor contributed to changes in results
from year to year, we have quantified material factors throughout the MD&A where
practicable.

     While management believes that the discussion and analysis in this report
is adequate for a fair presentation of the information, we recommend that you
read this discussion and analysis in conjunction with the remainder of this
Annual Report on Form 10-K.

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. Note 1 of the Notes describes the significant accounting policies
essential to the consolidated financial statements. The preparation of these
financial statements requires estimates and assumptions that affect the reported
amounts and disclosures.

     We believe the following to be critical accounting policies. That is, they
are both important to the portrayal of the Company's financial condition and
results, and they require critical management judgments and estimates about
matters that are inherently uncertain. Although we believe that our judgments
and estimates are appropriate and correct, actual future results may differ from
our estimates.

     Inventory reserves.  We establish reserves for estimated excess or obsolete
inventory based upon assumptions about demand and market conditions generally
over the following 12 months. We operate in a volatile industry sector
characterized by rapid changes in technology and market conditions.

     Valuation of long-lived and intangible assets and goodwill.  We operate our
own wafer fabrication facilities and make significant capital expenditures to
ensure that we are technologically competitive. In addition, we have actively
pursued the acquisition of businesses which have resulted in significant
goodwill and intangible assets. We assess the impairment of long-lived assets,
identifiable intangibles and related goodwill whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. Factors
which we consider could trigger an impairment review include the following: (i)
significant negative industry or economic trends; (ii) exiting an activity in
conjunction with a restructuring of operations; (iii) current, historical or
projected losses that demonstrate continuing losses associated with an asset; or
(iv) a significant decline in our market capitalization relative to net book
value. When we determine that there is an indicator that the carrying value of
long-lived assets, identifiable intangibles and related goodwill may not be
recoverable, we measure impairment based on estimates of future cash flow. These
estimates include assumptions about future conditions within the Company and the
industry.

     Restructuring reserves.  We have recorded reserves for restructuring costs
related to the restructuring of operations. The restructuring costs include
payments to employees for severance, lease and contract termination fees,
decommissioning costs for fabrication equipment, and other costs to close
facilities. The reserves are recorded at the time we announce a plan to exit
certain activities and are based on estimates of the costs and length of time to
exit those activities.

     Income taxes.  We have recorded a valuation allowance to reduce the
deferred tax assets to the amount that is more likely than not to be realized.
We have considered future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for the valuation allowance.

                                        27


OVERVIEW

     Revenues decreased 35% to $1.78 billion in 2001 from $2.74 billion in 2000.
The decrease was primarily the result of decreased demand, most notably for
products used in broadband access, networking infrastructure, storage
infrastructure applications, and storage area network ("SAN") systems,
reflecting the economic downturn in the industry. The decline in revenues was
partially offset by the additional revenues from acquisitions of C-Cube
Microsystems, Inc. ("C-Cube") and the RAID division of American Megatrends, Inc.
("AMI") in 2001.

     Gross profit margin decreased to 23% in 2001 from 43% in 2000 primarily as
a result of decreased revenue for higher margin products, higher manufacturing
variances and period costs as a percentage of revenues and additional excess
inventory and related charges of $210.6 million for 2001 as compared to $11.1
million in 2000. The decrease in gross profit margin was offset in part by
cost-saving measures undertaken during 2001 discussed further in Note 4 of the
Notes. Operating expenses increased 61% to $1.4 billion in 2001 from $880
million in 2000. The increase was primarily a result of the operating expenses
of C-Cube and AMI, a $219.6 million charge for restructuring and other
non-recurring items, net, and other acquisition-related charges of $96.6 million
for in-process research and development ("IPR&D"), $104.6 million for
amortization of non-cash deferred stock compensation and $188.3 million in
amortization of intangibles. (See Notes 2 and 4 of the Notes.) Research and
development ("R&D") costs increased by $124.2 million in 2001 due to additional
costs incurred in connection with acquisitions in 2001 and continued core
business spending, which was offset in part by cost-saving measures undertaken
during the year. Selling, general and administrative ("SG&A") costs remained
relatively flat from year to year. Incremental, post-acquisition SG&A expenses
of C-Cube and AMI were largely offset by cost-saving measures undertaken during
the year. For the years ended December 31, 2001 and 2000, gains on sale of
investments in equity securities were $5.3 million and $80.1 million,
respectively. For the year ended December 31, 2001, we recorded a net loss of
$992.0 million, or $2.84 loss per diluted share, compared to net income for the
same period in 2000 of $236.6 million, or $0.70 income per diluted share. A
further discussion on results of operations is covered below.

     Cash and short-term investments decreased by 11% to $1.01 billion as of
December 31, 2001 from $1.13 billion as of December 31, 2000. The decrease is
primarily attributable to lower cash flows from our continuing operations. Some
of the major transactions that impacted cash and short-term investments during
the year were as follows:

     - Payments for acquisitions made in 2001.

     - In the third quarter of 2001, we amended the master lease and security
       agreements entered into in April 2001 and March 2000. (See Note 12 of the
       Notes.) Pursuant to the amendments, we participated as a debt holder in
       the lease transactions replacing some of the existing banks. As of
       December 31, 2001, our debt contribution of $242 million was recorded as
       non-current assets on the balance sheet. We cash collateralized $54
       million of the remaining debt and equity investments of the lessors. This
       was also recorded as non-current assets and deposits.

     - On October 30, 2001, we issued $490 million of 4% Convertible
       Subordinated Notes due in 2006, increasing our long term liabilities to
       $1.5 billion at December 31, 2001 from $936.1 million at December 31,
       2000. (See Note 8 of the Notes.)

     Our significant cash position provides us with the capital to make
strategic acquisitions and to continue investing in key technologies.

     Stock split.  On January 25, 2000, we announced a two-for-one common stock
split, which was declared by the Board of Directors as a 100% stock dividend
payable to stockholders of record on February 4, 2000 as one new share of common
stock for each share held on that date. The newly issued common stock shares
were distributed on February 16, 2000. In the following discussion and analysis,
stockholders' equity has been restated to give retroactive recognition to the
two-for-one common stock split announced on January 25, 2000 for all periods
presented by reclassifying the par value of the newly issued shares arising from
the split from additional paid-in capital to common stock. In addition, all
references in the financial statements to number of shares, per share amounts,
stock option data and market prices of our common stock have been restated.

                                        28


     Acquisitions and other major transactions.  We are continually exploring
strategic acquisitions that build upon our existing library of intellectual
property and increase our leadership position in the markets where we operate.

  2001

     During 2001, we acquired C-Cube Microsystems Inc. and certain tangible and
intangible assets associated with the Redundant Array of Independent Disks, or
RAID, business of American Megatrends, Inc. The acquisitions were accounted for
as purchases and, accordingly, the estimated fair value of assets acquired and
liabilities assumed and the results of operations were included in our
Consolidated Financial Statements as of the effective date of each acquisition
through the end of the period. The acquisitions are summarized below. (See Note
2 of the Notes.)



                      ACQUISITION  PURCHASE                                                     IDENTIFIED      DEFERRED
COMPANY                  DATE       PRICE             CONSIDERATION          IPR&D   GOODWILL   INTANGIBLES   COMPENSATION
- -------               -----------  --------           -------------          -----   --------   -----------   ------------
                                                                    (AMOUNTS IN MILLIONS)
                                                                                         
C-Cube                May 2001      $893.7    40.2 million shares,           $77.5    $572.1      $130.5         $49.3
                                              10.6 million options,
                                              0.8 million warrants
RAID Division of AMI  August 2001    240.5    Cash                           19.1      128.9        77.5          16.4
                                              0.8 million restricted shares


     On April 4, 2001, we announced a co-development and foundry supply
agreement with Taiwan Semiconductor Manufacturing Company Ltd. ("TSMC"). This
agreement is part of our strategy to "outsource," that is to procure a larger
portion of our wafer requirements from external sources. As a result of our
joint development efforts with TSMC we anticipate purchasing, consistent with
our "outsourcing" strategy, such portion of our wafer volume requirements based
on the 0.13-micron process technology that we do not manufacture ourselves. In
addition, we anticipate being able to defer the need to expand our manufacturing
capacity for the 0.13-micron technology beyond the time when products designed
for that technology would begin volume production. We also anticipate
collaborating with TSMC on further advancement in wafer fabrication technology.

  2000

     During 2000, we acquired a division of NeoMagic Corporation ("NeoMagic"), a
division of Cacheware, Inc. ("Cacheware"), Intraserver Technology, Inc.
("Intraserver"), DataPath Systems, Inc. ("DataPath"), ParaVoice Technologies,
Inc. ("ParaVoice") and Syntax Systems, Inc. ("Syntax"). The acquisitions were
accounted for as purchases and accordingly, the estimated fair value of assets
acquired and liabilities assumed and the results of operations were included in
our consolidated financial statements as of the effective date of each
acquisition through the end of the period. These transactions are summarized
below. There were no significant differences between the accounting policies of
LSI and the companies acquired. (See Note 2 of the Notes.)



                       ACQUISITION   PURCHASE                                           IDENTIFIED      DEFERRED
COMPANY                   DATE        PRICE        CONSIDERATION     IPR&D   GOODWILL   INTANGIBLES   COMPENSATION
- -------                -----------   --------      -------------     -----   --------   -----------   ------------
                                                                 (AMOUNTS IN MILLIONS)
                                                                                 
Division of NeoMagic  April 2000      $ 15.4    Cash                 $6.4     $  1.9       $ 5.8         $   --
Division of           April 2000        22.2    Cash                  8.3        8.5         5.2             --
  Cacheware
Intraserver           May 2000          62.9    1.2 million shares,   1.6       50.8        17.5             --
                                                0.2 million options
DataPath              July 2000        420.8    7.5 million shares,  54.2      154.0        17.4          201.6
                                                1.6 million options
ParaVoice             October 2000      38.6    Cash                  6.9       10.4        21.2             --
Syntax                November 2000     58.8    1.4 million shares,    --       42.0        25.4            2.5
                                                0.6 million options


     In the second quarter of 2001, the NeoMagic research project was abandoned
and the remaining intangibles and goodwill recorded in connection with the
project were written off. See the discussion under restructuring of operations
and other non-recurring items for details.

                                        29


  1999

     On June 22, 1999, we combined with SEEQ Technology, Inc. ("SEEQ") in a
transaction accounted for as a pooling of interests. All financial information
has been restated retroactively to reflect the combined operations of LSI Logic
and SEEQ as if the combination has occurred at the beginning of the earliest
period presented. (See Note 2 of the Notes.)

RESULTS OF OPERATIONS

     Revenue.  Total revenues decreased 35% to $1.78 billion in 2001 from $2.74
billion in 2000. Revenues for the Semiconductor segment decreased 33% to $1.57
billion in 2001 from $2.34 billion in 2000. The decrease was primarily
attributable to decreased demand, most notably for products used in broadband
access, networking infrastructure and storage infrastructure applications,
reflecting the economic downturn in the semiconductor industry. The decline in
revenues in this sector was offset partially by the additional revenues from
C-Cube and AMI. Revenues for the SAN Systems segment decreased 47% to $211.3
million in 2001 from $399.1 million in 2000 due to decreased demand reflecting
industry declines for all products sold in the SAN Systems segment. As the
economic trends reverse, we expect to see sequential quarterly growth in
revenues of up to 3% in the first quarter of 2002 from the $406 million in the
fourth quarter of 2001.

     Total revenues increased 31% to $2.74 billion in 2000 from $2.09 billion in
1999. Revenues for the Semiconductor segment increased 29% to $2.34 billion in
2000 from $1.81 billion in 1999. Significant factors that contributed to this
revenue growth included increased demand for semiconductor products used in
broadband communications, networking infrastructure and storage infrastructure
applications, particularly in broadband access and networks, and storage
components. Revenues for the SAN Systems segment increased 43% to $399.1 million
in 2000 from $279.3 million in 1999. The increase was attributable to growth in
demand for all products used in the SAN Systems segment.

     One customer represented 18% of our total consolidated revenues for the
year ended December 31, 2001 and another customer represented 12% and 11% of our
total consolidated revenues for each of the years ended December 31, 2000 and
1999, respectively. One customer represented 21% of total revenues in the
Semiconductor segment for the year ended December 31, 2001. During 2000, no
customer represented 10% or more of total revenues in the Semiconductor segment.
During 1999, one customer represented 10% of total Semiconductor revenues. In
the SAN Systems segment, there were two customers with revenues representing 21%
each, and one customer representing 13% of total SAN Systems revenues for the
year ended December 31, 2001. During 2000, there were three customers with
revenues representing 31%, 17% and 13% of total SAN Systems revenues. During
1999, there were three customers with revenues representing 29%, 27% and 14% of
SAN Systems revenues.

     Revenues from domestic operations were $880.8 million, representing 49% of
consolidated revenues for 2001, as compared to $1.7 billion and $1.2 billion for
2000 and 1999, representing 61% and 58% of consolidated revenues, respectively.
The decline in domestic revenues is mainly due to the severity of the economic
downturn in the U.S. as compared to Pan Asia and Japan.

     Operating costs and expenses.  Key elements of the consolidated statements
of operations, expressed as a percentage of revenues for the respective segment,
were as follows:



                                                              2001   2000   1999
                                                              ----   ----   ----
                                                                   
CONSOLIDATED:
Gross profit margin.........................................   23%    43%    38%
Research and development....................................   28%    14%    14%
Selling, general and administrative.........................   17%    11%    12%
(Loss)/income from operations...............................  (56)%   11%     9%


                                        30


     Key elements of the statement of operations for the Semiconductor and SAN
Systems segments, expressed as a percentage of revenues, were as follows:



                                                              2001   2000   1999
                                                              ----   ----   ----
                                                                   
SEMICONDUCTOR SEGMENT:
Gross profit margin.........................................   22%    44%    39%
Research and development....................................   30%    15%    15%
Selling, general and administrative.........................   15%    11%    12%
(Loss)/income from operations...............................  (60)%   10%    10%




                                                              2001   2000   1999
                                                              ----   ----   ----
                                                                   
SAN SYSTEMS SEGMENT:
Gross profit margin.........................................   30%    38%    33%
Research and development....................................   14%     7%     9%
Selling, general and administrative.........................   31%    13%    11%
(Loss)/income from operations...............................  (28)%   13%     9%


     Gross profit margin.  We have advanced wafer manufacturing operations in
Oregon and Japan. We also acquire wafers from foundries in other locations. This
allows us to maintain our ability to provide products to customers with minimal
disruption in the manufacturing process due to economic and geographic risks
associated with each geographic location.

     The gross profit margin percentage for 2001 decreased to 23% from 43% in
2000 on a consolidated basis, reflecting lower gross profit margins in both of
our segments. The gross profit margin percentage for the Semiconductor segment
was 22% in 2001 compared to 44% in 2000. The decrease in the semiconductor
segment primarily reflect the economic downturn as evidenced by:

     - Decreased revenue for higher margin products;

     - Higher manufacturing variances and period costs as a percentage of
       revenues;

     - Additional excess inventory and related charges of $204.6 million in
       2001.

     The additional excess inventory and related charges were primarily
associated with underutilization charges related to a temporary idling of our
fabrication facilities, coupled with inventory production in anticipation of the
closing of our Colorado Springs fabrication facility (see Note 4 of the Notes)
and a sudden and significant decrease in forecasted revenue, and was calculated
in accordance with our policy, which is primarily based on inventory levels in
excess of 12-month judged demand for each specific product.

     The gross profit margin percentage for the SAN Systems segment was 30% in
2001 compared to 38% in 2000. The decrease is primarily attributable to
decreased revenue for higher margin products and additional excess inventory and
related charges of approximately $6 million recorded during 2001.

     The gross profit margin percentage for 2000 increased to 43% from 38% in
1999 on a consolidated basis, reflecting improved gross profit margins in both
of our segments. The gross profit margin percentage for the Semiconductor
segment was 44% in 2000 compared to 39% in 1999. The increase primarily
reflected a combination of the following factors:

     - Increased production capacity utilization at our fabrication facility in
       Gresham, Oregon, which commenced operations in December 1998, and

     - Increased revenue from higher margin products used in broadband
       communications and storage infrastructure applications.

                                        31


     The increase in gross profit margin in 2000 as compared to 1999 was offset
in part by the following factors:

     - $11.1 million non-recurring charge associated with the elimination of a
       non-strategic product area, and

     - An increase in compensation-related expenses.

     The gross profit margin percentage for the SAN Systems segment was 38% in
2000 compared to 33% in 1999. The increase is primarily attributable to changes
in product mix to include newer generation products, which have higher margins
than other SAN business products.

     Our operating environment, combined with the resources required to operate
in the semiconductor industry, requires that we manage a variety of factors.
These factors include, among other things:

     - Product mix;

     - Factory capacity and utilization;

     - Manufacturing yields;

     - Availability of certain raw materials;

     - Terms negotiated with third-party subcontractors; and

     - Foreign currency fluctuations.

     These and other factors could have a significant effect on our gross profit
margin in future periods.

     Changes in the relative strength of the yen may have a greater impact on
our gross profit margin than other foreign exchange fluctuations due to our
wafer fabrication operations in Japan. Although the yen weakened (the average
yen exchange rate for 2001 depreciated 14% from 2000), the effect on gross
profit margin and net income was not significant because yen-denominated sales
offset a substantial portion of yen-denominated costs during the period.
Moreover, we hedged a portion of our remaining yen exposure. (See Note 6 of the
Notes.) Future changes in the relative strength of the yen or mix of foreign
currency denominated revenues and costs could have a significant effect on our
gross profit margin or operating results.

     Research and development.  R&D expenses increased 33% to $503.1 million
during 2001 as compared to $378.9 million in 2000 on a consolidated basis. R&D
expenses for the Semiconductor segment increased 35% to $473.1 million in 2001
from $351.7 million in 2000. The increase was attributable to the following
factors:

     - Increased R&D activities based on new R&D projects, including those
       acquired in business combinations in 2001 (see Note 2 of the Notes);

     - Expenditures related to the continued development of advanced sub-micron
       products and process technologies.

     The increase was offset in part by $20.0 million and $24.0 million of
research and development benefits associated with a technology transfer
agreement entered into with Silterra in Malaysia during 2001 and 2000,
respectively. (See Note 3 of the Notes.) We will record an additional $4.0
million credit to R&D over the remaining contract term of less than one year for
technology to be transferred to Silterra.

     R&D expenses for the SAN Systems segment increased 10% to $30.0 million in
2001 from $27.2 million in 2000. The increase is primarily attributable to
higher compensation-related expenses due to an increase in average headcount
during the periods presented.

     R&D increased 27% to $378.9 million during 2000 as compared to $297.6
million in 1999. R&D expenses for the Semiconductor segment increased 29% to
$351.7 million in 2000 from $271.8 million in 1999. The increase was
attributable to the following factors:

     - Increased R&D activities based on the acquisitions of companies during
       2000 (see Note 2 of the Notes);

                                        32


     - Expenditures related to the continued development of advanced sub-micron
       products and process technologies; and

     - Increased compensation costs during 2000.

     The increase was offset in part by $24.0 million and $15.0 million of
research and development benefits associated with a technology transfer
agreement entered into with Silterra in Malaysia during 2000 and 1999,
respectively. (See Note 3 of the Notes.)

     R&D expenses for the SAN Systems segment increased 6% to $27.2 million in
2000 from $25.7 million in 1999. The increase is primarily attributable to
increased compensation expenses.

     As a percentage of revenues, R&D expenses were 28% in 2001, and 14% in 2000
and 1999, respectively, on a consolidated basis. R&D expenses as a percentage of
revenues for the Semiconductor segment were 30% in 2001 and 15% in 2000 and
1999, respectively. R&D expenses as a percentage of revenues for the SAN Systems
segment were 14% in 2001, 7% in 2000 and 9% in 1999. The increase in R&D
expenses as a percentage of revenues for both segments is primarily a result of
lower revenues for the periods presented and the effects of R&D spending changes
as discussed above.

     Selling, general and administrative.  SG&A expenses were flat at $307.3
million in 2001 as compared to $307.0 million in 2000 on a consolidated basis.
SG&A expenses for the Semiconductor segment decreased 5% to $241.5 million in
2001 from $255.2 million in 2000. SG&A expenses for the SAN Systems segment
increased 27% to $65.8 million in 2001 from $51.8 million in 2000. SG&A expenses
on a consolidated basis in 2001 were impacted primarily by the following
factors:

     - Continued SG&A expenses for the former C-Cube and AMI RAID business,
       which are part of the Semiconductor segment and included in our
       consolidated financial statements as of May 11, 2001 and August 31, 2001,
       respectively; and

     - An increase in compensation-related expenses for the SAN Systems segment
       due to an increase in average headcount during 2001.

     The above increases were offset in part by the positive effects of various
cost reduction programs in both segments in 2001. These include, among other
things, a reduction in workforce, elimination of 2001 annual merit increases and
bonus payments, and shutdowns of operations during the year. (See Note 4 of the
Notes.)

     SG&A expenses increased 19% to $307.0 million in 2000 as compared to $257.7
million in 1999. SG&A expenses for the Semiconductor segment increased 13% to
$255.2 million in 2000 from $225.8 million in 1999. The increase was primarily
attributable to sales commissions on increased revenues and increased
compensation costs based on an increase in headcount in 2000. SG&A expenses for
the SAN Systems segment increased 62% to $51.8 million in 2000 from $32.0
million in 1999. The increase in SG&A expenses was primarily attributable to an
increase in compensation costs based on an increase in headcount in 2000 and
also an increase in commission related expenses for sales personnel based on the
increased revenues during 2000.

     As a percentage of revenues, SG&A expenses increased to 17% in 2001 from
11% in 2000 and 12% in 1999 on a consolidated basis. SG&A expenses as a
percentage of revenues for the Semiconductor segment were 15% in 2001, 11% in
2000 and 12% in 1999. SG&A expenses as a percentage of revenues for the SAN
Systems segment were 31% in 2001, 13% in 2000 and 11% in 1999. The increase in
SG&A expenses as a percentage of revenues for both segments is primarily a
result of lower revenues for the periods presented and the effects of SG&A
spending changes as discussed above.

     Acquired in-process research and development.  During 2001, we recorded a
$96.6 million IPR&D charge associated with the acquisitions of C-Cube and the
purchase of the RAID business of AMI. During 2000, we recorded a $77.4 million
IPR&D charge associated with the acquisitions of ParaVoice, DataPath,
Intraserver and the purchase of divisions of NeoMagic and Cacheware. There was
no IPR&D charge recorded

                                        33


in connection with the acquisition of Syntax. During 1999, we recorded a $4.6
million IPR&D charge associated with the acquisition of ZSP. See summary table
below:



                       ACQUISITION            DISCOUNT   REVENUE PROJECTIONS
COMPANY                    DATE       IPR&D     RATE         BY PROJECT          ROYALTY RATE
- -------                -----------    -----   --------   -------------------     ------------
                                     (AMOUNTS IN MILLIONS)
                                                                
C-Cube                 May 2001       $77.5     27.5%    2003 - Cable Modem           --
                                                         2004 - Set-Top Box
                                                         2005 - DVD
                                                         2006 - DVD-R
RAID Division of AMI   August 2001    19.1        20%    2006                         --
Division of NeoMagic   April 2000      6.4        30%    2004                        30%
Division of Cacheware  April 2000      8.3        30%    2003                        30%
Intraserver            May 2000        1.6        30%    2005                        30%
DataPath               July 2000      54.2        20%    2004 - Read Channel   20% to Read
                                                         2006 - ADSL           Channel and ADSL
                                                         2007 - Tuner          3% to Tuner
ParaVoice              October 2000    6.9        50%    2005                         --
ZSP                    April 1999      4.6        25%    2003                        25%


     The above noted acquisitions were all accounted for as purchases and the
estimated fair value of net assets or liabilities acquired and the results of
operations were included in our consolidated financial statements as of the
acquisition date through the end of the period. (See Note 2 of the Notes.)

     The amounts of IPR&D were determined by identifying research projects for
which technological feasibility had not been established and no alternative
future uses existed as of the respective acquisition dates. The value of the
projects identified to be in progress was determined by estimating the future
cash flows from the projects once commercially feasible, discounting the net
cash flows back to their present value and then applying a percentage of
completion to the calculated value. The net cash flows from the identified
projects were based on estimates of revenues, cost of revenues, research and
development costs, selling general and administrative costs and applicable
income taxes for the projects. Total revenues for the projects are expected to
extend through the dates noted in the above table by acquisition. These
projections were based on estimates of market size and growth, expected trends
in technology and the expected timing of new product introductions by our
competitors and us. These estimates do not account for any potential synergies
that may be realized as a result of the acquisition and are in line with
industry averages and growth estimates.

  PERCENTAGE OF COMPLETION

     The percentage of completion for the projects for the purchases of the RAID
business from AMI, C-Cube, ParaVoice, Cacheware and a division of Neomagic were
determined based on research and development expenses incurred as of the
acquisition dates for the projects as a percentage of total research and
development expenses to bring the projects to technological feasibility.

     The percentage of completion for the projects for the purchases of
Intraserver, DataPath and ZSP were determined using milestones representing
management's estimate of effort, value added and degree of difficulty of the
portion of the projects completed as of the acquisition dates, as compared to
the remaining research and development to be completed to bring the projects to
technological feasibility. The development process is grouped into three phases,
with each phase containing between one and five milestones. The three phases
are:

     - Researching the market requirements and the engineering architecture and
       feasibility studies;

     - Design and verification milestones; and

     - Prototyping and testing the product (both internal and customer testing).

                                        34


  DISCOUNT AND ROYALTY RATES

     The discount rate is used for the projects to account for the risks
associated with the inherent uncertainties surrounding the successful
development of the IPR&D, market acceptance of the technology, the useful life
of the technology, the profitability level of such technology and the
uncertainty of technological advances, which could impact the estimates
described above. We applied a royalty rate by project by acquisition to
operating income to attribute value for dependency on predecessor core
technologies. See details in table above.

  PROJECT DESCRIPTIONS AND ESTIMATES OF COMPLETION BY ACQUISITION

     RAID business.  On August 31, 2001, we entered into an Asset Purchase
Agreement with AMI. Under the agreement, we acquired certain tangible and
intangible assets associated with AMI's RAID business. The acquisition will
enhance product offerings and is included in the Semiconductor segment. As of
the acquisition date, there were several projects in-process. The projects were
for development of RAID technology applications. Development of these projects
started in early 2000 and 2001. As of August 31, 2001, we estimated the projects
were approximately 12% to 62% complete for the RAID projects and the cost to
complete these projects was estimated at $4.6 million for 2001 and $2.4 million
for 2002. As of December 31, 2001, the actual development timeline and costs are
in line with estimates.

     C-Cube.  On March 26, 2001, we signed a definitive merger agreement to
acquire C-Cube Microsystems Inc. The acquisition is intended to enhance and
accelerate our DVD product offerings in the Semiconductor segment. As of the
acquisition date, there were various projects that were in-process. The majority
of the projects identified consist of Digital Video Disc Player ("DVD"), DVD
Recorder ("DVD-R"), Consumer Set-Top Box and Cable Modem. Development of these
projects started in early 1999. As of May 11, 2001, we estimated the projects
were approximately 84%, 62%, 61% and 69% complete for DVD, DVD-R, Consumer
Set-Top Box and Cable Modem, respectively. As of the acquisition date, the cost
to complete these projects was estimated at $22.7 million in 2001 and $9.1
million in 2002. As of December 31, 2001, the actual development timeline and
costs are in line with estimates.

     ParaVoice.  On October 23, 2000, we entered into an Asset Acquisition
Agreement with ParaVoice. Under the agreement, we acquired certain tangible and
intangible assets associated with ParaVoice's Voice over Internet Protocol
("VoIP") and Voice over DSL ("VoDSL") technology. The acquisition is intended to
enhance product offerings in the Semiconductor segment. As of the acquisition
date, there was one project in-process for the development of ParaVoice's VoIP
products, which was started in late 1999. As of October 23, 2000, we estimated
that the project was 23% complete. As of the acquisition date, the cost to
complete the project was estimated at $6.3 million in 2001 and $7.3 million for
2002. As of December 31, 2001, the actual development timeline and costs are in
line with estimates.

     DataPath.  On July 14, 2000, we acquired DataPath, a privately held
supplier of communications chips for broadband, data networking and wireless
applications, pursuant to the terms of the Agreement and Plan of Reorganization
and Merger. The acquisition of DataPath is expected to enhance our product
offerings in the communications market in the Semiconductor segment. As of the
acquisition date, there were various projects in-process. The majority of the
projects identified consist of Read Channel, Asynchronous Digital Subscriber
Line ("ADSL") and Tuner technologies. As of July 14, 2000, we estimated the
projects were approximately 50%, 65% and 75% complete in aggregate for Read
Channel, ADSL and Tuner Technologies, respectively. As of the acquisition date,
the cost to complete the projects was estimated at $8.3 million and $2.8 million
for ADSL and Tuner projects, respectively, through early 2002 and $32.8 million
for Read Channel projects through 2004. As of December 31, 2001, the actual
development timeline and costs are in line with estimates for continuing
projects.

     Intraserver.  On May 26, 2000, we acquired Intraserver pursuant to the
terms of the Agreement and Plan of Reorganization and Merger. The acquisition of
Intraserver is expected to enhance our host adapter board and other product
offerings in the storage infrastructure and communications markets in the
Semiconductor segment. As of the acquisition date, there were various projects
in-process. The majority of the projects identified are targeted to high-end
data storage and communication devices, where input/output

                                        35


functionality and speed is critical. As of May 26, 2000, we estimated the
projects were 58% complete in aggregate (ranging from 20% to 95%). As of the
acquisition date, the costs to complete the project were $0.5 million in 2000
and early 2001. As of December 31, 2001, the project was complete.

     Division of Cacheware.  On April 27, 2000, we entered into an Asset
Purchase Agreement with Cacheware. Under the agreement, we acquired certain
tangible and intangible assets associated with Cacheware's storage area network
business. ("SAN Business"). The acquisition was intended to provide a key
technology to enhance our SAN solutions. The SAN Business is included in our SAN
Systems segment. The project in-process as of their acquisition date was for
development of a SAN appliance. Development of the SAN appliance was started in
January 1999. As of April 27, 2000, we estimated that the project was 90%
complete and that remaining costs to complete the project would be $0.4 million
in 2000 and early 2001. As of December 31, 2001, the project is scheduled to be
completed in the first quarter of 2002.

     Division of NeoMagic.  On April 13, 2000, we entered into an Asset Purchase
Agreement with NeoMagic. Under the Agreement, we acquired certain tangible and
intangible assets from NeoMagic, which includes NeoMagic's optical read-channel
mixed-signal design team and RF intellectual property. The acquisition was
intended to enhance and accelerate our set-top decoder product offerings in the
Semiconductor segment. As of the acquisition date, one project was identified to
be in-process. The project was for the development of a two-chip controller
chipset. As of April 13, 2000, we estimated that the project was 68% complete.
As of the acquisition date, the project costs were estimated at $3.0 million for
the remainder of 2000 and $4.0 million in 2001. In the second quarter of 2001,
the project was abandoned and remaining intangibles and goodwill were written
off. See discussion under restructuring of operations and other non-recurring
items.

     ZSP.  On April 14, 1999, we acquired all of the outstanding capital stock
of ZSP, a development stage semiconductor company involved in the design and
marketing of programmable Digital Signal Processors ("DSPs") for use in wired
and wireless communications. We acquired ZSP's in-process DSP research and
development project in process that was targeted at the telecommunications
market. The project was completed in 1999.

     Development of the above-noted technologies that have not yet been
completed remains a significant risk to us due to the remaining effort to
achieve technological feasibility, rapidly changing customer markets and
significant competitive threats from numerous companies. Failure to bring the
product to market in a timely manner could adversely affect our sales and
profitability in the future. Additionally, the value of other intangible assets
acquired may become impaired.

     Restructuring of operations and other non-recurring items.  We recorded
approximately $219.6 million in restructuring and non-recurring charges for the
year ended December 31, 2001, consisting of $207.2 for restructuring of
operations and $12.4 million for other non-recurring charges.

  RESTRUCTURING

     In September 2001, we announced the consolidation of U.S. manufacturing
operations at Gresham, Oregon and the transfer of process research and
development from Santa Clara, California to Gresham, Oregon. We also announced
the closure of certain assembly activities in Fremont, California, which will be
transferred offshore. In September 2001, we recorded a restructuring charge of
$77 million for fixed asset write-downs due to impairment in the U.S., losses on
termination of operating leases for equipment and facilities, severance for
approximately 600 employees across multiple company activities and functions in
the U.S., Europe, Japan and Asia Pacific as well as other exit costs. In
December 2001, we recorded $14 million of additional fixed asset write-downs due
to impairment for the Santa Clara facility. We reclassified $25 million,
representing the fair market value of the assets identified above, from
property, plant and equipment to other current assets during the year to reflect
the intention to dispose of the assets within 12 months. In addition, in
December 2001, approximately $4 million in exit costs for the closures of the
Santa Clara facility was recorded relating primarily to labor and facilities
charges.

     In April 2001, we announced the closure of our Colorado Springs fabrication
facility ("the facility") in August 2001. In May 2001, we entered into a
definitive agreement to sell the facility to a third party. As part

                                        36


of the agreement, we agreed to purchase a minimum amount of production wafers
and die from the facility for a period of 18 months following the close of the
transaction. During the quarter ended June 30, 2001, we recorded an impairment
charge of $71 million relating to the facility, of which approximately $35
million was recorded in cost of sales and $36 million was recorded in
restructuring charges. The restructuring charges consisted of fixed asset
write-downs due to impairment, losses on termination of operating leases for
equipment, severance for approximately 413 manufacturing employees and other
exit costs. On August 1, 2001, we announced the termination of the agreement to
sell the facility. In September 2001, we recorded an additional restructuring
charge of $55 million for fixed asset write-downs and other exit costs
associated with the planned closure of the facility. The additional asset
write-downs during the third quarter of 2001 were incurred to reflect the new
value of the facility's assets if sold on a piecemeal basis rather than sold as
a facility in continued use. In addition, equipment market values continued to
decline in the third quarter of 2001. We reclassified approximately $62 million
from property, plant and equipment to other current assets to reflect the
intention to dispose of the facility within the next twelve months. The facility
was closed in the fourth quarter of 2001. In December 2001, we recorded $1.5
million of additional fixed asset write-downs due to impairment for the Colorado
Springs facility. In addition, approximately $3 million in exit costs for the
closure of the Colorado Springs facilities were recorded relating primarily to
labor and facilities charges.

     We recorded approximately $16 million in restructuring charges in the
second quarter of 2001 primarily associated with the write-down of fixed assets
due to impairment in the U.S., Japan and Hong Kong that will be disposed of, and
severance charges for approximately 240 employees across multiple company
activities and functions in the U.S., Europe and Asia Pacific. As a result of
the continued decline in the equipment market during the third quarter of 2001,
we recorded an additional charge of $0.5 million during the third quarter of
2001 to reflect the fair value of the equipment when sold. In December 2001, we
recorded $0.3 million of additional fixed asset write-downs due to impairment in
Japan. We plan to sell the assets and accordingly have reclassified $2 million
from property, plant and equipment to assets held for sale to reflect the
intention to sell the assets within the next 12 months.

     The fair value of assets determined to be impaired was the result of
independent appraisals and the use of management estimates. Given that current
market conditions for the sale of older fabrication facilities and related
equipment may continue to deteriorate, there can be no assurance that we will
realize its current net book value for the assets. We will reassess the
realizability of the carrying value of these assets at the end of each quarter
until the assets are sold or otherwise disposed of and additional adjustments
may be necessary.

     On January 16, 2002, the Company announced a series of actions to reduce
costs and tailor company expenses to current revenues. These actions include:
restructuring the Company's manufacturing operations in Tsukuba, Japan;
divesting the CDMA handset and DSL standard product business units and reducing
the worldwide workforce by approximately 1,400 positions or 20 percent. As a
result of the restructuring actions taken during 2002, we expect to reduce
expenses by approximately $120 million in 2002. (See Note 13 of the Notes.)

     The following table sets forth our restructuring reserves as of December
31, 2001:



                                                                                BALANCE AT
                                                   RESTRUCTURING               DECEMBER 30,
                                                      EXPENSE      UTILIZED        2001
                                                   -------------   ---------   ------------
                                                                (IN THOUSANDS)
                                                                      
Write-down of excess assets(a)...................    $139,724      $(135,962)    $ 3,762
Lease terminations and maintenance
  contracts(c)...................................      26,912        (16,217)     10,695
Facility closure and other exit costs (c)........      24,242        (10,089)     14,153
Payments to employees for severance(b)...........      16,346        (15,622)        724
                                                     --------      ---------     -------
          Total..................................    $207,224      $(177,890)    $29,334
                                                     ========      =========     =======


- ---------------

(a) Amounts utilized in 2001 reflect a non-cash write-down of fixed assets in
    the U.S., Japan and Hong Kong due to impairment of $133.8 million and cash
    payments for machinery and equipment decommissioning costs of $2.2 million.
    The fixed asset write-downs were accounted for as a reduction of the assets
    and did

                                        37


    not result in a liability. The $3.8 million balance as of December 31, 2001
    relates to machinery and equipment decommissioning costs in the U.S.

(b) Amounts utilized represent cash payments related to the severance of
    approximately 1180 employees during the year ended December 31, 2001. The
    $0.7 million balance as of December 31, 2001 will be paid during the first
    six months of 2002.

(c)  Amounts utilized represent cash payments.

  OTHER NON-RECURRING ITEMS:

     We recorded approximately $12.4 million in other non-recurring charges
during 2001 as follows:

     - $8.1 million in charges associated with the write-down of intangible
       assets due to impairment. The majority of the intangible assets were
       originally acquired in the purchase of a division of NeoMagic in the
       second quarter of 2000.

     - $4.3 million in charges primarily consisting of the write-down of an
       investment in a marketable equity security and related purchased
       intellectual property.

  2000 AND 1999

     We recorded restructuring of operations and other non-recurring net charges
of $2.8 million in 2000. This was primarily related to the loss on an agreement
entered into with a third party to outsource certain testing services previously
performed by us at our Fremont, California facility. (See Note 4 of the Notes.)

     We recorded restructuring of operations and other non-recurring net
benefits of $2.1 million in 1999. The net benefit reflected the combination of
the following:

     - Approximately $2.9 million in restructuring charges and $5.5 million in
       merger-related expenses in connection with the merger with SEEQ on June
       22, 1999 (see Note 2 of the Notes.) The restructuring charge was
       primarily comprised of write-downs of fixed assets that were duplicative
       to the combined company, charges for exit costs relating to
       non-cancelable building lease contracts and severance costs. The
       restructuring actions as outlined by the restructuring plan were
       completed by June 30, 2000, one year from the date the reserve was taken.

     - Approximately $10.5 million of 1998 restructuring reserve reversals
       associated with a change in management estimate. (See Note 4 of the
       Notes.) The amount consisted of the following:

       - $3.9 million of reserves for lease termination and non-cancelable
         purchase commitments primarily in the U.S. and Europe;

       - $3.7 million of excess severance reserves in the U.S., Japan, and
         Europe;

       - $2.0 million of reserves for manufacturing facility decommissioning
         costs and other exit costs primarily in the U.S. and Japan; and

       - $0.9 million of related cumulative translation adjustments.

     The change in management estimates of the reserve requirements stemmed
primarily from the following factors:

     - A significant increase in the requirement for manufacturing capacity to
       meet expected sales growth, which resulted in retention of certain
       employees originally targeted for termination of employment and in
       reversal of the reserve for decommissioning costs as a result of
       retention of the U.S. and Japan operations facilities originally targeted
       for sale; and

     - Our ability to exit lease commitments and non-cancelable purchase
       commitments more favorably than originally anticipated in the U.S. and
       Europe.

     Amortization of intangibles.  Amortization of goodwill and other
intangibles increased to $188.3 million in 2001 from $72.6 million in 2000. The
increase was primarily related to additional amortization of goodwill and other
intangibles associated with the acquisitions of C-Cube and the RAID business
from AMI. (See Note 2 of the Notes.)

                                        38


     Amortization of goodwill and other intangibles increased to $72.6 million
in 2000 from $46.6 million in 1999. The increase was primarily related to
additional amortization of goodwill associated with the acquisitions of Syntax,
ParaVoice, DataPath, Intraserver and the acquisition of divisions of Cacheware
and NeoMagic.

     In July 2001, the Financial Accounting Standards Board ("FASB") issued FASB
Statements Nos. 141 and 142 (SFAS 141 and SFAS 142), "Business Combinations" and
"Goodwill and Other Intangible Assets." The statements were effective for our
purchase of the RAID business from AMI, which closed on August 31, 2001. As a
result of the application of SFAS 141 and 142, approximately $129 million of
goodwill related to the AMI acquisition will not be amortized. See Note 2 of the
Notes and the recent accounting pronouncements section below for further
discussion.

     Amortization of non-cash deferred stock compensation.  Amortization of
non-cash deferred stock compensation of $104.6 million and $41.1 million in 2001
and 2000, respectively is due to non-cash deferred stock compensation recorded
in connection with acquisitions after July 1, 2000. Acquisitions consisted of
C-Cube and the RAID business from AMI in 2001 and DataPath and Syntax in 2000
for which deferred stock compensation and related amortization were recorded. We
amortize deferred stock compensation ratably over the vesting period. At
December 31, 2001, the deferred stock compensation that remained was $124.1
million and it is expected to be amortized over the next four years. (See Note 2
to the Notes.)

     Interest expense.  Interest expense increased to $44.6 million in 2001 from
$41.6 million in 2000. The increase was primarily attributable to increased debt
outstanding due to the issuance of the $490.0 million of 4% Convertible
Subordinated Notes (the "2001 Convertible Notes") in October 2001. (See Note 8
of the Notes.)

     Interest expense increased to $41.6 million in 2000 from $40.0 million in
1999. The increase was primarily attributable to increased debt outstanding due
to the issuance of $500.0 million of 4% Convertible Subordinated Notes (the
"2000 Convertible Notes") in February 2000. (See Note 8 of the Notes.)

     Interest income and other.  Interest income and other decreased to $14.5
million in income in 2001 from $51.8 million in income in 2000. The decrease was
primarily attributable to the following events in 2001, which were absent in
2000:

     - $15.2 million write-down of equity investments due to impairment
       considered to be other than temporary, net of a $3.8 million pre-tax gain
       associated with equity securities of a certain technology company that
       was acquired by another technology company (See Note 5 of the Notes);

     - $8.9 million of lower interest income due to lower average balances of
       interest-generating cash, cash equivalents and short-term investments and
       lower interest rates in 2001;

     - The write-off of debt issuance costs of approximately $3.5 million
       associated with the repayment of bank debt and a master lease and
       security agreement (See Notes 8 and 12 of the Notes); and

     - The cost of purchased option contracts, bank fees and other miscellaneous
       expenses.

     In addition, the $5.7 million pre-tax gain in 2000 discussed below was
absent in 2001.

     Interest income and other increased to $51.8 million in income in 2000 from
$17.6 million in income in 1999. The increase was primarily attributable to the
following events in 2000, which were absent in 1999:

     - $5.7 million pre-tax gain on the sale of a U.S. facility in Fremont,
       California, and

     - $33.8 million of additional interest income due to higher average
       balances of interest-generating cash, cash equivalents and short-term
       investments and higher interest rates.

     The above-noted increase was offset in part by net losses on disposals of
fixed assets, bank fees and other miscellaneous expenses during 2000.

     Gain on sale of equity securities.  During 2001, we sold investments in
certain marketable equity securities for $7.9 million in the open market,
realizing a pre-tax gain of approximately $5.3 million. During 2000, we sold
investments in certain marketable equity securities for $78.8 million in the
open market,

                                        39


realizing a pre-tax gain of approximately $73.3 million. In 2000, we also
recognized a $6.8 million pre-tax gain associated with equity securities of a
certain technology company that was acquired by another technology company. In
1999, we recognized a gain of $48.4 million on proceeds of $49.4 million from
the sale of marketable securities.

     Provision for income taxes.  In 2001, we recorded an income tax benefit of
$39.2 million, which represents an effective tax rate of 4%. This rate differs
from the U.S. statutory rate primarily due to losses of our foreign
subsidiaries, which are benefited at lower rates, net operating losses not
currently benefited, and items related to acquisitions, which are not deductible
for tax purposes. The rates for 2000 and 1999 were 38% and 29%, respectively.
The rate for 2000 was higher than the U.S. statutory rate primarily due to non-
deductible transaction costs related to acquisitions. The 1999 rate was lower
than the U.S. statutory rate primarily due to the utilization of prior loss
carryovers and other credits.

     Minority interest in net income of subsidiary.  Minority interest in net
income of subsidiary was not significant for the periods presented. The changes
in minority interest were attributable to the composition of earnings and losses
among certain of our international affiliates for each of the respective years.

FINANCIAL CONDITION AND LIQUIDITY

     Cash, cash equivalents and short-term investments decreased 11% to $1.01
billion in 2001 from $1.13 billion in 2000. Some of the major transactions that
impacted cash and short-term investments during the year were as follows:

     - Lower cash flows from our continuing operations in 2001.

     - Payments for companies acquired in 2001.

     - In the third quarter of 2001, we amended the master lease and security
       agreements entered into in April 2001 and March 2000. Pursuant to the
       amendments, we participated as a debt holder in the lease transactions
       replacing some of the existing lessor banks. As of December 31, 2001, our
       debt contribution of $242 million was recorded as non-current assets and
       deposits on the balance sheet. We cash collateralized $54 million of the
       remaining debt and equity investments of the lessors. This was also
       recorded as non-current assets and deposits. The net impact was a
       reduction in cash on the balance sheet. (See Note 12 of the Notes.)

     - In October 2001, we issued $490 million of 4% Convertible Subordinated
       Notes due in 2006. (See Note 8 of the Notes.)

     Cash, cash equivalents and short-term investments increased 71% to $1.13
billion in 2000 from $661.3 million in 1999. The increase was primarily a result
of proceeds from the issuance of the 2000 Convertible Notes, net of repayment of
the existing debt, and proceeds from our employee stock option and purchase
plans, partially offset by capital expenditures and cash paid for the purchase
of common stock under our repurchase program and the acquisition of non-public
technology companies. (See Note 2 of the Notes.) The increase was also
attributable to proceeds from the sale of investments in marketable equity
securities in the open market. At December 31, 2000, short-term investments
included $60.0 million of marketable equity securities. (See Note 5 of the
Notes.)

     WORKING CAPITAL.  Working capital decreased to $1.26 billion in 2001 from
$1.45 billion in 2000. The decrease was primarily a result of the following
factors:

     - Lower short-term investments resulting from (a) maturities and sales of
       securities available-for-sale, net of purchases and (b) marketable equity
       securities reclassified to long-term assets. (See Notes 5 and 8 of the
       Notes.) This decrease was offset in part by a higher cash balance at
       December 31, 2001 as compared to December 31, 2000. The higher cash
       balance is primarily due to the issuance of the 2001 Convertible Notes
       for $490 million, net of payments made for companies acquired in 2001 and
       the investment in non-current assets and deposits made under the amended
       master lease and security agreements (See Notes 2, 8 and 12 of the
       Notes.);

     - Lower accounts receivable due to decreased revenue and improved
       collections during the fourth quarter of 2001 as compared to the fourth
       quarter of 2000;

                                        40


     - Lower inventory levels due to lower production volumes and increases in
       reserves for excess and obsolete inventory, offset in part by lower
       turnover; and

     - Higher accrued and other liabilities resulting primarily from acquisition
       and restructuring-related accruals.

     The decrease in working capital was offset in part by higher prepaid
expenses and other current assets due to a reclassification from property and
equipment to current assets held for sale, lower accounts payable that reflect
lower purchases during the fourth quarter of 2001 as compared to the fourth
quarter of 2000, lower accrued salaries and wages due to the various cost
reduction measures implemented in 2001 and lower income taxes payable due to the
timing of tax payments and the tax benefit recorded during 2001.

     Working capital increased to $1.45 billion in 2000 from $813.0 million in
1999. The increase was primarily a result of the following factors:

     - Higher short-term investments resulting from purchases of debt and equity
       securities, net of sales and maturities and marketable equity securities
       reclassified from long-term assets. (See Notes 5 and 8 of the Notes);

     - Higher net accounts receivable due to increased revenue and the timing of
       shipments when comparing the fourth quarter of 2000 to the fourth quarter
       of 1999. Shipments during the fourth quarter of 1999 were more linear
       throughout the quarter whereas during the fourth quarter of 2000,
       shipments increased towards the end of the quarter;

     - Lower current portion of long-term obligations resulting from repayment
       of the Revolver. (See Note 8 of the Notes.); and

     - Higher inventory reflecting the combination of higher sales in 2000 as
       compared to 1999 and lower than expected sales during the fourth quarter
       of 2000.

     The increase in working capital was offset in part by higher accrued
salaries, wages and benefits and other liabilities primarily due to increases in
headcount mainly resulting from acquisitions of companies (See Note 2 of the
Notes) as of December 31, 2000 as compared to December 31, 1999, higher income
taxes payable due to the higher income tax rate applied in 2000 primarily due to
the DataPath acquisition, and also by higher trade accounts payable compared to
1999.

     CASH AND CASH EQUIVALENTS GENERATED FROM OPERATING ACTIVITIES.  During
2001, we generated $119.5 million of cash and cash equivalents from operating
activities compared to $565.4 million generated in 2000. The decrease in cash
and cash equivalents provided by operating activities was primarily attributable
to a net loss for the year ended 2001 (before depreciation and amortization,
write-off of acquired in-process research and development, non-cash
restructuring charges, amortization of non-cash deferred stock compensation and
gains on stock investments), as compared to net income for the year ended 2000,
accompanied by a decrease in working capital as discussed above.

     During 2000, we generated $565.4 million of cash and cash equivalents from
operating activities compared to $443.8 million in 1999. The increase in net
cash and cash equivalents provided by operating activities was primarily
attributable to the following factors:

     - Higher net income (before depreciation and amortization, write-off of
       acquired in-process research and development, non-cash restructuring
       charges, amortization of non-cash deferred stock compensation and gains
       on stock investments); and

     - An increase in trade accounts payable, and accrued and other liabilities.
       The increase in trade accounts payable reflects higher purchases during
       the fourth quarter of 2000 as compared to the same period of 1999 and the
       timing of invoice receipt and payment. The increase in accrued and other
       liabilities was primarily attributable to higher income taxes payable due
       to a higher provision for income taxes for 2000, net of payment and
       higher deferred tax liabilities recorded in conjunction with the
       acquisition of DataPath.

                                        41


     The increase in cash from operations was offset in part by an increase in
accounts receivable, inventories and prepaid expenses and other assets. The
increase in accounts receivable was primarily a result of higher revenues in the
fourth quarter of 2000 as compared to the same period of 1999 and the timing of
payment receipt. Higher inventory reflects the combination of higher sales in
2000 as compared to 1999 and lower than expected sales during the fourth quarter
of 2000. The increase in prepaid and other assets was primarily a result of
higher deferred tax assets recorded as of December 31, 2000 as compared to the
balance as of December 31, 1999 and increased capitalized software and
intellectual property during 2000 as compared to 1999.

     CASH AND CASH EQUIVALENTS USED IN INVESTING ACTIVITIES.  Cash and cash
equivalents used in investing activities was $146.8 million in 2001, compared to
$753.3 million used in 2000. The primary investing activities during 2001
included the following:

     - Lower proceeds from sale of stock investments;

     - Higher net payments towards acquisition of companies;

     - New investment in other non-current assets and deposits; (See Note 12 of
       the Notes.)

     - Higher maturities and sales of debt and equity securities available for
       sale, net of purchases as compared to 2000; and

     - Lower purchases of property and equipment, net of retirements.

     Cash and cash equivalents used in investing activities was $753.3 million
in 2000, compared to $472.0 million in 1999. The primary investing activities
during 2000 included the following:

     - Higher purchases of debt and equity securities available-for-sale and
       others, net of maturities and sales;

     - Higher purchases of property and equipment; and

     - Acquisitions of non-public technology companies (See Note 2 of the
       Notes).

     We believe that maintaining technological leadership in the highly
competitive worldwide semiconductor industry requires substantial ongoing
investment in advanced manufacturing capacity. Net capital additions were $224.3
million in 2001 and $276.6 million in 2000. In order to maintain our position as
a technological market leader, we expect the level of capital expenditures to be
less than $200 million in 2002.

     CASH AND CASH EQUIVALENTS PROVIDED BY FINANCING ACTIVITIES.  Cash and cash
equivalents provided by financing activities during 2001 was $554.3 million
compared to $183.7 million in 2000. The increase is primarily attributable to
higher proceeds from the issuance of the 2001 Convertible Notes, net of
repayment of bank debt and debt issuance costs as compared to the proceeds of
the 2000 Convertible Notes issued in 2000, net of repayment of the Revolver (See
Note 8 of the Notes). In addition, no shares were repurchased in 2001, as
compared to $49.3 million in repurchases in 2000. However, we generated lower
cash proceeds from our employee stock option and purchase plans in 2001 as
compared to the proceeds in 2000.

     Cash and cash equivalents provided by financing activities during 2000
totaled $183.7 million compared to $51.9 million in 1999. The increase was
primarily attributable to proceeds from the 2000 Convertible Notes, net of
repayment of the revolving credit facility (see Note 8 of the Notes) and higher
proceeds from our employee stock option and purchase plans in 2000. The increase
was offset in part by debt issuance costs associated with the 2000 Convertible
Notes and cash paid for the repurchase of our common stock under the repurchase
program in 2000.

     On October 30, 2001, we issued $490 million of 4% Convertible Subordinated
Notes (the "2001 Convertible Notes") due in 2006. The 2001 Convertible Notes are
subordinated to all existing and future senior debt, are convertible at the
holder's option at any time after 60 days following issuance, into shares of our
company's common stock at a conversion price of $26.339 per share. The 2001
Convertible Notes are redeemable at our option, in whole or in part, on at least
30 days notice at any time on or after November 6, 2004. Each holder of the 2001
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. Interest is payable semiannually. We
paid approximately $13.5 million for debt issuance costs related to the

                                        42


2001 Convertible Notes. The debt issuance costs are being amortized using the
interest method. The net proceeds from the 2001 Convertible Notes were used to
repay bank debt outstanding with a balance of approximately $200 million as of
September 30, 2001 as described below.

     On September 28, 2001, we entered into a Credit Agreement with Bank of
America, N.A. and Banc of America Securities LLC that provided for borrowings up
to $200 million through September 26, 2002. We borrowed $200 million under the
Credit Agreement as of September 30, 2001, with an interest rate based on LIBOR.
The obligation was secured by inventory and accounts receivable. In October
2001, the borrowings outstanding under the Credit Agreement were repaid in full
with the proceeds of the 2001 Convertible Notes and the Credit Agreement was
terminated.

     On February 18, 2000, we issued $500 million of 4% Convertible Subordinated
Notes (the "2000 Convertible Notes") due in 2005. The 2000 Convertible Notes are
subordinated to all existing and future senior debt, are convertible at the
holder's option at any time after 60 days following issuance, into shares of our
company's common stock at a conversion price of $70.2845 per share. The 2000
Convertible Notes are redeemable at our option, in whole or in part, on at least
30 days notice at any time on or after February 20, 2003. Each holder of the
2000 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. Interest is payable
semiannually. We paid approximately $15.3 million for debt issuance costs
related to the 2000 Convertible Notes. The debt issuance costs are being
amortized using the interest method. The net proceeds from the 2000 Convertible
Notes were used to repay bank debt outstanding with a balance of approximately
$380 million as of December 31, 1999 as described below.

     During March 1999, we issued $345 million of 4 1/4% Convertible
Subordinated Notes (the "1999 Convertible Notes") due in 2004. The 1999
Convertible Notes are subordinated to all existing and future senior debt, are
convertible at the holder's option at any time after 60 days following issuance,
into shares of our company's common stock at a conversion price of $15.6765 per
share. The 1999 Convertible Notes are redeemable at our option, in whole or in
part, on at least 30 days notice at any time on or after March 20, 2002. 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. Interest is payable
semiannually. We paid approximately $9.5 million for debt issuance costs related
to the 1999 Convertible Notes. The amount was capitalized in other assets and is
being amortized over the life of the 1999 Convertible Notes using the interest
method. The net proceeds of the 1999 Convertible Notes were used to repay
existing debt obligations.

     The term fundamental change referred to above means the occurrence of any
transaction or event such as an exchange offer, liquidation, tender offer,
consolidation, merger, or combination.

     On August 5, 1998, we entered into a credit agreement with ABN AMRO Bank
N.V. ("ABN AMRO"). The credit agreement was restated and superseded by the
Amended and Restated Credit Agreement dated as of September 22, 1998 by and
among us, LSI Logic Japan Semiconductor, Inc. ("JSI") and ABN AMRO, and was
thereafter syndicated to a group of lenders determined by ABN AMRO and us
("Notes payable to banks"). The credit agreement consisted of two credit
facilities: a $575 million senior unsecured reducing revolving credit facility
("Revolver"), and a $150 million senior unsecured revolving credit facility
("364-day Facility"). On April 21, 2000, the credit agreement was superseded by
the Second Amended and Restated Credit Agreement by and among us, JSI, ABN AMRO
and a group of lenders determined by ABN AMRO to terminate the yen sub-facility
and modify certain covenant requirements.

     On March 14, 2001, the Second Amended and Restated Credit Agreement was
amended to reduce the total revolving commitment by $165 million from $240
million to $75 million. On the effective date of this reduction, the revolving
commitment of each lender was reduced accordingly. The Second Amended and
Restated Credit Agreement was terminated in August 2001.

     It is our policy to reinvest our earnings internally and we do not
anticipate paying any cash dividends to stockholders in the foreseeable future.

                                        43


     In order to remain competitive, we must continue to make significant
investments in new facilities and capital equipment. We may seek additional
equity or debt financing from time to time. We believe that our existing liquid
resources and funds generated from operations, combined with funds from such
financing and our ability to borrow funds, will be adequate to meet our
operating and capital requirements and obligations through the foreseeable
future. However, we cannot be certain that additional financing will be
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.

     Fluctuations in our stock price impact the prices of our outstanding
convertible securities and the likelihood of the convertible securities being
converted into cash or equity. If we are required to redeem any of the
convertible securities for cash it may affect our liquidity position.

     As of December 31, 2001 we had operating leases financing certain wafer
fabrication equipment (See Note 12 of the Notes). The debt related to operating
leases is not reflected on the balance sheet.

RECENT ACCOUNTING PRONOUNCEMENTS

     In July 2001, the Financial Accounting Standards Board ("FASB") issued FASB
Statements Nos. 141 and 142 (SFAS 141 and SFAS 142), "Business Combinations" and
"Goodwill and Other Intangible Assets." SFAS 141 replaces APB 16 and eliminates
pooling-of-interests accounting prospectively. It also provides guidance on
purchase accounting related to the recognition of intangible assets and
accounting for negative goodwill. SFAS 142 changes the accounting for goodwill
from an amortization method to an impairment-only approach. Under SFAS 142,
goodwill and indefinite-lived intangibles will be tested annually and whenever
events or circumstances occur indicating that they might be impaired. Goodwill
is tested for impairment employing a two-step method. First the fair value of
the reporting unit is compared to its carrying amount. If the fair value is less
than the carrying amount, the impairment is measured as the excess of recorded
goodwill over its implied fair value. Indefinite-lived intangibles are tested
for impairment by comparing the carrying amount to the fair value. SFAS 141 and
SFAS 142 are effective for all business combinations completed after June 30,
2001. Upon adoption of SFAS 142, amortization of goodwill recorded for business
combinations consummated prior to July 1, 2001 will cease, and intangible assets
acquired prior to July 1, 2001 that do not meet the criteria for recognition
under SFAS 141 will be reclassified to goodwill. We adopted SFAS 142 on January
1, 2002, the beginning of fiscal 2002. As a result of the adoption of SFAS 142,
amortization of goodwill and intangibles will be lower by approximately $112
million in 2002 as compared to 2001 and approximately $952 million of goodwill
and indefinite-lived intangibles will no longer be amortized. We have completed
the transitional goodwill impairment assessment in accordance with SFAS 142 and
concluded that goodwill is not impaired as of January 1, 2002.

     In August 2001, the FASB issued Statement No. 143 ("SFAS 143"), "Accounting
for Asset Retirement Obligations." SFAS 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The Statement applies to all
entities. It applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development,
and/or the normal operation of a long-lived asset, except for certain
obligations of lessees. We adopted SFAS 143 on January 1, 2002 and it did not
have a significant effect on our financial position and results of operations.

     In October 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS 144 addresses financial
accounting and reporting for the impairment of long-lived assets and for
long-lived assets to be disposed. We adopted SFAS 144 on January 1, 2002 and it
did not have a significant effect on our financial position and results of
operations.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We have foreign subsidiaries that operate and sell our products in various
global markets. We purchase a substantial portion of our raw materials and
equipment from foreign suppliers and incur labor and other operating costs in
foreign currencies, particularly at our Japanese manufacturing facilities. As a
result, our

                                        44


cash flow and earnings are exposed to fluctuations in foreign currency exchange
rates. We attempt to limit these exposures through operational strategies and
financial market instruments. We use various hedge instruments, primarily
forward contracts with maturities of six months or less and currency option
contracts, to manage our exposure associated with net asset and liability
positions and cash flows denominated in non-functional currencies. We did not
purchase or hold derivative financial instruments for trading purposes as of
December 31, 2001 and 2000.

     Interest rate sensitivity.  We are subject to interest rate risk on our
investment portfolio and outstanding debt. An interest rate move of 41
basis-points (10% of our weighted-average worldwide interest rate in 2001)
affecting our floating-rate financial instruments as of December 31, 2001,
including both debt obligations and investments, 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. In
2000, an interest rate move of 41 basis points (10% of our weighted-average
worldwide interest rate in 2000) affecting our interest sensitive investments
would also not have had a significant effect on our financial position, results
of operations and cash flows.

     Foreign currency exchange risk.  Based on our overall currency rate
exposures at December 31, 2001, including derivative financial instruments and
nonfunctional currency denominated receivables and payables, a near-term 10%
appreciation or depreciation of the U.S. dollar would not have a significant
effect on our financial position, results of operations and cash flows over the
next fiscal year. In 2000 and 1999, a near-term 10% appreciation or depreciation
of the U.S. dollar would also not have had a significant effect.

                                        45


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                             LSI LOGIC CORPORATION

                          CONSOLIDATED BALANCE SHEETS



                                                                     DECEMBER 31,
                                                              ---------------------------
                                                                  2001           2000
                                                              ------------   ------------
                                                              (IN THOUSANDS, EXCEPT PER-
                                                                    SHARE AMOUNTS)
                                                                       
                                         ASSETS
Cash and cash equivalents...................................   $  757,138     $  235,895
Short-term investments......................................      256,169        897,347
Accounts receivable, less allowances of $20,151 and
  $8,297....................................................      191,731        522,729
Inventories.................................................      256,629        290,375
Deferred tax assets.........................................      160,371         54,552
Prepaid expenses and other current assets...................      146,930         71,342
                                                               ----------     ----------
     Total current assets...................................    1,768,968      2,072,240
Property and equipment, net.................................      944,374      1,278,683
Goodwill and other intangibles..............................    1,319,767        580,861
Deferred tax assets.........................................      107,957        120,887
Non-current assets and deposits.............................      296,265             --
Other assets................................................      188,441        144,816
                                                               ----------     ----------
     Total assets...........................................   $4,625,772     $4,197,487
                                                               ==========     ==========
                          LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable............................................   $  136,739     $  268,215
Accrued salaries, wages and benefits........................       72,260         87,738
Other accrued liabilities...................................      227,467        181,199
Income taxes payable........................................       73,187         88,752
Current portion of long-term obligations....................          332          1,030
                                                               ----------     ----------
     Total current liabilities..............................      509,985        626,934
                                                               ----------     ----------
Deferred tax liabilities....................................      173,759        130,616
Other long-term obligations.................................    1,456,276        936,058
                                                               ----------     ----------
     Total long-term obligations and deferred tax
      liabilities...........................................    1,630,035      1,066,674
                                                               ----------     ----------
Commitments and contingencies (Note 12)
Minority interest in subsidiary.............................        5,867          5,742
                                                               ----------     ----------
Stockholders' equity:
Preferred shares; $.01 par value; 2,000 shares authorized...           --             --
Common stock; $.01 par value; 1,300,000 shares authorized;
  368,446 and 321,523 shares outstanding....................        3,684          3,215
Additional paid-in capital..................................    2,905,638      1,931,564
Deferred stock compensation.................................     (124,091)      (163,045)
(Accumulated deficit)/retained earnings.....................     (319,803)       672,152
Accumulated other comprehensive income......................       14,457         54,251
                                                               ----------     ----------
     Total stockholders' equity.............................    2,479,885      2,498,137
                                                               ----------     ----------
     Total liabilities and stockholders' equity.............   $4,625,772     $4,197,487
                                                               ==========     ==========


                See Notes to Consolidated Financial Statements.
                                        46


                             LSI LOGIC CORPORATION

                     CONSOLIDATED STATEMENTS OF OPERATIONS



                                                                      YEAR ENDED DECEMBER 31,
                                                              ----------------------------------------
                                                                  2001          2000          1999
                                                              ------------   -----------   -----------
                                                              (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                                                                  
Revenues....................................................  $ 1,784,923    $2,737,667    $2,089,444
                                                              -----------    ----------    ----------
Costs and expenses:
  Cost of revenues..........................................    1,160,432     1,557,232     1,286,844
  Additional excess inventory and related charges...........      210,564        11,100            --
                                                              -----------    ----------    ----------
     Total cost of revenues.................................    1,370,996     1,568,332     1,286,844
  Research and development..................................      503,108       378,936       297,554
  Selling, general and administrative.......................      307,310       306,962       257,712
  Acquired in-process research and development..............       96,600        77,438         4,600
  Restructuring of operations and other non-recurring items,
     net....................................................      219,639         2,781        (2,063)
  Amortization of non-cash deferred stock compensation(*)...      104,627        41,113            --
  Amortization of intangibles...............................      188,251        72,648        46,625
                                                              -----------    ----------    ----------
     Total costs and expenses...............................    2,790,531     2,448,210     1,891,272
                                                              -----------    ----------    ----------
(Loss)/income from operations...............................   (1,005,608)      289,457       198,172
Interest expense............................................      (44,578)      (41,573)      (39,988)
Interest income and other, net..............................       14,529        51,766        17,640
Gain on sale of equity securities...........................        5,302        80,100        48,393
                                                              -----------    ----------    ----------
(Loss)/income before income taxes, minority interest and
  cumulative effect of change in accounting principle.......   (1,030,355)      379,750       224,217
(Benefit)/provision for income taxes........................      (39,198)      142,959        65,030
                                                              -----------    ----------    ----------
(Loss)/income before minority interest and cumulative effect
  of change in accounting principle.........................     (991,157)      236,791       159,187
Minority interest in net income of subsidiary...............          798           191           239
                                                              -----------    ----------    ----------
(Loss)/income before cumulative effect of change in
  accounting principle......................................     (991,955)      236,600       158,948
Cumulative effect of change in accounting principle.........           --            --       (91,774)
                                                              -----------    ----------    ----------
Net (loss)/income...........................................  $  (991,955)   $  236,600    $   67,174
                                                              ===========    ==========    ==========
Basic earnings per share:
  (Loss)/income before cumulative effect of change in
     accounting principle...................................  $     (2.84)   $     0.76    $     0.54
  Cumulative effect of change in accounting principle.......           --            --         (0.31)
                                                              -----------    ----------    ----------
  Net (loss)/income.........................................  $     (2.84)   $     0.76    $     0.23
                                                              ===========    ==========    ==========
Diluted earnings per share:
  (Loss)/income before cumulative effect of change in
     accounting principle...................................  $     (2.84)   $     0.70    $     0.51
  Cumulative effect of change in accounting principle.......           --            --         (0.28)
                                                              -----------    ----------    ----------
  Net (loss)/income.........................................  $     (2.84)   $     0.70    $     0.23
                                                              ===========    ==========    ==========
Shares used in computing per share amounts:
  Basic.....................................................      349,280       310,813       292,848
                                                              ===========    ==========    ==========
  Diluted...................................................      349,280       354,337       325,088
                                                              ===========    ==========    ==========


- ---------------

(*) Amortization of non-cash deferred stock compensation, if not shown
    separately, of $2 million, $78 million and $25 million would have been
    included in cost of revenues, research and development, and selling, general
    and administrative expenses respectively, for the year ended December 31,
    2001. Amortization of non-cash deferred stock compensation, if not shown
    separately, of $0.1 million, $29 million and $12 million would have been
    included in cost of revenues, research and development, and selling, general
    and administrative expenses respectively, for the year ended December 31,
    2000.

                See Notes to Consolidated Financial Statements.
                                        47


                             LSI LOGIC CORPORATION

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY



                                                                           (ACCUMULATED    ACCUMULATED
                              COMMON STOCK     ADDITIONAL     DEFERRED      DEFICIT)/         OTHER
                            ----------------    PAID-IN        STOCK         RETAINED     COMPREHENSIVE
                            SHARES    AMOUNT    CAPITAL     COMPENSATION     EARNINGS     INCOME/(LOSS)     TOTAL
                            -------   ------   ----------   ------------   ------------   -------------   ----------
                                                                 (IN THOUSANDS)
                                                                                     
Balances at December 31,
  1998....................  287,734   $2,878   $1,133,780    $      --      $ 368,378        $19,437      $1,524,473
Net income................                                                     67,174
Foreign currency
  translation
  adjustments.............                                                                    37,050
Unrealized gain on
  available-for-sale
  securities..............                                                                    89,704
Total comprehensive
  income..................                                                                                   193,928
Issuance to employees
  under stock option and
  purchase plans..........   11,838     118        89,313                                                     89,431
Tax benefit of employee
  stock transactions......                         48,000                                                     48,000
                            -------   ------   ----------    ---------      ---------        -------      ----------
Balances at December 31,
  1999....................  299,572   2,996     1,271,093           --        435,552        146,191       1,855,832
Net income................                                                    236,600
Foreign currency
  translation
  adjustments.............                                                                   (33,650)
Unrealized loss on
  available-for-sale
  securities..............                                                                   (58,290)
Total comprehensive
  income..................                                                                                   144,660
Purchase of common stock
  under stock repurchase
  program.................   (1,500)    (15)      (49,281)                                                   (49,296)
Issuance to employees
  under stock option and
  purchase plans..........   13,352     134       125,945                                                    126,079
Tax benefit of employee
  stock transactions......                         51,450                                                     51,450
Issuance of common stock
  in conjunction with
  acquisitions (Note 2)...   10,099     100       532,357                                                    532,457
Deferred stock
  compensation (Note 2)...                                    (204,158)                                     (204,158)
Amortization of deferred
  stock compensation......                                      41,113                                        41,113
                            -------   ------   ----------    ---------      ---------        -------      ----------
Balances at December 31,
  2000....................  321,523   3,215     1,931,564     (163,045)       672,152         54,251       2,498,137
Net loss..................                                                   (991,955)
Foreign currency
  translation
  adjustments.............                                                                   (31,069)
Unrealized loss on
  available-for-sale
  securities..............                                                                    (8,725)
Total comprehensive
  loss....................                                                                                (1,031,749)
Issuance to employees
  under stock option and
  purchase plans..........    6,249      62        81,588                                                     81,650
Issuance of common stock
  for conversion of
  convertible debt........        4      --            65                                                         65
Issuance of common stock
  in conjunction with
  acquisitions (Note 2)...   40,670     407       892,421                                                    892,828
Deferred stock
  compensation (Note 2)...                                     (65,673)                                      (65,673)
Amortization of deferred
  stock compensation......                                     104,627                                       104,627
                            -------   ------   ----------    ---------      ---------        -------      ----------
Balances at December 31,
  2001....................  368,446   $3,684   $2,905,638    $(124,091)     $(319,803)       $14,457      $2,479,885
                            =======   ======   ==========    =========      =========        =======      ==========


                See Notes to Consolidated Financial Statements.
                                        48


                             LSI LOGIC CORPORATION

                     CONSOLIDATED STATEMENTS OF CASH FLOWS



                                                                     YEAR ENDED DECEMBER 31,
                                                              -------------------------------------
                                                                 2001          2000         1999
                                                              -----------   -----------   ---------
                                                                         (IN THOUSANDS)
                                                                                 
Operating activities:
Net (loss)/income...........................................  $  (991,955)  $   236,600   $  67,174
Adjustments:
  Depreciation and amortization.............................      532,562       403,961     367,157
  Amortization of non-cash deferred stock compensation......      104,627        41,113          --
  Write-off of unamortized preproduction costs..............           --            --      97,356
  Acquired in-process research and development..............       96,600        77,438       4,600
  Non-cash restructuring and non-recurring
    charges/(benefits), net.................................      200,084         2,781      (7,107)
  Gain on sale of equity securities.........................       (5,302)      (80,100)    (48,393)
  Tax benefit of employee stock transactions................           --        51,450      48,000
  Changes in working capital components, net of assets
    acquired and liabilities assumed in business
    combinations:
    Accounts receivable.....................................      345,439      (246,755)    (20,300)
    Inventories.............................................       43,182       (47,136)    (58,929)
    Prepaid expenses and other assets.......................      (74,857)     (103,183)    (21,830)
    Accounts payable........................................     (138,100)       80,498     (13,988)
    Accrued and other liabilities...........................        7,171       148,750      30,071
                                                              -----------   -----------   ---------
  Net cash provided by operating activities.................      119,451       565,417     443,811
                                                              -----------   -----------   ---------
Investing activities:
  Purchase of debt and equity securities
    available-for-sale......................................   (1,272,897)   (1,432,515)   (608,017)
  Maturities and sales of debt and equity securities
    available-for-sale......................................    1,858,304       989,129     304,315
  Purchase of equity securities.............................      (12,269)      (26,664)     (5,778)
  Proceeds from sale of stock investments...................        7,926        78,770      49,407
  Acquisitions of companies, net of cash acquired...........     (177,677)      (85,402)     (6,779)
  Purchases of property and equipment, net of retirements...     (224,252)     (276,633)   (205,172)
  Increase in non-current assets and deposits...............     (325,894)           --          --
                                                              -----------   -----------   ---------
  Net cash used in investing activities.....................     (146,759)     (753,315)   (472,024)
                                                              -----------   -----------   ---------
Financing activities:
  Proceeds from borrowings..................................      690,088       500,000     345,000
  Repayment of debt obligations.............................     (201,226)     (376,658)   (373,063)
  Debt issuance costs.......................................      (16,249)      (15,300)     (9,488)
  Purchase of common stock under repurchase program.........           --       (49,296)         --
  Issuance of common stock, net.............................       81,650       124,975      89,431
                                                              -----------   -----------   ---------
  Net cash provided by financing activities.................      554,263       183,721      51,880
                                                              -----------   -----------   ---------
Effect of exchange rate changes on cash and cash
  equivalents...............................................       (5,712)      (10,531)     16,630
                                                              -----------   -----------   ---------
Increase/(decrease) in cash and cash equivalents............      521,243       (14,708)     40,297
                                                              -----------   -----------   ---------
Cash and cash equivalents at beginning of period............      235,895       250,603     210,306
                                                              -----------   -----------   ---------
Cash and cash equivalents at end of period..................  $   757,138   $   235,895   $ 250,603
                                                              ===========   ===========   =========


                See Notes to Consolidated Financial Statements.
                                        49


                             LSI LOGIC CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES

     Nature of business.  LSI Logic Corporation ("the Company" or "LSI") is a
leading supplier of high-performance integrated circuits and highly scalable
enterprise storage systems. The Company is focused on the four markets of
consumer products, communications, storage components and storage area network
("SAN") systems.

     Segment reporting.  The Company operates in two reportable segments: the
Semiconductor segment and the SAN Systems segment. In the Semiconductor segment,
the Company uses advanced process technology and comprehensive design
methodologies to design, develop, manufacture and market highly complex
integrated circuits. These system-on-a-chip solutions include both application
specific integrated circuits, commonly referred to as ASICs; application
specific standard products in silicon, or ASSPs; as well as Redundant Array of
Independent Disks ("RAID") host bus adapters and related products; and services.
In the SAN Systems segment, the Company designs, manufactures, markets and
supports high-performance, highly scaleable open storage area network systems,
storage solutions and a complete line of RAID systems, subsystems and related
software. (See Note 11 of the Notes to the Consolidated Financial Statements
referred to hereafter as "Notes".)

     Basis of presentation.  The consolidated financial statements include the
accounts of the Company and all of its subsidiaries. Intercompany transactions
and balances have been eliminated in consolidation. Assets and liabilities of
certain foreign operations are translated to U.S. dollars at current rates of
exchange and revenues and expenses are translated using weighted average rates.
Accounts denominated in foreign currencies have been remeasured into functional
currencies before translation into U.S. dollars. Foreign currency transaction
gains and losses are included as a component of interest income and other. Gains
and losses from foreign currency translation are included as a separate
component of comprehensive income.

     On January 25, 2000, the Company announced a two-for-one stock split, which
was declared by the Board of Directors as a 100% stock dividend payable to
stockholders of record on February 4, 2000 as one new share of common stock for
each share held on that date. The newly issued common stock shares were
distributed on February 16, 2000. In the Notes, stockholders' equity has been
restated to give retroactive recognition to the two-for-one common stock split
announced on January 25, 2000 for all periods presented by reclassifying the par
value of the newly issued shares arising from the split from additional paid-in
capital to common stock. In addition, all references in the financial statements
to number of shares, per share amounts, stock option data and market prices of
the Company's common stock have been restated.

  2001 ACQUISITIONS

     During 2001, the Company acquired C-Cube Microsystems Inc. ("C-Cube") and
certain tangible and intangible assets associated with the RAID business of
American Megatrends, Inc. ("AMI"). The acquisitions were accounted for as
purchases and, accordingly, the estimated fair value of assets acquired and
liabilities assumed and the results of operations were included in the Company's
consolidated financial statements as of the effective date of each acquisition,
through the end of the period. These transactions are summarized below. There
were no significant differences between accounting policies of LSI and the
companies acquired. (See Note 2 of the Notes.)



                       ACQUISITION   PURCHASE                                               IDENTIFIED      DEFERRED
COMPANY                   DATE        PRICE         CONSIDERATION        IPR&D   GOODWILL   INTANGIBLES   COMPENSATION
- -------                -----------   --------   ----------------------   -----   --------   -----------   ------------
                                                (AMOUNTS IN MILLIONS)
                                                                                     
C-Cube...............  May 2001       $893.7    40.2 million shares,     $77.5    $572.1      $130.5         $49.3
                                                10.6 million options,
                                                0.8 million warrants
RAID Division of       August 2001     240.5    Cash                     19.1      128.9        77.5          16.4
  AMI................                           0.8 million restricted
                                                shares


                                        50

                             LSI LOGIC CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  2000 AND 1999 ACQUISITIONS

     During 2000, the Company acquired a division of NeoMagic Corporation
("NeoMagic"), a division of Cacheware, Inc. ("Cacheware"), Intraserver
Technology, Inc. ("Intraserver"), DataPath Systems, Inc. ("DataPath"), ParaVoice
Technologies, Inc. ("ParaVoice") and Syntax Systems, Inc. ("Syntax"). The
acquisitions were accounted for as purchases and, accordingly, the estimated
fair value of assets acquired and liabilities assumed and the results of
operations were included in the Company's consolidated financial statements as
of the effective date of each acquisition, through the end of the period.

     These transactions are summarized below. There were no significant
differences between the accounting policies of LSI and the companies acquired.
(See Note 2 of the Notes.)



                            ACQUISITION   PURCHASE                                              IDENTIFIED      DEFERRED
COMPANY                        DATE        PRICE         CONSIDERATION       IPR&D   GOODWILL   INTANGIBLES   COMPENSATION
- -------                    -------------  --------   ---------------------   -----   --------   -----------   ------------
                                                  (AMOUNTS IN MILLIONS)
                                                                                         
Division of NeoMagic.....  April 2000      $ 15.4    Cash                    $6.4     $ 1.9        $ 5.8         $  --
Division of Cacheware....  April 2000        22.2    Cash                     8.3       8.5          5.2            --
Intraserver..............  May 2000          62.9    1.2 million shares,      1.6      50.8         17.5            --
                                                      0.2 million options
DataPath.................  July 2000        420.8    7.5 million shares,     54.2     154.0         17.4         201.6
                                                      1.6 million options
ParaVoice................  October 2000      38.6    Cash                     6.9      10.4         21.2            --
Syntax...................  November 2000     58.8    1.4 million shares,       --      42.0         25.4           2.5
                                                      0.6 million options


     In the second quarter of 2001, the NeoMagic research project was abandoned
and the remaining intangibles and goodwill recorded in connection with the
project were written off to other non-recurring items. (See Note 4 of the
Notes.)

     On June 22, 1999, the Company and SEEQ Technology, Inc. ("SEEQ") were
combined in a transaction accounted for as a pooling of interests. All financial
information has been restated retroactively to reflect the combined operations
of the Company and SEEQ as if the combination had occurred at the beginning of
the earliest period presented. (See Note 2 of the Notes.) Prior to the
combination, SEEQ's fiscal year-end was the last Sunday in September of each
year, whereas the Company operates on a year ending on December 31. SEEQ's
financial information has been recast to conform to the Company's year-end.
There were no significant differences between the accounting policies of the
Company and SEEQ.

     Minority interest in subsidiary represents the minority stockholders'
proportionate share of the net assets and the results of operations of the
Company's majority-owned subsidiary. Sales of common stock of the Company's
subsidiary and purchases of such shares may result in changes in the Company's
proportionate share of the subsidiary's net assets.

     The preparation of financial statements in conformity with generally
accepted accounting principles 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 materially from these
estimates.

     Certain items previously reported in specific financial statement captions
have been reclassified to conform to the 2001 presentation.

     Cash equivalents and short-term investments.  All highly liquid investments
purchased with an original maturity of 90 days or less are considered to be cash
equivalents and are classified as held-to-maturity. Marketable short-term
investments are generally classified and accounted for as available-for-sale.
Management determines the appropriate classification of debt and equity
securities at the time of purchase and reassesses the classification at each
reporting date. Investments in debt and equity securities classified as held-

                                        51

                             LSI LOGIC CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

to-maturity are reported at amortized cost plus accrued interest, and securities
classified as available-for-sale are reported at fair value with unrealized
gains and losses, net of related tax, recorded as a separate component of
comprehensive income in stockholders' equity until realized (See Note 5 of the
Notes). Gains and losses on securities sold are determined based on the specific
identification method and are included in interest income and other. For all
investment securities, unrealized losses that are other than temporary are
recognized in net income. The Company does not hold these securities for
speculative or trading purposes.

     Fair value disclosures of financial instruments.  The estimated fair value
of financial instruments is determined by the Company, using available market
information and valuation methodologies considered to be appropriate. However,
considerable judgment is required in interpreting market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts that the Company could realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies could have a significant effect on the estimated fair
value amounts. At December 31, 2001, the estimated fair values of the 2001, 2000
and 1999 Convertible Subordinated Notes were $444.7 million, $418.8 million and
$387.2 million, respectively. At December 31, 2000, the estimated fair values of
the 2000 and 1999 Convertible Subordinated Notes were $356.9 million and $388.6
million, respectively.

     Derivative instruments.  The Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as amended by SFAS Nos. 137 and 138 as of January 1,
2001. SFAS No. 133 requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. It further provides criteria for derivative
instruments to be designated as fair value, cash flow and foreign currency
hedges and establishes respective accounting standards for reporting changes in
the fair value of the instruments. All of the Company's derivative instruments
are recorded at their fair value in other current assets or other accrued
liabilities. (See Note 6 of the Notes.) The transition adjustment upon adoption
of SFAS No. 133 was not material.

     On the date a derivative contract is entered into, the Company designates
its derivative as either a hedge of the fair value of a recognized asset or
liability ("fair-value" hedge), as a hedge of the variability of cash flows to
be received ("cash-flow" hedge), or as a foreign-currency hedge. Changes in the
fair value of a derivative that is highly effective, and is designated and
qualifies as a fair-value hedge, along with the loss or gain on the hedged asset
or liability that is attributable to the hedged risk (including losses or gains
on firm commitments), are recorded in current period earnings. Changes in the
fair value of a derivative that is highly effective, and is designated and
qualifies as a cash-flow hedge, are recorded in other comprehensive income,
until earnings are affected by the variability of the cash flows. Changes in the
fair value of derivatives that are highly effective, and are designated and
qualify as a foreign-currency hedge, are recorded in either current period
earnings or other comprehensive income, depending on whether the hedge
transaction is a fair-value hedge (e.g., a hedge of a firm commitment that is to
be settled in a foreign currency) or a cash-flow hedge (e.g., a
foreign-currency-denominated forecasted transaction). The Company's derivative
instruments at December 31, 2001 and 2000 were designated as foreign currency
fair-value hedges.

     The Company formally documents all relationships between hedging
instruments and hedged items, as well as its risk management objective and
strategy for undertaking various hedge transactions. This process includes
linking all derivatives that are designated as fair-value, cash-flow or
foreign-currency hedges to specific assets and liabilities on the balance sheet
or to specific firm commitments or forecasted transactions. The Company also
assesses, both at the hedge's inception and on an ongoing basis, whether the
derivatives that are used in hedging transactions are highly effective in
offsetting changes in fair values or cash flows of the hedged items. If it were
determined that a derivative is not highly effective as a hedge or that it has
ceased to be a highly effective hedge, the Company would discontinue hedge
accounting prospectively, as discussed below.

                                        52

                             LSI LOGIC CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The Company would discontinue hedge accounting prospectively when (1) it is
determined that the derivative is no longer effective in offsetting changes in
the fair value or cash flows of a hedged item (including firm commitments or
forecasted transactions); (2) the derivative expires or is sold, terminated or
exercised; (3) the derivative is no longer designated as a hedge instrument,
because it is unlikely that a forecasted transaction will occur; (4) the hedged
firm commitment no longer meets the definition of a firm commitment; or (5)
management determines that designation of the derivative as a hedge instrument
is no longer appropriate.

     When hedge accounting is discontinued because it is determined that the
derivative no longer qualifies as an effective fair-value hedge, the derivative
will continue to be carried on the balance sheet at its fair value, and the
hedged asset or liability will no longer be adjusted for changes in fair value.
When hedge accounting is discontinued because the hedged item no longer meets
the definition of a firm commitment, the derivative will continue to be carried
on the balance sheet at its fair value, and any asset or liability that was
recorded pursuant to recognition of the firm commitment will be removed from the
balance sheet and recognized as a gain or loss in current-period earnings. When
hedge accounting is discontinued because it is probable that a forecasted
transaction will not occur, the derivative will continue to be carried on the
balance sheet at its fair value, and gains and losses that were accumulated in
other comprehensive income will be recognized immediately in earnings. In all
other situations in which hedge accounting is discontinued, the derivative will
be carried at its fair value on the balance sheet, with changes in its fair
value recognized in current period earnings.

     Concentration of credit risk of financial instruments.  Financial
instruments that potentially subject the Company to credit risk consist of cash
equivalents, short-term investments and accounts receivable. Cash equivalents
and short-term investments are maintained with high quality institutions, the
composition and maturities of which are regularly monitored by management. A
majority of the Company's trade receivables are derived from sales to large
multinational computer, communication, networking and consumer electronics
manufacturers, with the remainder distributed across other industries. As of
December 31, 2001, two customers each accounted for 12% of consolidated trade
receivables. No customers accounted for greater than or equal to 10% of trade
receivables as of December 31, 2000. Concentrations of credit risk with respect
to all other trade receivables are considered to be limited due to the quantity
of customers comprising the Company's customer base and their dispersion across
industries and geographies. One customer accounted for 18% of the Company's
total consolidated revenues for the year ended December 31, 2001, and another
customer represented 12% and 11% of the Company's consolidated revenues for the
years ended December 31, 2000 and 1999, respectively. The Company performs
ongoing credit evaluations of its customers' financial condition and requires
collateral as considered necessary. Write-offs of uncollectable amounts have not
been significant.

     Inventories.  Inventories are stated at the lower of cost or market. Cost
is determined on a first-in, first-out basis for raw materials and is computed
on a currently adjusted standard basis (which approximates first-in, first-out)
for work-in-process and finished goods. Inventory reserves are established when
conditions indicate that the selling price could be less than cost due to
physical deterioration, obsolescence, changes in price levels, or other causes.
Reserves are established for excess inventory generally based on inventory
levels in excess of 12 months judged demand for each specific product.

     Property and equipment.  Property and equipment are recorded at cost and
include interest on funds borrowed during the construction period. Depreciation
and amortization are calculated based on the straight-

                                        53

                             LSI LOGIC CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

line method. Depreciation of equipment and buildings, in general, is computed
using the assets' estimated useful lives as presented below:

                                                            
Buildings and improvements..................................   20-40 years
Equipment...................................................     3-6 years
Furniture and fixtures......................................     3-5 years



     Amortization of leasehold improvements is computed using the shorter of the
remaining term of the Company's facility leases or the estimated useful lives of
the improvements. Depreciation for income tax purposes is computed using
accelerated methods.

     Preproduction engineering costs.  In April 1998, the Accounting Standards
Executive Committee of the AICPA released SOP No. 98-5, "Reporting on the Costs
of Start-up Activities." The SOP is effective for fiscal years beginning after
December 15, 1998 and requires companies to expense all costs incurred or
unamortized in connection with start-up activities. Accordingly, the Company
expensed the unamortized preproduction balance of $92 million, net of tax,
associated with the Gresham manufacturing facility on January 1, 1999 and has
presented it as a cumulative effect of a change in accounting principle in
accordance with the SOP No. 98-5.

     Goodwill and other intangibles.  Goodwill and other intangibles acquired in
connection with business acquisitions and the purchase of common stock from
minority stockholders were approximately $1,661 million and $737 million, and
related accumulated amortization was $341 million and $156 million at December
31, 2001 and 2000, respectively. (See Note 2 of the Notes.) The acquisitions
were accounted for as purchases, and the excess of the purchase price over the
fair value of assets acquired was allocated to existing technology, customer
base, workforce in place, trademarks and residual goodwill, which are being
amortized using the straight-line method over a weighted average life of two to
six years. Goodwill and other intangibles are evaluated for impairment based on
the related estimated undiscounted cash flows. The goodwill and identifiable
intangible assets from the acquired RAID division of AMI has been accounted for
in accordance with the Financial Accounting Standards Board Statement No. 141,
"Business Combinations" and Financial Accounting Standards Board Statement No.
142, "Goodwill and Other Intangible Assets." (See Note 2 of the Notes.)

     Other assets.  Long-term investments in marketable and restricted shares of
technology companies are included in other assets. The marketable investments
are accounted for as available-for-sale and are reported at fair value with
unrealized gains and losses, net of related tax, recorded as a separate
component of comprehensive income in stockholders' equity until realized in
accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." (See Note 5 of the Notes.) Gains and losses on securities
sold are based on the specific identification method and are included in gain on
sale of equity securities. The investments in restricted and non-marketable
shares are recorded at cost. For all investment securities, unrealized losses
that are other than temporary are recognized as a component of interest income
and other. Circumstances that indicate an other than temporary decline may
include subsequent "down" financing rounds, decreases in quoted market price and
declines in results of operations of the issuer. The Company does not hold these
securities for speculative or trading purposes.

     Software.  The Company capitalizes external costs related to the purchase
and implementation of software projects used for business operations and
engineering design activities. Capitalized software costs primarily include
purchased software and external consulting fees. Capitalized software projects
are amortized over the estimated useful lives of the projects, typically a two
to five year period. The Company had $178 million and $137 million of
capitalized software costs and $131 million and $72 million of accumulated
amortization included in other assets at December 31, 2001 and 2000,
respectively. Software amortization totaling $56 million, $41 million and $25
million was included in the Company's results of operations during 2001, 2000
and 1999.

                                        54

                             LSI LOGIC CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Self-insurance.  The Company retains certain exposures in its insurance
plan under self-insurance programs. Reserves for claims made and reserves for
estimated claims incurred but not yet reported are recorded as current
liabilities.

     Revenue recognition.  Product revenue is primarily recognized upon shipment
with the exception of standard products sold to distributors. Revenue from
standard products sold to distributors is deferred until the distributor sells
the product to a third party. Revenue from the licensing of the Company's design
and manufacturing technology is recognized when the significant contractual
obligations have been fulfilled. Royalty revenue is recognized upon the sale of
products subject to royalties. The Company uses the percentage-of-completion
method for recognizing revenues on fixed-fee design arrangements. All amounts
billed to a customer related to shipping and handling are classified as revenue
while all costs incurred by the Company for shipping and handling are classified
as costs of goods sold.

     The provisions of Statement of Position 97-2, "Software Revenue
Recognition," as amended by Statement of Position 98-9 "Modification of SOP
97-2, Software Revenue Recognition, With Respect to Certain Transactions" are
applied to all transactions involving the sale of software products and hardware
transactions where the software is not incidental. For hardware transactions
where software is incidental, the fee is not bifurcated and separate accounting
guidance is not applied to the hardware and software elements. For hardware
transactions where no software is involved the provisions of Staff Accounting
Bulletin 101 "Revenue Recognition" are applied.

     Stock-based compensation.  The Company accounts for stock-based
compensation, including stock options granted and shares issued under the
Employee Stock Purchase Plan, using the intrinsic value method prescribed in APB
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
Compensation cost for stock options, if any, is recognized ratably over the
vesting period. The Company's policy is to grant options with an exercise price
equal to the quoted market price of the Company's stock on the grant date. The
Company provides additional pro forma disclosures as required under SFAS No.
123, "Accounting for Stock-Based Compensation." (See Note 9 of the Notes.)

     The Company adopted FASB Interpretation No. 44 ("FIN No. 44"), "Accounting
for Certain Transactions Involving Stock Compensation -- an Interpretation of
APB 25", on July 1, 2000. Amortization of non-cash deferred stock compensation
of $105 million and $41 million in 2001 and 2000, respectively, is due to
non-cash deferred stock compensation of $270 and $204 million recorded in
connection with the acquisitions of the RAID business of AMI, C-Cube, Syntax and
DataPath, which closed on August 31, 2001, May 11, 2001, November 29, 2000, and
July 14, 2000, respectively (See Note 2 of the Notes).

                                        55

                             LSI LOGIC CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Earnings per share.  Basic earnings per share ("EPS") is computed by
dividing net income available to common stockholders (numerator) by the weighted
average number of common shares outstanding (denominator) during the period.
Diluted EPS is computed using the weighted-average number of common and dilutive
potential common shares outstanding during the period. In computing diluted EPS,
the average stock price for the period is used in determining the number of
shares assumed to be repurchased upon the exercise of stock options. A
reconciliation of the numerators and denominators of the basic and diluted per
share amount computations is as follows:



                                                                      YEAR ENDED DECEMBER 31,
                                   ----------------------------------------------------------------------------------------------
                                                2001                              2000                           1999
                                   -------------------------------   ------------------------------   ---------------------------
                                                           PER-                             PER-                            PER-
                                                           SHARE                            SHARE                          SHARE
                                    INCOME*    SHARES+    AMOUNT     INCOME*    SHARES+    AMOUNT     INCOME*    SHARES+   AMOUNT
                                   ---------   -------   ---------   --------   -------   ---------   --------   -------   ------
                                                              (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
                                                                                                
Basic EPS:
  Net (loss)/income before
    cumulative effect of change
    in accounting principle......  $(991,955)  349,280    $(2.84)    $236,600   310,813     $0.76     $158,948   292,848   $ 0.54
                                                          ------                            -----                          ------
  Cumulative effect of change in
    accounting principle.........         --        --        --           --        --        --      (91,774)  292,848    (0.31)
  Net (loss)/income available to
    common stockholders..........   (991,955)  349,280     (2.84)     236,600   310,813      0.76       67,174   292,848     0.23
                                                          ------                            -----                          ------
  Effect of dilutive securities:
    Stock options and restricted
      stock awards (See Note
      2).........................                                                21,517                           14,634
    4 1/4% Convertible
      Subordinated Notes.........                                      10,997    22,007                  8,126    17,606
Diluted EPS:
  Net (loss)/income before
    cumulative effect of change
    in accounting, principle
    (adjusted for assumed
    conversion of debt)..........   (991,955)  349,280     (2.84)     247,597   354,337      0.70      167,074   325,088     0.51
                                                          ------                            -----                          ------
  Cumulative effect of change in
    accounting principle.........         --        --        --           --        --        --      (91,774)  325,088    (0.28)
  Net (loss)/income available to
    common stockholders..........  $(991,955)  349,280    $(2.84)    $247,597   354,337     $0.70     $ 75,300   325,088   $ 0.23
                                                          ------                            -----                          ------


- ---------------

* Numerator

+ Denominator

     Options to purchase approximately 73,996,916 shares were outstanding at
December 31, 2001 and were excluded from the computation of diluted shares
because of their antidilutive effect on earnings per share as the Company
incurred a net loss for the year. Options to purchase approximately 6,573,340
shares and 4,122,000 shares were outstanding at December 31, 2000 and 1999,
respectively, but were not included in the computation of diluted shares for the
year ended December 31, 2000 and 1999, respectively, because the exercise prices
of these options were greater than the average market price of common shares for
the respective years. The exercise price of these options ranged from $0.01 to
$72.25 and $26.38 to $72.25 at December 31, 2001 and 2000, respectively.

     Related party transactions.  There were no significant related party
transactions during the years ended December 31, 2001, 2000 and 1999, other than
as listed in Notes 3 and 12 of the Notes.

     Comprehensive income.  Comprehensive income 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. The primary difference between net income and
comprehensive income, for the Company, arises from foreign currency translation
adjustments and unrealized gains or losses

                                        56

                             LSI LOGIC CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

on available-for-sale securities, net of applicable taxes. Comprehensive income
is shown in the statement of stockholders' equity. As of December 31, 2001, the
accumulated other comprehensive income consisted of $22 million of unrealized
gains on available-for-sale securities, net of the related tax effect of $12
million, and $8 million loss from foreign currency translation adjustments, net
of the related tax effect of $3 million. As of December 31, 2000, the
accumulated other comprehensive income consisted of $31 million of unrealized
gains on available-for-sale securities, net of the related tax effect of $17
million, and $23 million gain from foreign currency translation adjustments, net
of the related tax effect of $12 million. As of December 31, 1999, the
accumulated other comprehensive income consisted of $90 million of unrealized
gain on available-for-sale securities, net of the related tax effect of $48
million, and $56 million gain from foreign currency translation adjustments, net
of the related tax effect of $30 million.

NOTE 2 -- BUSINESS COMBINATIONS

     Acquisitions accounted for as purchases.  The estimated fair value of
acquired assets and assumed liabilities and the results of operations for
acquisitions accounted for as a purchase are included in the Company's
consolidated financial statements as of the effective date of the purchase,
through the end of the period. The total purchase price is allocated to the
estimated fair value of assets acquired and liabilities assumed based on
independent appraisals and management estimates. The fair value of common shares
issued for acquisitions was determined using the average closing stock price for
the period of two days before and after the date the number of LSI common shares
to be issued was fixed. The purchase price includes direct acquisition costs
consisting of investment banking, legal and accounting fees. There were no
significant differences between the accounting policies of the Company and the
acquired entities except as noted below.

     Deferred compensation.  On July 1, 2000, FIN No. 44 was adopted by the
Company as discussed in Note 1 of the Notes. In accordance with FIN No. 44, for
all acquisitions that closed after it's adoption, the intrinsic value of the
unvested options, restricted awards and warrants assumed as part of the
acquisitions as of the closing date of the acquisitions was recorded as deferred
stock compensation as a component of the purchase price to be amortized over the
respective vesting periods of the options and awards. The Company calculated the
value of restricted shares issued using the closing price of its common stock on
the date of consummation of the purchase. The fair value of the options and
warrants assumed was determined using the Black Scholes method. Deferred stock
compensation is included as a component of stockholders' equity and is amortized
over the vesting period of one to four years.

                                        57

                             LSI LOGIC CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     In-process research and development.  During 2001, the Company recorded a
$96.6 million IPR&D charge associated with the acquisitions of C-Cube and the
purchase of the RAID business of AMI. During 2000, the Company recorded a $77.4
million IPR&D charge associated with the acquisitions of ParaVoice, DataPath,
Intraserver and the purchase of divisions of NeoMagic and Cacheware. There was
no IPR&D charge recorded in connection with the acquisition of Syntax. During
1999, the Company recorded a $4.6 million IPR&D charge associated with the
acquisition of ZSP. See summary table below:



                                                           PERCENTAGE OF
                       ACQUISITION           DISCOUNT     COMPLETION AND      REVENUE PROJECTIONS
COMPANY                    DATE      IPR&D     RATE           METHOD               BY PROJECT           ROYALTY RATE
- -------                ------------  -----   --------   -------------------  ----------------------  -------------------
                                                 (AMOUNTS IN MILLIONS)
                                                                                   
C-Cube...............  May 2001      $77.5    27.5%     61% to 84%, percent  2003 -- Cable Modem             --
                                                          of R&D expenses    2004 -- Set-Top Box
                                                                             2005 -- DVD
                                                                             2006 -- DVD-R
RAID Division of       August 2001   19.1       20%     12% to 62%, percent  2006                            --
  AMI................                                     of R&D expenses
Division of            April 2000     6.4       30%     68%, percent of R&D  2004                            30%
  NeoMagic...........                                        expenses
Division of            April 2000     8.3       30%     90%, percent of R&D  2003                            30%
  Cacheware..........                                        expenses
Intraserver..........  May 2000       1.6       30%     20% to 95%, project  2005                            30%
                                                            milestones
DataPath.............  July 2000     54.2       20%     50% to 75%, project  2004 -- Read Channel    20% to Read Channel
                                                            milestones       2006 -- ADSL              and ADSL 3% to
                                                                             2007 -- Tuner                  Tuner
ParaVoice............  October 2000   6.9       50%     23%, percent of R&D  2005                            --
                                                             expenses
ZSP..................  April 1999     4.6       25%        65%, project      2003                            25%
                                                            milestones


     The amounts of IPR&D were determined by identifying research projects for
which technological feasibility had not been established and no alternative
future uses existed as of the respective acquisition dates. The value of the
projects identified to be in progress was determined by estimating the future
cash flows from the projects once commercially feasible, discounting the net
cash flows back to their present value and then applying a percentage of
completion to the calculated value. The net cash flows from the identified
projects were based on estimates of revenues, cost of revenues, research and
development costs, selling general and administrative costs and applicable
income taxes for the projects. Total revenues for the projects are expected to
extend through the dates noted in the table above by acquisition. These
projections were based on estimates of market size and growth, expected trends
in technology and the expected timing of new product introductions by our
competitors and us. These estimates do not account for any potential synergies
that may be realized as a result of the acquisition and are in line with
industry averages and growth estimates.

     The percentage of completion for the projects was determined using one of
the following methods:

     - Percentage of research and development expenses.  Research and
       development expenses incurred as of the acquisition dates for the
       projects as a percentage of total research and development expenses to
       bring the projects to technological feasibility.

     - Project milestones.  Milestones representing management's estimate of
       effort, value added and degree of difficulty of the portion of the
       projects completed as of the acquisition dates, as compared to the
       remaining research and development to be completed to bring the projects
       to technological feasibility. The development process is grouped into
       three phases, with each phase containing between one and five milestones.
       The three phases are: (i) researching the market requirements and the
       engineering architecture and feasibility studies; (ii) design and
       verification milestones; and (iii) prototyping and testing the product
       (both internal and customer testing).

                                        58

                             LSI LOGIC CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     A discount rate is used for the projects to account for the risks
associated with the inherent uncertainties surrounding the successful
development of the IPR&D, market acceptance of the technology, the useful life
of the technology, the profitability level of such technology and the
uncertainty of technological advances, which could impact the estimates
described above. The Company applied a royalty rate by project by acquisition to
operating income to attribute value for dependency on predecessor core
technologies.

     Development of technologies that have not yet been completed remains a
substantial risk to the Company due to various factors, including the remaining
effort to achieve technological feasibility, rapidly changing customer markets
and competitive threats from other companies. Failure to bring the product to
market in a timely manner could adversely affect sales and profitability of the
Company in the future. Additionally, the value of other intangible assets
acquired may become impaired.

     Recent accounting pronouncements.  In July 2001, the Financial Accounting
Standards Board ("FASB") issued FASB Statements Nos. 141 and 142 (SFAS 141 and
SFAS 142), "Business Combinations" and "Goodwill and Other Intangible Assets."
SFAS 141 replaces APB 16 and eliminates pooling-of-interests accounting
prospectively. It also provides guidance on purchase accounting related to the
recognition of intangible assets and accounting for negative goodwill. SFAS 142
changes the accounting for goodwill from an amortization method to an
impairment-only approach. Under SFAS 142, goodwill and indefinite-lived
intangibles will be tested annually and whenever events or circumstances occur
indicating that they might be impaired. Goodwill is tested for impairment
employing a two-step method. First the fair value of the reporting unit is
compared to its carrying amount. If the fair value is less than the carrying
amount, the impairment is measured as the excess of recorded goodwill over its
implied fair value. Indefinite-lived intangibles are tested for impairment by
comparing the carrying amount to the fair value. SFAS 141 and SFAS 142 are
effective for all business combinations completed after June 30, 2001. Upon
adoption of SFAS 142, amortization of goodwill recorded for business
combinations consummated prior to July 1, 2001 will cease, and intangible assets
acquired prior to July 1, 2001 that do not meet the criteria for recognition
under SFAS 141 will be reclassified to goodwill. The Company will adopt SFAS 142
on January 1, 2002, the beginning of fiscal 2002, for all goodwill and
intangibles that arose before July 1, 2001. As a result of the adoption of SFAS
142, amortization of goodwill and intangibles will be lower by approximately
$112 million in 2002 as compared to 2001 and approximately $952 million of
goodwill and indefinite-lived intangibles will no longer be amortized. The
Company has completed the transitional goodwill impairment assessment in
accordance with SFAS 142 and concluded that goodwill is not impaired as of
January 1, 2002.

  2001

     Acquisition of the RAID business.  On August 31, 2001, the Company
finalized the Asset Purchase Agreement with American Megatrends, Inc. ("AMI").
Under the agreement, the Company acquired certain tangible and intangible assets
associated with AMI's Redundant Array of Independent Disks, or RAID, business.
The acquisition will enhance product offerings and be included in the
Semiconductor segment. The acquisition was accounted for as a purchase.

                                        59

                             LSI LOGIC CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The Company paid approximately $224 million in cash, which included direct
acquisition costs of $2.5 million. The Company issued and will issue
approximately 0.8 million restricted common shares to certain RAID business
employees retained as part of the purchase transaction. The total purchase price
was allocated as follows (in thousands):

                                                            
Fair value of net liabilities acquired......................   $ (1,440)
In-process research and development.........................     19,100
Current technology..........................................     74,100
Trademarks..................................................      3,400
Excess of purchase price over net liabilities acquired......    128,891
                                                               --------
                                                               --------
Total purchase price excluding deferred compensation........    224,051
Deferred stock compensation.................................     16,400
                                                               --------
Total purchase price........................................   $240,451
                                                               ========



     The calculated value of deferred stock compensation includes certain
minimum guaranteed amounts. Deferred stock compensation will be amortized over
approximately two years.

     In-process research and development.  In connection with the purchase of
the RAID business, the Company recorded a $19.1 million charge for several IPR&D
projects during the third quarter of 2001. The projects were for development of
RAID technology applications. The percentage of completion for the projects was
determined based on the percentage of research and development expenses. The
discount rate used was 20% for the projects. Development of RAID technology
applications was started in early 2000 and 2001. As of August 31, 2001, the
Company estimated that the projects were from 12% to 62% complete.

     Useful life of intangible assets.  The amount allocated to current
technology and trademarks is being amortized over their estimated useful lives
of 4 and 5.5 years, respectively, using the straight-line method. The excess of
purchase price over net assets acquired is not being amortized. The
identification of intangibles and amortization periods were determined in
accordance with the recent accounting pronouncements as described above.

     Pro forma statement of earnings information has not been presented because
the effect of this acquisition was not material.

     ACQUISITION OF C-CUBE.  On March 26, 2001, the Company signed a definitive
merger agreement ("Merger Agreement") to acquire C-Cube Microsystems Inc.
("C-Cube"). In accordance with the Merger Agreement, the Company commenced an
exchange offer whereby it offered 0.79 of a share of common stock for each
outstanding share of C-Cube common stock. Under the terms of the Merger
Agreement, the exchange offer was followed by a merger in which the Company
acquired, at the same exchange ratio, the remaining shares of C-Cube common
stock not previously acquired in the exchange offer. Upon completion of the
merger, the Company assumed all options and warrants to purchase shares of
C-Cube common stock and converted them into options and warrants to purchase
shares of the Company's common stock. The merger was subject to customary
closing conditions, including the tender for exchange of at least a majority of
C-Cube's outstanding shares of common stock (including for purposes of the
calculation of the majority of shares, certain outstanding options and warrants
to purchase C-Cube shares). The acquisition was effective May 11, 2001. The
acquisition was accounted for as a purchase.

     The Company issued approximately 40.2 million shares of its common stock,
10.6 million options and 0.8 million warrants in exchange for the outstanding
ordinary shares, options and warrants of C-Cube, respectively. The fair value of
common shares issued was $18.73 per share. The acquisition is intended to

                                        60

                             LSI LOGIC CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

enhance and accelerate the Company's digital video product offerings in the
Semiconductor segment. The components of purchase price are as follows (in
thousands):

                                                            
Fair value of common shares issued..........................   $752,557
Fair value of options assumed...............................    116,174
Fair value of warrants assumed..............................      8,121
Direct acquisition costs....................................     16,856
                                                               --------
Total purchase price........................................   $893,708
                                                               ========



     The total purchase price was allocated as follows:



                                                               (IN THOUSANDS)
                                                            
Tangible net assets acquired................................      $ 64,315
Acquired in-process research and development................        77,500
Current technology..........................................        74,000
Trademarks..................................................        20,500
Assembled workforce.........................................        36,000
Excess of purchase price over net assets acquired...........       572,120
                                                                  --------
Total purchase price excluding deferred stock
  compensation..............................................       844,435
Deferred stock compensation.................................        49,273
                                                                  --------
Total purchase price........................................      $893,708
                                                                  ========


     In-process research and development.  In connection with the purchase of
C-Cube, the Company recorded a $77.5 million charge for various IPR&D projects.
The projects identified primarily consisted of digital video disc ("DVD"),
recordable digital video ("DVD-R"), Consumer Set-Top Box and Cable Modem. The
percentage of completion for the projects was determined based on the percentage
of research and development expenses. The discount rate used was 27.5% for these
projects. The development of these projects started in early 1999. As of May 11,
2001, the Company estimated the projects were approximately 84%, 62%, 61% and
69% complete for DVD, DVD-R, Consumer Set-Top Box and Cable Modem, respectively.

     Useful life of intangible assets.  The amount allocated to current
technology, trademarks, assembled workforce and excess of purchase price over
net assets acquired is being amortized over their estimated weighted average
useful life of six years using the straight-line method.

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

     The summary includes the impact of certain adjustments such as amortization
of intangibles and non-cash deferred stock compensation. Additionally, the
in-process research and development charge of $77.5 million discussed above has
been excluded from the periods presented as it arose from the acquisition of
C-Cube. The restructuring and other non-recurring charges of $219.6 million were
included in the pro forma calculation as the charges did not relate to the
acquisition of C-Cube. (See Note 4 of the Notes.)

                                        61

                             LSI LOGIC CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)



                                                              YEAR ENDED DECEMBER 31,
                                                              -----------------------
                                                                 2001         2000
                                                              ----------   ----------
                                                                    (UNAUDITED)
                                                               (IN THOUSANDS, EXCEPT
                                                                PER-SHARE AMOUNTS)
                                                                     
Revenues....................................................  $1,851,659   $3,002,716
Net (loss)/ income..........................................  $ (962,488)  $  109,112
Basic EPS...................................................  $    (2.65)  $     0.31
Diluted EPS.................................................  $    (2.65)  $     0.29


  2000

     During 2000, the Company completed six acquisitions, which were accounted
for using the purchase method of accounting. Unaudited pro forma statement of
earnings information has not been presented because the effects of these
acquisitions were not material on either an individual or an aggregate basis.
See summary table below:


                                                                                      FAIR VALUE
                                                                                      OF TANGIBLE
ENTITY NAME, SEGMENT                                                                  NET ASSETS/
INCLUDED IN, DESCRIPTION OF    ACQUISITION    PURCHASE                               (LIABILITIES)
ACQUIRED BUSINESS                 DATE         PRICE           CONSIDERATION           ACQUIRED      GOODWILL
- ---------------------------    -----------    --------         -------------         -------------   --------
                                                  (IN MILLIONS, EXCEPT NUMBER OF SHARES)
                                                                                      
Syntax, SAN Systems           November 2000    $ 58.8    1.4 million shares issued       $(11.1)      $42.0
segment, Software solutions                              at $30.71 per share,
for centralized storage                                  including 0.04 million
management                                               restricted common shares,
                                                         0.6 million options
                                                         assumed
ParaVoice, Semiconductor      October 2000       38.6    Cash                               0.1        10.4
segment, Voice over
Internet Protocol (VoIP)
and Voice over DSL (VoDSL)
DataPath, Semiconductor         July 2000       420.8    7.5 million shares issued         (6.4)      154.0
segment, Semiconductor                                   at $46.11 per share,
standard products                                        including 2.3 million
                                                         restricted common shares,
                                                         1.6 million options
                                                         assumed
Intraserver, Semiconductor      May 2000         62.9    1.2 million shares issued         (7.0)       50.8
segment, Host adapter                                    at $45.83 per share, 0.2
boards, storage                                          million options assumed
infrastructure and
communication products
Division of Cacheware, SAN     April 2000        22.2    Cash                               0.2         8.5
Systems segment, SAN
Business
Division of NeoMagic,          April 2000        15.4    Cash                               1.3         1.9
Semiconductor segment,
Optical read-channel mixed
signal design team and RF
intellectual property



ENTITY NAME, SEGMENT           CURRENT        ASSEMBLED
INCLUDED IN, DESCRIPTION OF  TECHNOLOGY &    WORKFORCE &              DEFERRED
ACQUIRED BUSINESS             TRADEMARKS    CUSTOMER BASE   IPR&D   COMPENSATION
- ---------------------------  ------------   -------------   -----   ------------
                                   (IN MILLIONS, EXCEPT NUMBER OF SHARES)
                                                        
Syntax, SAN Systems             $13.0           $12.4       $ --       $ 2.5
segment, Software solutions
for centralized storage
management
ParaVoice, Semiconductor         18.0             3.2        6.9          --
segment, Voice over
Internet Protocol (VoIP)
and Voice over DSL (VoDSL)
DataPath, Semiconductor          17.4              --       54.2       201.6
segment, Semiconductor
standard products
Intraserver, Semiconductor       15.3             2.2        1.6          --
segment, Host adapter
boards, storage
infrastructure and
communication products
Division of Cacheware, SAN        4.0             1.2        8.3          --
Systems segment, SAN
Business
Division of NeoMagic,             3.8             2.0        6.4          --
Semiconductor segment,
Optical read-channel mixed
signal design team and RF
intellectual property


     In the second quarter of 2001, the NeoMagic research project was abandoned
and the remaining intangibles and goodwill recorded in connection with the
project were written off to other non-recurring items. (See Note 4 of the
Notes.)

  1999

     Merger with SEEQ.  On June 22, 1999, the Company and SEEQ were combined.
SEEQ was formed in January 13, 1981 and engaged in the development, production
and sale of state-of-the-art semiconductor data communications devices. The
stock-for-stock transaction was approved by the shareholders of SEEQ. In
December 1999, SEEQ was merged with and into LSI with LSI continuing as the
surviving corporation in the merger. As a result of the merger, the separate
existence of SEEQ ceased. Under the terms of the Agreement

                                        62

                             LSI LOGIC CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

and Plan of Reorganization and Merger, SEEQ's shareholders received 0.1518 of a
share of the Company's common stock for each SEEQ share. Accordingly, the
Company issued approximately 5 million shares of its common stock for all the
outstanding shares of SEEQ common stock. Additionally, outstanding options to
acquire SEEQ common stock as of the merger date were converted to options to
acquire 0.8 million shares of the Company's common stock.

     The merger was accounted for as a pooling of interests. Accordingly, the
Company's financial statements have been restated retroactively to include the
financial results of SEEQ for all periods presented. Selected financial
information for the combining entities included in the consolidated statements
of operations for the six-month period ended June 30, 1999 (unaudited), the
interim period nearest the merger date is as follows:



                                                                 SIX MONTHS
                                                                   ENDED
                                                                  JUNE 30,
                                                                    1999
                                                               --------------
                                                               (IN THOUSANDS)
                                                            
Net sales:
  LSI.......................................................      $949,915
  SEEQ......................................................        14,714
                                                                  --------
  Combined..................................................      $964,629
                                                                  ========
Net loss:
  LSI.......................................................      $(75,148)
  SEEQ......................................................        (2,785)
                                                                  --------
  Combined..................................................      $(77,933)
                                                                  ========


     Adjustments to conform accounting policies of SEEQ to those of LSI were not
significant to the combined financial results. There were no inter-company
transactions between the two companies for the periods presented.

     Restructuring and merger-related expenses associated with the SEEQ
merger.  In connection with the merger with SEEQ on June 22, 1999, the Company
recorded approximately $2.9 million in restructuring charges and $5.5 million in
merger-related expenses, which included $0.5 million recorded by SEEQ in the
first quarter of 1999. The merger expenses related primarily to investment
banking and other professional fees directly attributable to the merger with
SEEQ. The restructuring charge was comprised of $1.9 million in write-downs of
fixed assets that were duplicative to the combined company, $0.5 million of exit
costs relating to non-cancelable building lease contracts and a $0.5 million
provision for severance costs related to the involuntary termination of certain
employees. The restructuring actions as outlined by the restructuring plan were
completed by June 30, 2000, one year from the date the reserve was taken.
Approximately $0.5 million of severance was paid to three employees terminated
during 1999.

     Acquisition of ZSP.  On April 14, 1999, the Company acquired all of the
outstanding capital stock of ZSP, a semiconductor company that designs and
markets programmable digital signal processors. The acquisition was accounted
for as a purchase. There were no significant differences between the accounting
policies of the Company and ZSP.

                                        63

                             LSI LOGIC CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The Company paid $7 million in cash, which included direct acquisition
costs of $0.6 in addition to liabilities assumed of $4.3 million. The total
purchase price of $11.3 million was allocated as follows (in thousands):

                                                            
Fair value of tangible net liabilities......................   $  (301)
In-process research and development.........................     4,600
Current technology..........................................     2,600
Excess of purchase price over net assets acquired...........     4,370
                                                               -------
                                                               $11,269
                                                               =======



     Pro forma results of operations have not been presented as ZSP's operations
were not significant to the Company's consolidated operations, and therefore,
the pro forma results would not significantly differ from the Company's
historical results.

NOTE 3 -- LICENSE AGREEMENT

     In the second quarter of 1999, the Company and Silterra Malaysia Sdn. Bhd.
(formerly known as Wafer Technology (Malaysia) Sdn. Bhd.) ("Silterra") entered
into a technology transfer agreement under which the Company grants licenses to
Silterra with respect to certain of the Company's wafer fabrication technologies
and provides associated manufacturing training and related services. In
exchange, the Company receives cash consideration of $75 million and equity
consideration over three years for which transfers and obligations of the
Company are scheduled to occur. The equity consideration was valued at zero as
of December 31, 2001. The Company transferred technology to Silterra valued at
$20 million, $24 million and $15 million for the years ended December 31, 2001,
2000 and 1999, respectively. The amount was recorded as an offset to the
Company's R&D expenses. In addition, the Company provided engineering training
with a value of $2 million, $4 million and $2 million for the years ended
December 31, 2001, 2000 and 1999, respectively. The amount was recorded as an
offset to cost of revenues.

NOTE 4 -- RESTRUCTURING AND OTHER NON-RECURRING ITEMS

  2001

     The Company recorded approximately $219.6 million in restructuring and
non-recurring charges for the year ended December 31, 2001, consisting of $207.2
for restructuring of operations and $12.4 million for other non-recurring
charges.

  Restructuring

     In September 2001, the Company announced the consolidation of U.S.
manufacturing operations at Gresham, Oregon and the transfer of process research
and development from Santa Clara, California to Gresham, Oregon. The Company
also announced the closure of certain assembly activities in Fremont,
California, which will be transferred offshore. In September 2001, the Company
recorded a restructuring charge of $77 million for fixed asset write-downs due
to impairment in the U.S., losses on operating leases for equipment and
facilities, severance for approximately 600 employees across multiple company
activities and functions in the U.S., Europe, Japan and Asia Pacific as well as
other exit costs. In December 2001, the Company recorded $14 million of
additional fixed asset write-downs due to impairment for the Santa Clara
facility. The Company reclassified $25 million, representing the fair market
value of the assets identified above, from property, plant and equipment to
other current assets during the year to reflect the intention to dispose of the
assets within 12 months. In addition, in December 2001, approximately $4 million
in exit costs for the closure of the Santa Clara facility was recorded relating
primarily to labor and facilities charges.

                                        64

                             LSI LOGIC CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     In April 2001, the Company announced the closure of the Company's Colorado
Springs fabrication facility ("the facility") in August 2001. In May 2001, the
Company entered into a definitive agreement to sell the facility to a third
party. As part of the agreement, the Company agreed to purchase a minimum amount
of production wafers and die from the facility for a period of 18 months
following the close of the transaction. During the quarter ended June 30, 2001,
the Company recorded an impairment charge of $71 million relating to the
facility of which approximately $35 million was recorded in cost of sales and
$36 million was recorded in restructuring charges. The restructuring charges
consisted of fixed asset write-downs due to impairment, losses on operating
leases for equipment, severance for approximately 413 manufacturing employees
and other exit costs. On August 1, 2001, the Company announced the termination
of the agreement to sell the facility. The facility was closed in the fourth
quarter of 2001. In September 2001, the Company recorded an additional
restructuring charge of $55 million for fixed asset write-downs and other exit
costs associated with the planned closure of the facility. The additional asset
write-downs during the third quarter of 2001 were incurred to reflect the lower
value of the facility's assets if sold on a piecemeal basis rather than sold as
a facility in continued use. In addition, equipment market values continued to
decline in the third quarter of 2001. The Company reclassified approximately $62
million from property, plant and equipment to other current assets to reflect
the intention to dispose of the facility within the next 12 months. In December
2001, the Company recorded $1.5 million of additional fixed asset write-downs
due to impairment for the Colorado Springs facility. In addition, approximately
$3 million in exit costs for the closures of Colorado Springs facilities were
recorded relating primarily to labor and facilities charges.

     The Company recorded approximately $16 million in restructuring charges in
the second quarter of 2001 primarily associated with the write-down of fixed
assets due to impairment in the U.S., Japan and Hong Kong that will be disposed
of and severance charges for approximately 240 employees across multiple company
activities and functions in the U.S., Europe and Asia Pacific. As a result of
the continued decline in the equipment market during the third quarter of 2001,
the Company recorded an additional charge of $0.5 million during the third
quarter of 2001 to reflect the fair value of the equipment when sold. In
December 2001, the Company recorded $0.3 million of additional fixed asset
write-downs due to impairment in Japan. The Company plans to sell the assets and
accordingly has reclassified $2 million from property, plant and equipment to
other current assets to reflect the intention to sell the assets within the next
12 months.

     The fair value of assets determined to be impaired was based on independent
appraisals and management estimates. Given that current market conditions for
the sale of older fabrication facilities and related equipment may continue to
deteriorate, there can be no assurance that the Company will realize its current
net book value for the assets. The Company will reassess the realizability of
the carrying value of these assets at the end of each quarter until the assets
are sold or otherwise disposed of and additional adjustments may be necessary.

     The following table sets forth our restructuring reserves as of December
31, 2001, which is included in other accrued liabilities on the balance sheet:



                                                                                BALANCE AT
                                                   RESTRUCTURING               DECEMBER 31,
                                                      EXPENSE      UTILIZED        2001
                                                   -------------   ---------   ------------
                                                                (IN THOUSANDS)
                                                                      
Write-down of excess assets(a)...................    $139,724      $(135,962)    $ 3,762
Lease terminations and maintenance
  contracts(c)...................................      26,912        (16,217)     10,695
Facility closure and other exit costs(c).........      24,242        (10,089)     14,153
Payments to employees for severance(b)...........      16,346        (15,622)        724
                                                     --------      ---------     -------
  Total..........................................    $207,224      $(177,890)    $29,334
                                                     ========      =========     =======


                                        65

                             LSI LOGIC CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

- ---------------

(a)  Amounts utilized in 2001 reflect a non-cash write-down of fixed assets in
     the U.S., Japan and Hong Kong due to impairment of $133.8 million and cash
     payments for machinery and equipment decommissioning costs of $2.2 million.
     The fixed asset write-downs were accounted for as a reduction of the assets
     and did not result in a liability. The $3.8 million balance as of December
     31, 2001 relates to machinery and equipment decommissioning costs in the
     U.S.

(b)  Amounts utilized represent cash payments related to the severance of
     approximately 1180 employees during the year ended December 31, 2001. The
     $0.7 million balance as of December 31, 2001 will be paid during the first
     six months of 2002.

(c)  Amounts utilized represent cash payments.

  Other Non-Recurring Charges:

     The Company recorded approximately $12.4 million in other non-recurring
charges during 2001 as follows:

     - $8.1 million in charges associated with the write-down of intangible
       assets due to impairment. The majority of the intangible assets were
       originally acquired in the purchase of a division of NeoMagic in the
       second quarter of 2000.

     - $4.3 million in charges primarily consisting of the write-down of an
       investment in a marketable equity security and related purchased
       intellectual property.

  2000

     The Company recorded a restructuring of operations and other non-recurring
net charges of $2.8 million in 2000. This was primarily related to the loss on
an agreement entered into with a third party to outsource certain testing
services previously performed by us at our Fremont, California facility.

  1999

     During the third quarter of 1999, the Company completed the activities
underlying the restructuring plan, which was originally established in the third
quarter of 1998. During the year ended December 31, 1999, the Company utilized
$11.5 million of restructuring reserves, which consisted of severance payments
of $7.9 million for 358 employees terminated during the year, $2.3 million for
early lease contract terminations and to exit non-cancelable purchase
commitments, $0.7 million of manufacturing facility decommissioning costs in
Japan and other exit costs, and $0.6 million of currency translation
adjustments. During 1999, the Company recorded approximately $2.9 million in
restructuring charges and $5.5 million in merger-related expenses in connection
with the merger with SEEQ on June 22, 1999 (see Note 2 of the Notes.)

     During 1999, the Company determined that $10.5 million of the restructuring
reserve from 1998 would not be utilized because of a change in management's
estimate of the reserve requirements. The amount consisted of the following:

     - $3.9 million of reserves for lease terminations and non-cancelable
       purchase commitments, primarily in the U.S. and Europe;

     - $3.7 million of excess severance reserves in the U.S., Japan and Europe;

     - $2.0 million of reserves for manufacturing facility decommissioning costs
       and other exit costs primarily in the U.S. and Japan; and

     - $0.9 million of related cumulative translation adjustments.

                                        66

                             LSI LOGIC CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

       The change in management estimates of the reserve requirements stemmed
       primarily from the following factors:

     - A significant increase in the requirement for manufacturing capacity to
       meet expected sales growth, which resulted in retention of certain
       employees originally targeted for termination of employment and in
       reversal of the reserve for decommissioning costs as a result of
       retention of the U.S. and Japan operation facilities originally targeted
       for sale; and

     - The Company's ability to exit lease commitments and non-cancelable
       purchase commitments on more favorable terms than originally anticipated
       in the U.S. and Europe.

     Accordingly, the restructuring reserve reversal was included in the
determination of income from operations for the year ended December 31, 1999.

NOTE 5 -- CASH AND INVESTMENTS

     As of December 31, 2001 and 2000, cash and cash equivalents and short-term
investments included the following debt and equity securities:



                                                                2001       2000
                                                              --------   --------
                                                                (IN THOUSANDS)
                                                                   
CASH AND CASH EQUIVALENTS
Overnight deposits..........................................  $295,439   $ 51,862
Commercial paper............................................   151,793     31,658
Corporate and municipal debt securities.....................     9,957      5,705
                                                              --------   --------
  Total held-to-maturity....................................   457,189     89,225
Cash........................................................   299,949    146,670
                                                              --------   --------
  Total cash and cash equivalents...........................  $757,138   $235,895
                                                              ========   ========
SHORT-TERM INVESTMENTS
Corporate and municipal debt securities.....................  $191,405   $488,592
Commercial paper............................................    19,851    203,952
Auction rate preferred......................................    29,887     69,731
Certificates of deposit.....................................        --     23,308
Equity securities...........................................        --     60,000
U.S. government and agency securities.......................    15,026     51,764
                                                              --------   --------
  Total available-for-sale..................................  $256,169   $897,347
                                                              ========   ========


     Unrealized holding gains and losses of held-to-maturity securities and
available-for-sale debt securities were not significant and accordingly the
amortized cost of these securities approximated fair market value at December
31, 2001 and 2000. Securities classified as held-to-maturity were included in
cash equivalents, and debt securities classified as available-for-sale were
included in short-term investments as of December 31, 2001 and 2000. Contractual
maturities of these securities were within one year as of December 31, 2001.
Realized gains and losses for held-to-maturity securities and available-for-sale
debt securities were not significant for the years ended December 31, 2001, 2000
and 1999.

     At December 31, 2001, the Company had investments in available-for-sale
marketable equity securities with an aggregate carrying value of $54 million, of
which all securities were included as a component of other long-term assets. At
December 31, 2000, the Company had investments in available-for-sale marketable
equity securities with an aggregate carrying value of $66 million, of which $60
million were classified as short-

                                        67

                             LSI LOGIC CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

term investments. The remaining balance was included in other long-term assets.
As of December 31, 2001, an unrealized gain of $22 million, net of the related
tax effect of $12 million, on these equity securities was included in
accumulated comprehensive income. As of December 31, 2000, an unrealized gain of
$31 million, net of the related tax effect of $17 million, on these equity
securities was included in accumulated comprehensive income.

     During 2001, the Company sold equity securities for $8 million in the open
market, realizing a pre-tax gain of approximately $5 million. During 2000, the
Company sold equity securities for $79 million in the open market, realizing a
pre-tax gain of approximately $73 million. In addition, the Company realized a
pre-tax gain of approximately $7 million associated with equity securities of a
certain technology company that was acquired by another technology company
during the year. During 1999, the Company sold equity securities for $49 million
in the open market, realizing a pre-tax gain of approximately $48 million.

     During the year ended December 31, 2001, the Company wrote down to
estimated fair value equity investments in certain technology companies. The
write down was for approximately $19 million. The decline in value of the
investments was considered by management to be other than temporary. The Company
also realized a pre-tax gain of approximately $4 million associated with equity
securities of a certain technology company that was acquired by another
technology company during the year.

NOTE 6 -- DERIVATIVE INSTRUMENTS

     The Company has foreign subsidiaries that operate and sell the Company's
products in various global markets. As a result, the Company is exposed to
changes in foreign currency exchange rates and interest rates. The Company
utilizes various hedge instruments, primarily forward contracts and currency
option contracts, to manage its exposure associated with firm intercompany and
third-party transactions and net asset and liability positions denominated in
non-functional currencies. The Company does not hold derivative financial
instruments for speculative or trading purposes.

  FORWARD CONTRACTS

     Forward contracts are used to hedge certain cash flows denominated in
non-functional currencies. Changes in the fair value of forward contracts due to
changes in time value are excluded from the assessment of effectiveness and are
recognized in other income and expense. At December 31, 2001, there was one
forward contract outstanding, it was set to expire within one month and is
designated as a foreign currency fair-value hedge in accordance with SFAS No.
133. For the year ended December 31, 2001, the change in time value of the
forward contracts was not significant. The Company did not record any gains or
losses due to hedge ineffectiveness during 2001.

     Forward exchange contracts are also used to hedge certain foreign
currency-denominated assets or liabilities. These derivatives do not qualify for
SFAS No. 133 hedge accounting treatment. Accordingly, changes in the fair value
of these hedges are recorded immediately in earnings to offset the changes in
fair value of the assets or liabilities being hedged. The related gains and
losses included in other income and expense was not significant.

  OPTION CONTRACTS

     The Company also enters into purchased currency option contracts that are
designated as foreign currency cash-flow hedges of third-party yen revenue
exposures. Changes in the fair value of currency option contracts due to changes
in time value are excluded from the assessment of effectiveness and are
recognized in other income and expense. There were no option contracts
outstanding as of December 31, 2001 and 2000. For the year ended December 31,
2001, the change in option time value was approximately $4 million. During the
year ended December 31, 2001, an amount of $6 million was reclassified to
revenue from other comprehensive

                                        68

                             LSI LOGIC CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

income as the forecasted transactions affected earnings. The Company did not
record any gains or losses due to hedge ineffectiveness for the year ended
December 31, 2001.

NOTE 7 -- BALANCE SHEET DETAIL



                                                                   DECEMBER 31,
                                                             -------------------------
                                                                2001          2000
                                                             -----------   -----------
                                                                  (IN THOUSANDS)
                                                                     
Inventories:
  Raw materials............................................  $    31,797   $    36,133
  Work-in-process..........................................       88,354       129,394
  Finished goods...........................................      136,478       124,848
                                                             -----------   -----------
                                                             $   256,629   $   290,375
                                                             ===========   ===========
Property and equipment:
  Land.....................................................  $    52,130   $    55,846
  Buildings and improvements...............................      470,433       477,175
  Equipment................................................    1,330,609     1,620,472
  Leasehold improvements...................................       54,083        54,373
  Furniture and fixtures...................................       54,778        53,874
  Construction in progress.................................       58,454       164,026
                                                             -----------   -----------
                                                               2,020,487     2,425,766
  Accumulated depreciation and amortization................   (1,076,113)   (1,147,083)
                                                             -----------   -----------
                                                             $   944,374   $ 1,278,683
                                                             ===========   ===========


     The Company recorded, as a component of cost of revenues, additional excess
inventory and related charges of $211 million for the year ended December 31,
2001. The charges were due to inventory production in anticipation of closing
the Company's Colorado Springs manufacturing facility (see Note 4 of the Notes),
a sudden and significant decrease in forecasted revenue, and significant
underutilization related to a temporary idling of the Company's fabrication
facilities due to reduced demand. The charges were calculated in accordance with
the Company's policy, which is primarily based on inventory levels in excess of
12 month judged demand for each specific product.

     An allocation of interest costs incurred on borrowings during a period
required to complete construction of the asset is capitalized as part of the
historical cost of acquiring certain assets. Gross capitalized interest included
in property and equipment totaled $29 million at December 31, 2001 and 2000. No
interest was capitalized during 2001 and 2000. Accumulated amortization of
capitalized interest was $17 million and $15 million at December 31, 2001 and
2000, respectively.

                                        69

                             LSI LOGIC CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 8 -- DEBT



                                                                  DECEMBER 31,
                                                              ---------------------
                                                                 2001        2000
                                                              ----------   --------
                                                                 (IN THOUSANDS)
                                                                     
2001 Convertible Subordinated Notes.........................  $  490,000   $     --
2000 Convertible Subordinated Notes.........................     500,000    500,000
1999 Convertible Subordinated Notes.........................     344,935    345,000
Capital lease obligations...................................       1,203      2,341
                                                              ----------   --------
                                                               1,336,138    847,341
Current portion of long-term debt, capital lease obligations
  and short-term borrowings.................................        (332)    (1,030)
                                                              ----------   --------
Long-term debt and capital lease obligations................  $1,335,806   $846,311
                                                              ==========   ========


     On October 30, 2001, the Company issued $490 million of 4% Convertible
Subordinated Notes (the "2001 Convertible Notes") due in 2006. The 2001
Convertible Notes are subordinated to all existing and future senior debt, are
convertible at the holder's option, at any time after 60 days following
issuance, into shares of the Company's common stock at a conversion price of
$26.339 per share. The 2001 Convertible Notes are redeemable at the Company's
option, in whole or in part, on at least 30 days notice at any time on or after
November 6, 2004. Each holder of the 2001 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. Interest is payable semiannually. The Company paid
approximately $13.5 million for debt issuance costs related to the 2001
Convertible Notes. The debt issuance costs are being amortized using the
interest method. The net proceeds from the 2001 Convertible Notes were used to
repay bank debt outstanding with a balance of approximately $200 million as of
September 30, 2001 as described below.

     On September 28, 2001, the Company entered into a Credit Agreement with
Bank of America, N.A. and Banc of America Securities LLC that provides for
borrowings up to $200 million through September 26, 2002. The Company borrowed
$200 million under the Credit Agreement as of September 30, 2001, with an
interest rate based on LIBOR. The obligation was secured by inventory and
accounts receivable. In October 2001, the borrowings outstanding under the
Credit Agreement were repaid in full with the proceeds of the 2001 Convertible
Notes and the Credit Agreement was terminated.

     On February 18, 2000, the Company issued $500 million of 4% Convertible
Subordinated Notes (the "2000 Convertible Notes") due in 2005. The 2000
Convertible Notes are subordinated to all existing and future senior debt, are
convertible at the holder's option, at any time after 60 days following
issuance, into shares of the Company's common stock at a conversion price of
$70.2845 per share. The 2000 Convertible Notes are redeemable at the Company's
option, in whole or in part, on at least 30 days notice at any time on or after
February 20, 2003. Each holder of the 2000 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. Interest is payable semiannually. The Company paid
approximately $15.3 million for debt issuance costs related to the 2000
Convertible Notes. The debt issuance costs are being amortized using the
interest method. The net proceeds from the 2000 Convertible Notes were used to
repay bank debt outstanding with a balance of approximately $380 million as of
December 31, 1999 as described below.

     During March 1999, the Company issued $345 million of 4 1/4% Convertible
Subordinated Notes (the "1999 Convertible Notes") due in 2004. The 1999
Convertible Notes are subordinated to all existing and future senior debt, are
convertible at the holder's option, at any time after 60 days following
issuance, into

                                        70

                             LSI LOGIC CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

shares of the Company's common stock at a conversion price of $15.6765 per
share. The 1999 Convertible Notes are redeemable at the option of the Company,
in whole or in part, on at least 30 days notice at any time on or after March
20, 2002. Each holder of the 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. Interest is payable semiannually. The Company paid approximately $9.5
million for debt issuance costs related to the 1999 Convertible Notes. The
amount was capitalized in other assets and is being amortized over the life of
the 1999 Convertible Notes using the interest method. The net proceeds of the
1999 Convertible Notes were used to repay existing debt obligations.

     The term fundamental change referred to above means the occurrence of any
transaction or event such as an exchange offer, liquidation, tender offer,
consolidation, merger, or combination.

     On August 5, 1998, the Company entered into a credit agreement with ABN
AMRO Bank N.V. ("ABN AMRO"). The credit agreement was restated and superseded by
the Amended and Restated Credit Agreement dated as of September 22, 1998 by and
among the Company, LSI Logic Japan Semiconductor, Inc. ("JSI") and ABN AMRO, and
was thereafter syndicated to a group of lenders determined by ABN AMRO and the
Company ("Notes payable to banks"). The credit agreement consisted of two credit
facilities: a $575 million senior unsecured reducing revolving credit facility
("Revolver"), and a $150 million senior unsecured revolving credit facility
("364-day Facility"). On April 21, 2000, the credit agreement was superseded by
the Second Amended and Restated Credit Agreement by and among the Company, JSI,
ABN AMRO and a group of lenders determined by ABN AMRO to terminate the yen
sub-facility and modify certain covenant requirements.

     On March 14, 2001, the Second Amended and Restated Credit Agreement was
amended to reduce the total revolving commitment by $165 million from $240
million to $75 million. On the effective date of this reduction, the revolving
commitment of each lender was reduced accordingly. The Second Amended and
Restated Credit Agreement was terminated in August 2001.

     Aggregate principal payments required on outstanding capital lease and debt
obligations are $0.3 million, $0.3 million, $345.3 million, $500.2 million and
$490 million for the years ended December 31, 2002, 2003, 2004, 2005 and 2006,
respectively. There are currently no payments required after December 31, 2006.

     The Company paid $38 million, $30 million and $37 million in interest
during 2001, 2000 and 1999, respectively.

NOTE 9 -- COMMON STOCK

     Authorized shares.  The following summarizes all shares of common stock
reserved for issuance for the employee stock option and purchase plans as of
December 31, 2001:



                                                                 NUMBER OF
                                                                   SHARES
                                                               --------------
                                                               (IN THOUSANDS)
                                                            
Issuable upon:
Exercise of stock options, including options available for
  grant.....................................................      107,127
Purchase under Employee Stock Purchase Plan.................       10,656
                                                                  -------
                                                                  117,783
                                                                  =======


     Stock split.  On January 25, 2000, the Company announced a two-for-one
stock split, which was declared by the Board of Directors as a 100% stock
dividend payable to stockholders of record on February 4, 2000 as one new share
of common stock for each share held on that date. The newly issued common stock
shares were distributed on February 16, 2000. All references to stock option
data of the Company's common

                                        71

                             LSI LOGIC CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

stock below have been restated retroactively to reflect the two-for-one common
stock split as if it occurred for all periods presented.

     Stock repurchase program.  There were no stock repurchases in 2001. On July
28, 2000, the Company's Board of Directors authorized a new stock repurchase
program in which up to 5 million shares of the Company's common stock may be
repurchased in the open market from time to time. Accordingly, the Company
repurchased 1.5 million shares of its common stock in the open market for
approximately $49.3 million during the year ended December 31, 2000. The
transactions were recorded as reductions to common stock and additional paid-in
capital.

     Stock option plans.  On August 13, 1999, the Board of Directors approved
the 1999 Nonstatutory Stock Option Plan ("1999 NSO Plan") under which 14 million
shares were reserved for issuance. In August 2000, 12 million additional shares
were approved by the Board of Directors for issuance, and in May 2001, 13
million additional shares were approved for issuance, for a total of 39 million
shares reserved for issuance under the 1999 NSO Plan. Under the terms of the
1999 NSO Plan, the Company may grant stock options to its employees, excluding
officers, with an exercise price that is no less than the fair market value of
the stock on the date of grant. The term of each option is determined by the
Board of Directors and is generally ten years. Options generally vest in annual
increments of 25% per year commencing one year from the date of grant.

     The 1991 Equity Incentive Plan enables the Company to grant stock options
to its employees and consultants. Stock options may be granted with an exercise
price no less than the fair value of the stock on the date of grant. The term of
each option is determined by the Board of Directors and is generally ten years.
Options generally vest in annual increments of 25% per year commencing one year
from the date of grant. A total of 77.5 million shares have been reserved for
issuance under this plan, including 5 million shares approved by the
stockholders in May 2001 and 10 million approved by stockholders in May 2000.

     The Company's 1982 Incentive Stock Option Plan is administered by the Board
of Directors. Terms of that plan required that the exercise price of options be
no less than the fair value at the date of grant and that options be granted
only to employees and consultants of the Company. Generally, options granted
vested in annual increments of 25% per year commencing one year from the date of
grant and had a term of ten years. During 1992, the 1982 Incentive Stock Option
Plan expired by its terms. Accordingly, no further options may be granted
thereunder. None of the options previously granted under this plan remained
outstanding at December 31, 2001.

     In May 1995, the stockholders approved the 1995 Director Option Plan, which
replaced the 1986 Directors' Stock Option Plan, and reserved 1 million shares
for issuance thereunder. Terms of the 1995 Director Option Plan provide for an
initial option grant to new directors and subsequent automatic option grants
each year thereafter. The option grants generally have a ten-year term and vest
in equal increments over four years. The exercise price of options granted is
the fair market value of the stock on the date of grant. On May 7, 1999, the
stockholders approved an amendment to the 1995 Director Option Plan to increase
the annual grant of options to each non-employee director to 25,000 shares,
which fully vest six months after grant. None of the options previously granted
under the 1986 Directors' Stock Option Plan remained outstanding at December 31,
2001.

     In connection with the acquisition of C-Cube (see Note 2 of the Notes),
each outstanding stock option under C-Cube's Stock Option Plan was converted to
an option of the Company's common stock at a ratio of 0.79. As a result,
outstanding options to purchase 10,616,640 shares and warrants to purchase
750,100 shares were assumed. No further options may be granted under the C-Cube
Stock Option Plan.

     In connection with the acquisition of Syntax Systems, Inc. (see Note 2 of
the Notes), each outstanding stock option under Syntax's Stock Option Plan was
converted to an option of the Company's common stock at a ratio of 0.1896. As a
result, outstanding options to purchase 611,241 shares were assumed. No further
options may be granted under the Syntax Stock Option Plan.
                                        72

                             LSI LOGIC CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     In connection with the acquisition of DataPath Systems, Inc. (see Note 2 of
the Notes), each outstanding stock option under DataPath's Stock Option Plan was
converted to an option of the Company's common stock at a ratio of 0.4269. As a
result, outstanding options to purchase 1,560,823 shares were assumed. No
further options may be granted under the DataPath Stock Option Plan.

     In connection with the acquisition of Intraserver Technology, Inc. (see
Note 2 of the Notes), each outstanding stock option under Intraserver's Stock
Option Plan was converted to an option of the Company's common stock at a ratio
of 2.2074. As a result, outstanding options to purchase 154,709 shares were
assumed. No further options may be granted under the Intraserver Stock Option
Plan.

     In connection with the merger with SEEQ (see Note 2 of the Notes), each
outstanding stock option under SEEQ's Stock Option Plan was converted to an
option of the Company's common stock at a ratio of 0.1518. As a result,
outstanding options to purchase 760,878 shares were assumed. No further options
may be granted under the SEEQ Stock Option Plan. All tables presented below were
retroactively restated as if the merger occurred at the beginning of the periods
presented.

     At December 31, 2001, remaining shares available for grant under all stock
option plans were approximately 33,130,000.

     The following table summarizes the Company's stock option share activity
and related weighted average exercise price within each category for each of the
years ended December 31, 2001, 2000 and 1999 (share amounts in thousands):



                                               2001               2000               1999
                                         ----------------   ----------------   ----------------
                                         SHARES    PRICE    SHARES    PRICE    SHARES    PRICE
                                         ------   -------   ------   -------   ------   -------
                                                                      
Options outstanding at January 1.......  55,164   $ 24.09   48,709   $ 16.73   40,232   $ 10.92
Options assumed........................  10,617     15.26    2,327      6.19       --        --
Options canceled.......................  (7,257)   (25.89)  (5,833)   (27.94)  (2,830)   (13.13)
Options granted........................  18,911     20.79   18,069     41.47   18,848     25.73
Options exercised......................  (3,438)   (10.22)  (8,108)   (10.70)  (7,541)    (9.38)
                                         ------   -------   ------   -------   ------   -------
Options outstanding at December 31.....  73,997   $ 22.44   55,164   $ 24.09   48,709   $ 16.73
                                         ======   =======   ======   =======   ======   =======
Options exercisable at December 31.....  30,766   $ 18.81   19,250   $ 14.62   16,139   $ 11.00
                                         ======   =======   ======   =======   ======   =======


     Significant option groups outstanding at December 31, 2001 and related
weighted average exercise price and contractual life information is as follows
(share amounts in thousands):



                                            OUTSTANDING       EXERCISABLE     REMAINING
                                          ---------------   ---------------     LIFE
                                          SHARES   PRICE    SHARES   PRICE     (YEARS)
                                          ------   ------   ------   ------   ---------
                                                               
Options with exercise prices ranging
  from:
$ 0.01 to $ 5.00........................     858   $ 2.13      755   $ 2.27     3.72
$ 5.01 to $10.00........................  12,073     8.45    7,494     8.38     6.87
$10.01 to $15.00........................  12,076    12.63    8,039    12.16     6.20
$15.01 to $20.00........................  10,244    17.78    4,299    16.99     7.88
$20.01 to $25.00........................  15,759    22.10    1,586    21.65     9.01
$25.01 to $30.00........................   8,961    29.15    3,929    29.16     7.91
$30.01 to $35.00........................   4,657    32.60    2,158    32.57     7.98
Greater than $35.01.....................   9,369    49.21    2,506    49.50     8.36
                                          ------   ------   ------   ------     ----
                                          73,997   $22.44   30,766   $18.81     7.70
                                          ======   ======   ======   ======     ====


     All options were granted at an exercise price equal to the market value of
the Company's common stock at the date of grant, with the exception of the
options assumed as part of the acquisition of C-Cube on May 11,

                                        73

                             LSI LOGIC CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2001, Syntax on November 29, 2000, DataPath on July 14, 2000, Intraserver on May
26, 2000 and the merger with SEEQ on June 22, 1999. (See Note 2 of the Notes.)
The weighted average estimated grant date fair value, as defined by SFAS No.
123, of options granted during 2001, 2000 and 1999 was $15.44, $30.86 and $14.35
per option, respectively. The estimated grant date fair value was calculated
using the Black-Scholes model. The Black-Scholes model, as well as other
currently accepted option valuation models, 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. The following weighted average assumptions
were included in the estimated grant date fair value calculations for the
Company's stock option awards:



                                                               2001     2000    1999
                                                              ------   ------   -----
                                                                       
Expected life (years).......................................    3.79     3.85    4.76
Risk-free interest rate.....................................    4.70%    6.28%   5.55%
Volatility..................................................  110.98%  108.15%  60.46%
Dividend yield..............................................      --       --      --


     Stock purchase plan.  Since 1983, the Company has offered an Employee Stock
Purchase Plan under which rights are granted to all employees to purchase shares
of common stock at 85% of the lesser of the fair market value of such shares at
the beginning of an offering period or the end of each six-month segment within
such an offering period. Sales under the Employee Stock Purchase Plan in 2001,
2000 and 1999 were approximately 2.9 million, 5.2 million and 4.3 million shares
of common stock at an average price of $16.39, $6.30 and $5.20 per share,
respectively. In 1997, the stockholders approved an amendment to the Company's
Employee Stock Purchase Plan to increase the number of shares of common stock
reserved for issuance on the first day of each fiscal year, beginning fiscal
1998, by 1.15% of the shares of the Company's common stock issued and
outstanding on the last day of the immediately preceding fiscal year, less the
number of shares available for future option grants under the Employee Stock
Purchase Plan on the last day of the preceding fiscal year. An additional 2.4
million, 2.5 million and 1.5 million shares were reserved for this Plan in 2001,
2000 and 1999, respectively. In addition, during 2001, the Company's
stockholders approved an amendment to the Company's Employee Stock Purchase Plan
to increase the number of shares reserved for issuance by 10 million shares.

     The weighted average estimated grant date fair value, as defined by SFAS
No. 123, of rights to purchase stock under the Employee Stock Purchase Plan
granted in 2001, 2000 and 1999 was $6.90, $13.83 and $8.30 per share,
respectively. The estimated grant date fair value was calculated using the
Black-Scholes model. The following weighted average assumptions were included in
the estimated grant date fair value calculations for rights to purchase stock
under the Company's Employee Stock Purchase Plan:



                                                              2001    2000    1999
                                                              -----   -----   -----
                                                                     
Expected life (years).......................................   0.50    0.63    0.75
Risk-free interest rate.....................................   3.03%   6.07%   4.95%
Volatility..................................................  82.34%  98.82%  60.30%
Dividend yield..............................................     --      --      --


     Stock purchase rights.  In November 1988, the Company implemented a plan to
protect stockholders' rights in the event of a proposed takeover of the Company.
The plan was amended and restated in November 1998. Under the plan, each share
of the Company's outstanding common stock carries one Preferred Share Purchase
Right. Each Preferred Share Purchase Right entitles the holder, under certain
circumstances, to purchase one-thousandth of a share of Preferred Stock of the
Company or its acquirer at a discounted price. The Preferred Share Purchase
Rights are redeemable by the Company and will expire in 2008.

                                        74

                             LSI LOGIC CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Pro forma net (loss)/income and proforma net (loss)/income per share.  Had
the Company recorded compensation costs based on the estimated grant date fair
value, as defined by SFAS No. 123, for awards granted under its stock option
plans and stock purchase plan, the Company's net income and earnings per share
would have been adjusted to the pro forma amounts below for the years ended
December 31, 2001, 2000 and 1999.



                                                           2001           2000          1999
                                                      --------------   -----------   ----------
                                                       (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
                                                                            
Pro forma net (loss)/income
  Basic.............................................   $(1,220,551)     $140,964      $10,679
  Diluted...........................................   $(1,220,551)     $150,055      $10,679
Pro forma net (loss)/income per share
  Basic.............................................   $     (3.49)     $   0.45      $  0.04
  Diluted...........................................   $     (3.49)     $   0.43      $  0.04


     For the year ended December 31, 2001, common stock equivalents of
approximately 95.8 million shares were excluded from the computation of pro
forma diluted earnings per share as a result of their antidilutive effect on pro
forma earnings per share. For the year ended December 31, 2000, common stock
equivalents of approximately 6.2 million shares and interest expense of $11
million, net of taxes, associated with the 2000 Convertible Subordinated Notes
were excluded from the computation of pro forma diluted earnings per share as a
result of their antidilutive effect on pro forma earnings per share. For the
year ended December 31, 1999, common equivalents of approximately 17.6 million
shares and interest expense of $8 million, net of taxes, associated with the
1999 Convertible Subordinated Notes were excluded from the computation of pro
forma diluted earnings per share as a result of their antidilutive effect on pro
forma earnings per share. The pro forma effect on net income and net income per
share for 2001, 2000 and 1999 is not representative of the pro forma effect on
net income in future years because it does not take into consideration pro forma
compensation expense related to grants made prior to 1995. See Note 8 of the
Notes for a discussion of the 2001, 2000 and 1999 Convertible Notes.

NOTE 10 -- INCOME TAXES

     The provision for taxes consisted of the following:



                                                           YEAR ENDED DECEMBER 31,
                                                        -----------------------------
                                                          2001       2000      1999
                                                        --------   --------   -------
                                                               (IN THOUSANDS)
                                                                     
CURRENT:
  Federal.............................................  $     --   $108,974   $17,507
  State...............................................        --      5,880     1,678
  Foreign.............................................     6,073     41,162    47,535
                                                        --------   --------   -------
     Total............................................     6,073    156,016    66,720
                                                        ========   ========   =======
DEFERRED (BENEFIT)/LIABILITY:
  Federal.............................................   (28,688)    (7,640)   (3,658)
  State...............................................    (6,192)    (1,750)     (569)
  Foreign.............................................   (10,391)    (3,667)    2,537
                                                        --------   --------   -------
     Total............................................   (45,271)   (13,057)   (1,690)
                                                        --------   --------   -------
Total.................................................  $(39,198)  $142,959   $65,030
                                                        ========   ========   =======


                                        75

                             LSI LOGIC CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Undistributed earnings of the Company's foreign subsidiaries aggregate
approximately $265 million at December 31, 2001, and are indefinitely reinvested
in foreign operations or will be remitted substantially free of additional tax.
No material provision has been made for taxes that might be payable upon
remittance of such earnings, nor is it practicable to determine the amount of
this liability.

     The domestic and foreign components of income before income taxes and
minority interest were as follows:



                                                          YEAR ENDED DECEMBER 31,
                                                     ---------------------------------
                                                        2001         2000       1999
                                                     -----------   --------   --------
                                                              (IN THOUSANDS)
                                                                     
Domestic...........................................  $  (605,797)  $169,449   $198,039
Foreign............................................     (424,558)   210,301     26,178
                                                     -----------   --------   --------
Income before income taxes and minority interest...  $(1,030,355)  $379,750   $224,217
                                                     ===========   ========   ========


     Significant components of the Company's deferred tax assets and liabilities
as of December 31 were as follows:



                                                                  DECEMBER 31,
                                                              --------------------
                                                                2001        2000
                                                              ---------   --------
                                                                 (IN THOUSANDS)
                                                                    
DEFERRED TAX ASSETS:
  Net operating loss carryforwards..........................  $  90,913   $ 15,949
  Tax credit carryovers.....................................     25,037     10,852
  Future deductions for purchased intangible assets.........     90,981     71,175
  Future deductions for reserves and other..................     40,767     31,891
  Future deductions for inventory reserves..................     31,142     11,080
                                                              ---------   --------
  Total deferred tax assets.................................    278,840    140,947
  Valuation allowance.......................................   (150,267)   (19,553)
                                                              ---------   --------
  Net deferred tax assets...................................    128,573    121,394
DEFERRED TAX LIABILITIES:
  Depreciation and amortization.............................    (51,530)   (89,622)
                                                              ---------   --------
Total net deferred tax assets...............................  $  77,043   $ 31,772
                                                              =========   ========


     The deferred tax assets valuation allowance at December 31, 2001 and 2000
is attributed to U.S. federal, state and foreign deferred tax assets, which
result primarily from restructuring and other one-time charges, and net
operating loss carryovers. Management believes that the realization of deferred
tax assets was not assured in the years presented other than to the extent of
estimated taxable income for the carryover period.

     At December 31, 2001, the Company had federal and state net operating loss
carryovers of approximately $242 million and $77 million, respectively, which
will expire beginning in 2004 through 2022. Approximately $39 million of the
federal net operating loss carryover and $12 million of the state net operating
loss carryover relate to recent acquisitions and are subject to certain
limitations under IRC sec.382. The Company had tax credits of approximately $25
million, which will expire beginning in 2004.

                                        76

                             LSI LOGIC CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Differences between the Company's effective tax rate and the federal
statutory rate were as follows:



                                                        YEAR ENDED DECEMBER 31,
                                         -----------------------------------------------------
                                              2001                2000               1999
                                         ---------------     --------------     --------------
                                                            (IN THOUSANDS)
                                                                         
Federal statutory rate.................  $(360,624)  (35)%   $132,913    35%    $ 78,476    35%
State taxes, net of federal benefit....     (4,025)   --        2,685     1%       1,091    --
Difference between U.S. and foreign tax
  rates................................    136,366    13%     (23,542)   (6)%     37,091    17%
Nondeductible expenses.................     65,878     6%      73,048    20%      (2,603)   (1)%
Foreign tax credits....................         --    --      (29,542)   (8)%    (10,973)   (5)%
Research and development tax credit....     (8,963)   (1)%    (10,000)   (3)%     (5,000)   (2)%
Benefit of deferred tax assets not
  previously recognized................         --    --       (3,503)   (1)%    (33,826)  (15)%
Net operating loss and future
  deductions not currently benefited...    130,714    13%          --    --           --    --
Other..................................      1,456    --          900    --          774    --
                                         ---------   ---     --------   ---     --------   ---
Effective tax rate.....................  $ (39,198)   (4)%   $142,959    38%    $ 65,030    29%
                                         =========   ===     ========   ===     ========   ===


     The Company paid $22 million, $28 million and $14 million for income taxes
in 2001, 2000 and 1999, respectively.

     The IRS is currently auditing the Company's federal income tax returns for
fiscal years 1995 through 1996. Final proposed adjustments have not been
received for these years. Management believes the ultimate outcome of the IRS
audits will not have a material adverse impact on the Company's financial
position or results of operations.

NOTE 11 -- SEGMENT REPORTING

     The Company operates in two reportable segments: the Semiconductor segment
and the SAN Systems segment. In the Semiconductor segment, the Company uses
advanced process technology and comprehensive design methodologies to design,
develop, manufacture and market highly complex integrated circuits. These
system-on-a-chip solutions include both application specific integrated
circuits, commonly referred to as ASICs; application specific standard products
in silicon, or ASSPs; as well as RAID host bus adapters and related products;
and services. In the SAN Systems segment, the Company designs, manufactures,
markets and supports high-performance, highly scaleable open storage area
network systems, storage solutions and a complete line of RAID systems,
subsystems and related software. There were no significant inter-segment
revenues for the periods presented below.

                                        77

                             LSI LOGIC CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Information about profit or loss and assets.  The following is a summary of
operations by segment for the years ended December 31, 2001, 2000 and 1999:



                                                         YEAR ENDED DECEMBER 31,
                                                  -------------------------------------
                                                     2001          2000         1999
                                                  -----------   ----------   ----------
                                                             (IN THOUSANDS)
                                                                    
REVENUES:
  Semiconductor.................................  $ 1,573,618   $2,338,557   $1,810,111
  SAN Systems...................................      211,305      399,110      279,333
                                                  -----------   ----------   ----------
     Total......................................  $ 1,784,923   $2,737,667   $2,089,444
                                                  ===========   ==========   ==========
(LOSS)/INCOME FROM OPERATIONS:
  Semiconductor.................................  $  (947,156)  $  238,134   $  172,628
  SAN Systems...................................      (58,452)      51,323       25,544
                                                  -----------   ----------   ----------
     Total......................................  $(1,005,608)  $  289,457   $  198,172
                                                  ===========   ==========   ==========


     Intersegment revenues for the periods presented above were not significant.
Restructuring of operations and other non-recurring items were included in both
segments.

     One customer represented 18% of the Company's total consolidated revenues
for the year ended December 31, 2001, and another customer represented 12% and
11% of the Company's consolidated revenues each of the years ended December 31,
2000 and 1999, respectively. In the Semiconductor segment, one customer
represented 21% of total Semiconductor revenues for the year ended December 31,
2001. No customer represented 10% or more of the total revenue in the
Semiconductor segment for the year ended December 31, 2000. For the year ended
December 31, 1999, one customer represented 10% of the total Semiconductor
revenues. In the SAN Systems segment, there were two customers with revenues
representing 21% each, and one customer with revenues representing 13% of total
SAN Systems revenues for the year ended December 31, 2001. During 2000, there
were three customers with revenues representing 31%, 17% and 13% of total SAN
Systems revenues. During 1999, there were three customers with revenues
representing 29%, 27% and 14% of SAN systems revenues.

     The following is a summary of total assets by segment as of December 31,
2001, 2000 and 1999:



                                                               DECEMBER 31,
                                                   ------------------------------------
                                                      2001         2000         1999
                                                   ----------   ----------   ----------
                                                              (IN THOUSANDS)
                                                                    
TOTAL ASSETS:
  Semiconductor..................................  $4,301,326   $3,851,849   $3,051,865
  SAN Systems....................................     324,446      345,638      154,740
                                                   ----------   ----------   ----------
  Total..........................................  $4,625,772   $4,197,487   $3,206,605
                                                   ==========   ==========   ==========


                                        78

                             LSI LOGIC CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Information about geographic areas.  The Company's significant operations
outside the United States include manufacturing facilities, design centers and
sales offices in Japan, Europe and Pan Asia. The following is a summary of
operations by entities located within the indicated geographic areas for 2001,
2000 and 1999.



                                                                 YEAR ENDED DECEMBER 31,
                                                           ------------------------------------
                                                              2001         2000         1999
                                                           ----------   ----------   ----------
                                                                      (IN THOUSANDS)
                                                                            
REVENUES:
  United States..........................................  $  880,779   $1,678,709   $1,209,177
  Japan..................................................     372,815      289,149      282,749
  Europe.................................................     273,436      373,945      290,428
  Pan Asia...............................................     257,893      395,864      307,090
                                                           ----------   ----------   ----------
     Total...............................................  $1,784,923   $2,737,667   $2,089,444
                                                           ==========   ==========   ==========




                                                                       DECEMBER 31,
                                                           ------------------------------------
                                                              2001         2000         1999
                                                           ----------   ----------   ----------
                                                                      (IN THOUSANDS)
                                                                            
LONG-LIVED ASSETS:
  United States..........................................  $2,481,461   $1,662,184   $1,521,067
  Japan..................................................     118,968      185,758      226,898
  Europe.................................................       7,438        8,844        8,089
  Pan Asia...............................................     140,979      147,574       94,387
                                                           ----------   ----------   ----------
     Total...............................................  $2,748,846   $2,004,360   $1,850,441
                                                           ==========   ==========   ==========


     United States revenues include export sales. Long-lived assets consist of
net property and equipment, goodwill, capitalized software and other
intangibles, and other long-term assets excluding long-term deferred tax assets.

NOTE 12 -- COMMITMENTS AND CONTINGENCIES

     The Company uses operating leases to finance certain equipment used in its
wafer fabrication facilities. As of December 31, 2001 the Company had two
operating leases, which are commonly referred to as synthetic leases. A
synthetic lease represents a form of off-balance sheet financing under which an
unrelated third party funds up to 100% of the costs of acquisition and
installation of the property.

     In March 2000, the Company entered into a master lease and security
agreement with ABN AMRO Bank and two other banks acting as the Lessor and
several other banks acting as Participants for up to $250 million for certain
wafer fabrication equipment. Each lease supplement pursuant to the transaction
will have a lease term of three years with two consecutive one-year renewal
options. The Company may, at the end of any lease term, return, or purchase at a
stated amount all the equipment. As of December 31, 2001, the Company had fully
drawn against the agreement.

     In April 2001, the Company entered into a master lease and security
agreement with a group of banks for up to $230 million for certain wafer
fabrication equipment. The Lessor under this lease is an unrelated trust
administered and managed by Wells Fargo Bank Northwest. Each lease supplement
pursuant to the transaction will have a lease term of five years with two
consecutive one-year renewal options. The Company may, at the end of any lease
term, return, or purchase at a stated amount all the equipment. As of December
31, 2001, the Company had drawn down a total of $152 million under the
agreement. The agreement was amended in fourth quarter of 2001 to reduce the
total availability to $180 million.

                                        79

                             LSI LOGIC CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     In the third quarter of 2001, the Company amended the master lease and
security agreements entered into in April 2001 and March 2000 as described
above. As of December 31, 2001, there was $296 million outstanding under these
two leases. Pursuant to the amendments, the Company now participates in these
leases as a debt holder, replacing some of the existing banks. As of December
31, 2001, the Company's debt contribution of $242 million and cash collateral of
$54 million were recorded as non-current assets. The Lessors have access to the
cash collateral only in the event of a default by the Company. Per the
amendments, the Company is required to maintain a minimum cash balance of $350
million. The Company was in compliance with this requirement as of December 31,
2001.

     No officer or employee of the Company has any financial interest with
regards to these leasing arrangements or with the trust used in the April 2001
lease. The minimum lease payments under the two lease agreements, excluding
option periods, are $3 million each for the years 2002 and 2003, and $0.9
million each in the years 2004 and 2005. These payments reflect the amendments
and as such, exclude any payments on the Company's debt participation.

     The Company leases the majority of its facilities and certain equipment
under non-cancelable operating leases, which expire through 2011. The facilities
lease agreements typically provide for base rental rates that are increased at
various times during the terms of the lease and for renewal options at the fair
market rental value. Future minimum payments under these operating lease
agreements are $34 million, $28 million, $21 million, $15 million, $9 million
and $25 million for the years ending December 31, 2002, 2003, 2004, 2005, 2006
and thereafter, respectively.

     Rental expense under all operating leases was $96 million, $64 million and
$58 million for the years ended December 31, 2001, 2000 and 1999, respectively.

     In late 1995, a lawsuit was filed by certain former shareholders of our
Canadian subsidiary ("LSI Canada") petitioner in a proceeding in the Court of
Queens Bench of Alberta, Judicial District of Calgary in which the question of
LSI Canada's value at September 7, 1995 is to be determined. At present, parties
representing approximately 580,000 shares are contesting the value of $4.00
(Canadian) that was paid to the other former shareholders of LSI Canada at the
time all the shares of LSI Canada not then owned by the Company were acquired by
the Company. Following a hearing held in March 2001, the Court dismissed the
motion of the former shareholders that challenged the proprietary of the fair
value proceedings initiated by LSI Canada and the jurisdiction of the Court to
adjudicate the matter. In addition, the Court ruled that the portions of the
application of the former shareholders to initiate a claim based upon
allegations that our actions and certain named (former) directors and a (former)
officer of LSI Canada were oppressive of the rights of minority shareholders of
LSI Canada were to be struck and the balance of the claims were stayed. The
Court also directed all of the litigants to recommence preparation for trial in
the fair value proceeding and advised the litigants of the Court's intention to
schedule a date for trial of that matter as soon as practicable. While we cannot
give any assurances regarding the resolution of these matters, we believe that
the final outcome will not have a material adverse effect on our consolidated
results of operations or financial condition. No assurance can be given,
however, that these matters will be resolved without our becoming obligated to
make payments or to pay other costs to the opposing parties, with the potential
for having an adverse effect on our financial position or results of operations.

                                        80

                             LSI LOGIC CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     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 against 88
electronics industry companies, including LSI Logic. 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. 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. In December 2001, the court held a
hearing on Cypress Semiconductor's and plaintiff's cross-motions for summary
judgment with respect to the 4,390,586 patent. In February 2002, the court
denied Cypress Semiconductor's motion for summary judgment. The court also
granted the plaintiff's cross motion in part with respect to Cypress
Semiconductor and denied the cross-motion with respect to all other defendants.
These activities are ongoing, and as yet, 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
our consolidated results of operations or financial condition.

     U.S. Philips Corporation, a subsidiary of Royal Philips Electronics of
Netherlands, 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.
While we cannot make any assurance regarding the eventual resolution of this
matter, we do not believe it will have a material adverse effect on our
consolidated results of operations or financial condition.

     The Company is a party to other litigation matters and claims, which are
normal in the course of its operations. While the results of such litigations
and claims cannot be predicted with certainty, the final outcome of such matters
is not expected to have a significant adverse effect on the Company's
consolidated financial position or results of operations. No assurance can be
given, however, that these matters will be resolved without the Company becoming
obligated to make payments or to pay other costs to the opposing parties, with
the potential for having an adverse effect on the Company's financial position
or its results of operations.

NOTE 13 -- SUBSEQUENT EVENTS

     On January 16, 2002, the Company announced a series of actions to reduce
costs and align company expenses to current revenues. These actions include:
restructuring the Company's manufacturing operations in Tsukuba, Japan;
divesting the CDMA handset and DSL standard product business units and reducing
the worldwide workforce by approximately 1,400 positions or 20 percent.

                                        81


                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Stockholders and Board of Directors
of LSI Logic Corporation:

     In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 84 present fairly, in all material
respects, the financial position of LSI Logic Corporation and its subsidiaries
(the "Company") at December 31, 2001 and December 31, 2000, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2001 in conformity with accounting principles generally
accepted in the United States of America. In addition, in our opinion, the
financial statement schedule listed in the index appearing under Item 14(a)(2)
on page 85 present fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements. These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

- -s- PricewaterhouseCoopers LLP

San Jose, California
January 23, 2002

                                        82


                          SUPPLEMENTARY FINANCIAL DATA

                         INTERIM FINANCIAL INFORMATION



                                                                    QUARTER
                                                  --------------------------------------------
                                                   FIRST      SECOND       THIRD      FOURTH
                                                  --------   ---------   ---------   ---------
                                                                  (UNAUDITED)
                                                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                                                         
YEAR ENDED DECEMBER 31, 2001
Revenues........................................  $517,199   $ 465,219   $ 396,675   $ 405,830
Gross profit....................................   206,054      72,434      59,997      75,442
Net loss........................................   (31,248)   (312,481)   (398,082)   (250,144)
Basic earnings per share:
  Net loss......................................  $  (0.10)  $   (0.91)  $   (1.09)  $   (0.68)
Diluted earnings per share:
  Net loss......................................  $  (0.10)  $   (0.91)  $   (1.09)  $   (0.68)
YEAR ENDED DECEMBER 31, 2000
Revenues........................................  $615,186   $ 644,328   $ 727,578   $ 750,575
Gross profit....................................   249,686     276,350     314,770     328,529
Net income......................................    86,243      70,576      18,096      61,685
Basic earnings per share:
  Net income....................................  $   0.28   $    0.23   $    0.06   $    0.19
Diluted earnings per share:
  Net income....................................  $   0.25   $    0.21   $    0.06   $    0.18


     During the second and third quarters of 2001, the Company recorded
in-process research and development ("IPR&D") charges of $78 million and $19
million, respectively, in connection with the purchases of C-Cube and a division
of AMI (See Note 2 of the Notes to the Consolidated Financial Statements).
During the first, second, third and fourth quarters of 2001, the Company
recorded amortization of non-cash deferred stock compensation of $21 million,
$28 million, $27 million and $29 million, respectively. During the second, third
and fourth quarters of 2001, the Company recorded restructuring and other
non-recurring charges of $60 million, $133 million and $27 million,
respectively.

     During the second, third and fourth quarters of 2000, the Company recorded
IPR&D charges of $16 million, $54 million and $7 million, respectively, in
connection with the purchases of divisions of NeoMagic and Cacheware and
acquisitions of Intraserver, DataPath and ParaVoice. (See Note 2 of the Notes to
the Consolidated Financial Statements.) During the third and fourth quarters of
2000, the Company recorded amortization of non-cash deferred stock compensation
of $19 million and $22 million, respectively.

                                        83


ITEM 9.  CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE

     Not applicable

                                    PART III

     Certain information required by Part III is omitted from this Report in
that the Company will file a definitive proxy statement within 120 days after
the end of its fiscal year pursuant to Regulation 14A (the "Proxy Statement")
for its Annual Meeting of Stockholders to be held May 2, 2002, and certain of
the information to be included therein is incorporated by reference herein.

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information regarding the Company's executive officers required by this
Item is incorporated by reference to the section entitled "Executive Officers of
the Company" in Part I of this Form 10-K.

     The information regarding the Company's directors is incorporated by
reference to "Election of Directors" in the Company's Proxy Statement.

     The information concerning Section 16(a) reporting is incorporated by
reference to "Section 16(a) Beneficial Ownership Reporting Compliance" in the
Company's Proxy Statement.

ITEM 11.  EXECUTIVE COMPENSATION

     The information required by this Item is incorporated by reference to
"Executive Compensation" in the Company's Proxy Statement.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required by this Item is incorporated by reference to
"Security Ownership" in the Company's Proxy Statement.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required by this Item is incorporated by reference to
"Certain Transactions" in the Company's Proxy Statement.

                                    PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

     (a) The following documents are filed as a part of this Report:

          1.  Financial Statements.  The following Consolidated Financial
     Statements of LSI Logic Corporation and Report of Independent Accountants
     are contained in this Form 10-K:



                                                                  PAGE IN
                                                               THE FORM 10-K
                                                               -------------
                                                            
Consolidated Balance Sheets -- As of December 31, 2000 and
  2001......................................................        46
Consolidated Statements of Operations -- For the Three Years
  Ended December 31, 2001, 2000 and 1999....................        47
Consolidated Statements of Stockholders' Equity -- For the
  Three Years Ended December 31, 2001, 2000 and 1999........        48
Consolidated Statements of Cash Flows -- For the Three Years
  Ended December 31, 2001, 2000 and 1999....................        49
Notes to Consolidated Financial Statements..................        50
Report of Independent Accountants...........................        82


                                        84


     Effective beginning 1990, we changed our fiscal year end from December 31
to the 52- or 53-week period that ends on the Sunday closest to December 31.
Beginning in 1997, we reverted to a straight December 31 fiscal year end. For
presentation purposes, the consolidated financial statements, notes and
financial statement schedules for fiscal years 1990 through 1996 refer to
December 31 as the year-end. Fiscal year 1997 was a 53-week year; fiscal years
1999, 2000 and 2001 were 52-week years.

2.  Financial Statement Schedules.

                                  SCHEDULE II
                       VALUATION AND QUALIFYING ACCOUNTS
                                 (IN MILLIONS)



                 COLUMN A                      COLUMN B           COLUMN C          COLUMN D     COLUMN E
                                              BALANCE AT    ADDITIONS CHARGED TO                BALANCE AT
                                             BEGINNING OF     COSTS, EXPENSES                     END OF
                DESCRIPTION                     PERIOD       OR OTHER ACCOUNTS     DEDUCTIONS     PERIOD
                -----------                  ------------   --------------------   ----------   ----------
                                                                                    
2001
Allowance for doubtful accounts............      $ 8                $ 15              $ (3)        $ 20
Inventory reserves.........................       87                 189              (117)         159
Valuation allowance for deferred tax
  assets...................................       20                 130                --          150
2000
Allowance for doubtful accounts............      $11                $  4              $ (7)        $  8
Inventory reserves.........................       61                  53               (27)          87
Valuation allowance for deferred tax
  assets...................................       23                  --                (3)          20
1999
Allowance for doubtful accounts............      $ 4                $  9              $ (2)        $ 11
Inventory reserves.........................       83                  22               (44)          61
Valuation allowance for deferred tax
  assets...................................       58                  --               (35)          23


3.  Exhibits:

    
 2.1   Stock Purchase Agreement dated as of June 28, 1998, by and
       among the Registrant, HEA and HEI. Incorporated by reference
       to exhibits filed with the Registrant's Registration
       Statement on Form 8-K/A filed October 20, 1998.
 2.2   First Amendment to Stock Purchase Agreement dated as of
       August 6, 1998, by and among the Registrant, HEA and HEI.
       Incorporated by reference to exhibits filed with the
       Registrant's Registration Statement on Form 8-K/A filed
       October 20, 1998.
 2.3   Agreement and Plan of Reorganization and Merger dated
       February 21, 1999, among the Registrant, Stealth Acquisition
       Corporation and SEEQ Technology Inc. Incorporated by
       reference to Exhibit 99.1 filed with the Registrant's
       Current Report on Form 8-K as of February 23, 1999.
 2.4   Agreement and Plan of Reorganization dated May 20, 2000 by
       and among Registrant, Diamond Acquisition Corporation,
       DataPath Systems, Inc., and certain individuals named
       therein. Incorporated by reference to exhibits filed with
       Registrant's Form 8-K filed May 24, 2000.
 2.5   Agreement and Plan of Reorganization dated March 26, 2001 by
       and among Registrant, Clover Acquisition Corporation and
       C-Cube Microsystems, Inc. Incorporated by reference to
       exhibits filed with the Registrant's Registration Statement
       on Form S-4 (No. 333-58862) filed April 13, 2001.
 3.1   Restated Certificate of Incorporation of Registrant.
       Incorporated by reference to exhibits filed with the
       Registrant's Registration Statement on Form S-8 (No.
       333-46436) filed September 22, 2000.
 3.2   Amended and Restated By-laws of Registrant. Said document is
       included as an Exhibit to this Annual Report on Form 10-K
       for the year ended December 31, 2001.
 4.1   Amended and Restated Preferred Shares Rights Agreement dated
       as of November 20, 1998, between LSI Logic Corporation and
       BankBoston N.A. Incorporated by reference to exhibits filed
       with the Registrant's Form 8-A12G/A on December 8, 1998.



                                        85

    
 4.2   Indenture dated March 15, 1999 between LSI Logic Corporation
       and State Street Bank and Trust Company of California, N.A.,
       Trustee, covering $345,000,000 principal amount of 4  1/4%
       Convertible Subordinated Notes due 2004. Incorporated by
       reference to exhibits filed with the Registrant's Form S-3
       (No. 333-80611), filed on June 14, 1999.
 4.3   Indenture dated February 15, 2000 between LSI Logic
       Corporation and State Street Bank and Trust Company of
       California, Trustee. Incorporated by reference to exhibits
       filed with the Registrant's Form 8-K filed on February 24,
       2000.
 4.4   See Exhibit 3.1.
10.1   Registrant's 1982 Incentive Stock Option Plan, as amended,
       and forms of Stock Option Agreement. Incorporated by
       reference to exhibits filed with the Registrant's Annual
       Report on Form 10-K for the year ended December 31, 1988.*
10.2   Lease Agreement dated November 22, 1983 for 48580 Kato Road,
       Fremont, California between the Registrant and BankAmerica
       Realty Investors. Incorporated by reference to exhibits
       filed with the Registrant's Annual Report on Form 10-K for
       the year ended December 31, 1983.
10.3   Form of Indemnification Agreement entered and to be entered
       into between Registrant and our officers, directors and
       certain key employees. Incorporated by reference to exhibits
       filed with the Registrant's Annual Report on Form 10-K for
       the year ended December 31, 1987.*
10.4   Amended and Restated LSI Logic Corporation 1991 Equity
       Incentive Plan. Incorporated by reference to documents filed
       as appendices with Registrant's definitive Proxy materials,
       filed on March 26, 2001.*
10.5   Lease Agreement dated February 28, 1991 for 765 Sycamore
       Drive, Milpitas, California between the Registrant and the
       Prudential Insurance Company of America. Incorporated by
       reference to exhibits filed with the Registrant's Annual
       Report on Form 10-K for the year ended December 31, 1987.
10.6   Stock Purchase Agreement dated as of January 20, 1995;
       Promissory Note dated January 26, 1995; Note Purchase
       Agreement dated as of January 26, 1995 in connection with
       our purchase of the minority interest in one of our Japanese
       subsidiaries. Incorporated by reference to exhibits filed
       with the Registrant's Annual Report on Form 10-K for the
       year ended December 31, 1994.
10.7   1995 Director Option Plan. Incorporated by reference to
       exhibits filed with the Registrant's Annual Report on Form
       10-K for the year ended December 31, 1995.*
10.8   LSI Logic Corporation International Employee Stock Purchase
       Plan. Incorporated by reference to exhibits filed with the
       Registrant's Registration Statement on Form S-8 (No.
       333-74627) filed on March 18, 1999.*
10.9   Form of LSI Logic Corporation Change of Control Severance
       Agreement between LSI Logic Corporation and each of its
       executive officers. Incorporated by reference to exhibits
       filed with the Registrant's Annual Report on Form 10-K for
       the year ended December 31, 1998.*
10.10  LSI Logic Corporation Change of Control Agreement entered
       into on November 20, 1998, by and between LSI Logic
       Corporation and Wilfred J. Corrigan. Incorporated by
       reference to exhibits filed with the Registrant's Annual
       Report on Form 10-K for the year ended December 31, 1998.*
10.11  Technology Transfer Agreement between LSI Logic Corporation
       and Wafer Technology (Malaysia) Sdn. Bhd. Dated September 8,
       1999. Incorporated by reference to exhibits filed with the
       Registrant's Quarterly Report on Form 10-Q for the quarter
       ended September 30, 1999.
10.12  Mint Technology, Inc. Amended 1996 Stock Option Plan.
       Incorporated by reference to exhibits filed with the
       Registrant's Registration Statement on Form S-8 (No.
       333-34285) filed August 25, 1997.
10.13  Registrant's Amended and Restated Employee Stock Purchase
       Plan. Incorporated by reference to documents filed as
       appendices with Registrant's definitive Proxy materials,
       filed on March 26, 2001.*
10.14  Symbios Logic, Inc. 1995 Stock Plan. Incorporated by
       reference to exhibits filed with the Registrant's Form S-8
       (No. 333-62159) filed on August 25, 1998.
10.15  LSI Logic Corporation 1999 Nonstatutory Stock Option Plan.
       Incorporated by reference to exhibits filed with the
       Registrant's Form S-8 (No. 333-90951) filed on November 15,
       1999.
10.16  SEEQ Technology, Inc. Amended and Restated 1982 Stock Option
       Plan. Incorporated by reference to exhibits filed with the
       Registrant's Form S-8 (No. 333-81435) filed on June 24,
       1999.



                                        86

    
10.17  SEEQ Technology, Inc. 1989 Non-Employee Director Stock
       Option Plan. Incorporated by reference to exhibits filed
       with the Registrant's Form S-8 (No. 333-81435) filed on June
       24, 1999.*
10.18  Amended and Restated Participation Agreement by and among
       Registrant, and ABN AMRO Bank N.V., ABN AMRO Bank N.V. as
       agent for Lessors and Participants dated April 18, 2000.
       Incorporated by reference to exhibits with Registrant's
       Quarterly Report on Form 10-Q for the quarter ended April 2,
       2000.
10.19  Second Amended and Restated Credit Agreement dated as of
       April 21, 2000, by and among Registrant, LSI Logic Japan
       Semiconductor, ABN AMRO Bank and Lenders. Incorporated by
       reference to exhibits filed with the Registrant's Annual
       Report on Form 10-K for the year ended December 31, 2000.
10.20  IntraServer Technology, Inc. 1998 Stock Option Plan.
       Incorporated by reference to exhibits filed with
       Registrant's Form S-8 (No. 333-38746) filed on June 7,
       2000.*
10.21  DataPath Systems, Inc. Amended 1994 Stock Option Plan.
       Incorporated by reference to exhibits filed with
       Registrant's Form S-8 (No. 333-42888) filed on August 2,
       2000.*
10.22  DataPath Systems, Inc. Amended and Restated 1997 Stock
       Option Plan. Incorporated by reference to exhibits filed
       with Registrant's Form S-8 (No. 333-42888) filed on August
       2, 2000.*
10.23  Syntax Systems, Inc. Restated Stock Option Plan of January
       5, 1999. Incorporated by reference to exhibits filed with
       Registrant's Form S-8 (No. 333-52050) filed on December 18,
       2000.*
10.24  C-Cube Microsystems Inc. Director Stock Option Plan.
       Incorporated by reference to exhibits filed with
       Registrant's Form S-8 (No. 333-62960) filed on June 14,
       2001.*
10.25  C-Cube Microsystems Inc. 2000 Stock Plan. Incorporated by
       reference to exhibits filed with Registrant's Form S-8 (No.
       333-62960) filed on June 14, 2001.*
10.26  Wilfred J. Corrigan Employment Agreement dated as of
       September 20, 2001. Said document is included as an Exhibit
       to this Annual Report on Form 10-K for the year ended
       December 31, 2001.*
10.27  First Amendment to Amended and Restated Participation
       Agreement by and among LSI Logic, ABN Amro Bank N.V.,
       Keybank National Association, FBTC Leasing Corp. as Lessor,
       ABN Amro Bank N.V., as agent for Lessors and Participants,
       dated as of August 2, 2001. Incorporated by reference to
       exhibits filed with Registrant's Quarterly Report on Form
       10-Q for the quarter ended September 30, 2001.
10.28  Second Amendment to Amended and Restated Participation
       Agreement by and among LSI Logic, ABN Amro Bank N.V.,
       Keybank National Association, FBTC Leasing Corp. as Lessor,
       ABN Amro Bank N.V., as agent for Lessors and Participants,
       dated as of August 17, 2001. Incorporated by reference to
       exhibits filed with Registrant's Quarterly Report on Form
       10-Q for the quarter ended September 30, 2001.
10.29  Third Amendment to Participation Agreement and Omnibus
       Amendment by and among LSI Logic, Banc of America Leasing &
       Capital LLC, as Lessor, Fleet National Bank, as Lessor Agent
       and as Agent and Participants, dated as of September 28,
       2001. Incorporated by reference to exhibits filed with
       Registrant's Quarterly Report on Form 10-Q for the quarter
       ended September 30, 2001.
10.30  Participation Agreement by and among LSI Logic, First
       Security Bank, N.A. as Certificate Trustee, First Security
       Trust Company of Nevada, as Agent and Participants, dated as
       of April 20, 2001. Incorporated by reference to exhibits
       filed with Registrant's Quarterly Report on Form 10-Q for
       the quarter ended September 30, 2001.
10.31  First Amendment to Participation Agreement by and among LSI
       Logic, Wells Fargo Bank Northwest, N.A. (f/k/a First
       Security Bank, N.A.), as Certificate Trustee, First Security
       Trust Company of Nevada, as Agent and Participants, dated as
       of August 2, 2001. Incorporated by reference to exhibits
       filed with Registrant's Quarterly Report on Form 10-Q for
       the quarter ended September 30, 2001.
10.32  Second Amendment to Participation Agreement by and among LSI
       Logic, Wells Fargo Bank Northwest, N.A. (f/k/a First
       Security Bank, N.A.), as Certificate Trustee, First Security
       Trust Company of Nevada, as Agent and Participants, dated as
       of August 17, 2001. Incorporated by reference to exhibits
       filed with Registrant's Quarterly Report on Form 10-Q for
       the quarter ended September 30, 2001.



                                        87

    
10.33  Third Amendment to Participation Agreement and Omnibus
       Amendment by and among LSI Logic, Wells Fargo Bank
       Northwest, N.A., (f/k/a First Security Bank, N.A.), as
       Certificate Trustee, Wells Fargo Bank Nevada, National
       Association (f/k/a First Security Trust Company of Nevada),
       as Agent and Participants, dated as of September 28, 2001.
       Incorporated by reference to exhibits filed with
       Registrant's Quarterly Report on Form 10-Q for the quarter
       ended September 30, 2001.
10.34  Indenture dated October 30, 2001 between LSI Logic
       Corporation, covering $490,000,000 amount of 4% Convertible
       Subordinated Notes due 2006. Incorporated by reference to
       exhibits filed with the Registrant's Form S-3 (No.
       333-81434), filed on January 25, 2002.
13.1   Annual Report to Stockholders for the year ended December
       31, 2000 (to be deemed filed only to the extent required by
       the instructions for Reports on Form 10-K).
21.1   List of Subsidiaries
23.1   Consent of Independent Accountants
24.1   Power of Attorney (See page 89)



- ---------------

* Denotes management contract or compensatory plan or arrangement.

     (b) Reports on Form 8-K.

     During the fourth quarter ended December 31, 2001, we filed the following
Current Reports on Form 8-K:

     On October 25, 2001, we filed a Current Report on Form 8-K pursuant to Item
5 to report financial results set forth in the Registrant's news release dated
October 23, 2001.

     (c) Exhibits.

     See Item 14(a)(3), above.

     (d) Financial Statement Schedules

     See Item 14(a)(2), above.

TRADEMARK ACKNOWLEDGMENTS

     The LSI Logic logo design, ATMizer, CoreWare, G10, GigaBlaze, HyperPHY,
MetaStor, MiniRISC, and SeriaLink are registered trademarks of LSI Logic
Corporation; Cablestream, ContinuStor, G11, G12, Gflx, HotScale, Merlin,
SANtricity, and SANshare are trademarks of LSI Logic Corporation.

     ARM is a registered Trademark of Advanced RISC Machines Limited, used under
license. OakDSPCore is a registered trademark of DSP Group, Inc., used under
license. All other brand and product names appearing in this report are the
trademarks of their respective companies.

                                        88


                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) 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
                                          By:    /s/ WILFRED J. CORRIGAN
                                            ------------------------------------
                                                    Wilfred J. Corrigan
                                                 Chairman of the Board and
                                                  Chief Executive Officer

Dated: March 8, 2002

                               POWER OF ATTORNEY

     KNOW ALL PERSONS BY THESE PRESENT, that each person whose signature appears
below constitutes and appoints Wilfred J. Corrigan and David G. Pursel, jointly
and severally, his attorneys-in-fact, each with the power of substitution, for
him in any and all capacities, to sign any amendments to this Report on Form
10-K, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.



              SIGNATURE                                TITLE                       DATE
              ---------                                -----                       ----
                                                                         
/s/ WILFRED J. CORRIGAN                   Chairman of the Board and Chief      March 8, 2002
- -------------------------------------      Executive Officer (Principal
Wilfred J. Corrigan                       Executive Officer) and Director

/s/ BRYON LOOK                          Executive Vice President and Chief     March 8, 2002
- -------------------------------------      Financial Officer (Principal
Bryon Look                                Financial Officer and Principal
                                                Accounting Officer)

/s/ T.Z. CHU                                         Director                  March 8, 2002
- -------------------------------------
T.Z. Chu

/s/ MALCOLM R. CURRIE                                Director                  March 8, 2002
- -------------------------------------
Malcolm R. Currie

/s/ JAMES H. KEYES                                   Director                  March 8, 2002
- -------------------------------------
James H. Keyes

/s/ R. DOUGLAS NORBY                                 Director                  March 8, 2002
- -------------------------------------
R. Douglas Norby

/s/ MATTHEW O'ROURKE                                 Director                  March 8, 2002
- -------------------------------------
Matthew O'Rourke


                                        89




              SIGNATURE                                TITLE                       DATE
              ---------                                -----                       ----

                                                                         
/s/ GREGORIO REYES                                   Director                  March 8, 2002
- -------------------------------------
Gregorio Reyes

/s/ LARRY W. SONSINI                                 Director                  March 8, 2002
- -------------------------------------
Larry W. Sonsini


                                        90


                               INDEX TO EXHIBITS



EXHIBIT
NUMBER                            DESCRIPTION
- -------                           -----------
       
  2.1     Stock Purchase Agreement dated as of June 28, 1998, by and
          among the Registrant, HEA and HEI. Incorporated by reference
          to exhibits filed with the Registrant's Registration
          Statement on Form 8-K/A filed October 20, 1998.
  2.2     First Amendment to Stock Purchase Agreement dated as of
          August 6, 1998, by and among the Registrant, HEA and HEI.
          Incorporated by reference to exhibits filed with the
          Registrant's Registration Statement on Form 8-K/A filed
          October 20, 1998.
  2.3     Agreement and Plan of Reorganization and Merger dated
          February 21, 1999, among the Registrant, Stealth Acquisition
          Corporation and SEEQ Technology Inc. Incorporated by
          reference to Exhibit 99.1 filed with the Registrant's
          Current Report on Form 8-K as of February 23, 1999.
  2.4     Agreement and Plan of Reorganization dated May 20, 2000 by
          and among Registrant, Diamond Acquisition Corporation,
          DataPath Systems, Inc., and certain individuals named
          therein. Incorporated by reference to exhibits filed with
          Registrant's Form 8-K filed May 24, 2000.
  2.5     Agreement and Plan of Reorganization dated March 26, 2001 by
          and among Registrant, Clover Acquisition Corporation and
          C-Cube Microsystems, Inc. Incorporated by reference to
          exhibits filed with the Registrant's Registration Statement
          on Form S-4 (No. 333-58862) filed April 13, 2001.
  3.1     Restated Certificate of Incorporation of Registrant.
          Incorporated by reference to exhibits filed with the
          Registrant's Registration Statement on Form S-8 (No.
          333-46436) filed September 22, 2000.
  3.2     Amended and Restated By-laws of Registrant. Said document is
          included as an Exhibit to this Annual Report on Form 10-K
          for the year ended December 31, 2001.
  4.1     Amended and Restated Preferred Shares Rights Agreement dated
          as of November 20, 1998, between LSI Logic Corporation and
          BankBoston N.A. Incorporated by reference to exhibits filed
          with the Registrant's Form 8-A12G/A on December 8, 1998.
  4.2     Indenture dated March 15, 1999 between LSI Logic Corporation
          and State Street Bank and Trust Company of California, N.A.,
          Trustee, covering $345,000,000 principal amount of 4 1/4%
          Convertible Subordinated Notes due 2004. Incorporated by
          reference to exhibits filed with the Registrant's Form S-3
          (No. 333-80611), filed on June 14, 1999.
  4.3     Indenture dated February 15, 2000 between LSI Logic
          Corporation and State Street Bank and Trust Company of
          California, Trustee. Incorporated by reference to exhibits
          filed with the Registrant's Form 8-K filed on February 24,
          2000.
  4.4     See Exhibit 3.1.
 10.1     Registrant's 1982 Incentive Stock Option Plan, as amended,
          and forms of Stock Option Agreement. Incorporated by
          reference to exhibits filed with the Registrant's Annual
          Report on Form 10-K for the year ended December 31, 1988.*
 10.2     Lease Agreement dated November 22, 1983 for 48580 Kato Road,
          Fremont, California between the Registrant and BankAmerica
          Realty Investors. Incorporated by reference to exhibits
          filed with the Registrant's Annual Report on Form 10-K for
          the year ended December 31, 1983.
 10.3     Form of Indemnification Agreement entered and to be entered
          into between Registrant and our officers, directors and
          certain key employees. Incorporated by reference to exhibits
          filed with the Registrant's Annual Report on Form 10-K for
          the year ended December 31, 1987.*
 10.4     Amended and Restated LSI Logic Corporation 1991 Equity
          Incentive Plan. Incorporated by reference to documents filed
          as appendices with Registrant's definitive Proxy materials,
          filed on March 26, 2001.*
 10.5     Lease Agreement dated February 28, 1991 for 765 Sycamore
          Drive, Milpitas, California between the Registrant and the
          Prudential Insurance Company of America. Incorporated by
          reference to exhibits filed with the Registrant's Annual
          Report on Form 10-K for the year ended December 31, 1987.


                                        91




EXHIBIT
NUMBER                            DESCRIPTION
- -------                           -----------
       
 10.6     Stock Purchase Agreement dated as of January 20, 1995;
          Promissory Note dated January 26, 1995; Note Purchase
          Agreement dated as of January 26, 1995 in connection with
          our purchase of the minority interest in one of our Japanese
          subsidiaries. Incorporated by reference to exhibits filed
          with the Registrant's Annual Report on Form 10-K for the
          year ended December 31, 1994.
 10.7     1995 Director Option Plan. Incorporated by reference to
          exhibits filed with the Registrant's Annual Report on Form
          10-K for the year ended December 31, 1995.*
 10.8     LSI Logic Corporation International Employee Stock Purchase
          Plan. Incorporated by reference to exhibits filed with the
          Registrant's Registration Statement on Form S-8 (No.
          333-74627) filed on March 18, 1999.*
 10.9     Form of LSI Logic Corporation Change of Control Severance
          Agreement between LSI Logic Corporation and each of its
          executive officers. Incorporated by reference to exhibits
          filed with the Registrant's Annual Report on Form 10-K for
          the year ended December 31, 1998.*
 10.10    LSI Logic Corporation Change of Control Agreement entered
          into on November 20, 1998, by and between LSI Logic
          Corporation and Wilfred J. Corrigan. Incorporated by
          reference to exhibits filed with the Registrant's Annual
          Report on Form 10-K for the year ended December 31, 1998.*
 10.11    Technology Transfer Agreement between LSI Logic Corporation
          and Wafer Technology (Malaysia) Sdn. Bhd. Dated September 8,
          1999. Incorporated by reference to exhibits filed with the
          Registrant's Quarterly Report on Form 10-Q for the quarter
          ended September 30, 1999.
 10.12    Mint Technology, Inc. Amended 1996 Stock Option Plan.
          Incorporated by reference to exhibits filed with the
          Registrant's Registration Statement on Form S-8 (No.
          333-34285) filed August 25, 1997.
 10.13    Registrant's Amended and Restated Employee Stock Purchase
          Plan. Incorporated by reference to documents filed as
          appendices with Registrant's definitive Proxy materials,
          filed on March 26, 2001.*
 10.14    Symbios Logic, Inc. 1995 Stock Plan. Incorporated by
          reference to exhibits filed with the Registrant's Form S-8
          (No. 333-62159) filed on August 25, 1998.
 10.15    LSI Logic Corporation 1999 Nonstatutory Stock Option Plan.
          Incorporated by reference to exhibits filed with the
          Registrant's Form S-8 (No. 333-90951) filed on November 15,
          1999.
 10.16    SEEQ Technology, Inc. Amended and Restated 1982 Stock Option
          Plan. Incorporated by reference to exhibits filed with the
          Registrant's Form S-8 (No. 333-81435) filed on June 24,
          1999.
 10.17    SEEQ Technology, Inc. 1989 Non-Employee Director Stock
          Option Plan. Incorporated by reference to exhibits filed
          with the Registrant's Form S-8 (No. 333-81435) filed on June
          24, 1999.*
 10.18    Amended and Restated Participation Agreement by and among
          Registrant, and ABN AMRO Bank N.V., ABN AMRO Bank N.V. as
          agent for Lessors and Participants dated April 18, 2000.
          Incorporated by reference to exhibits with Registrant's
          Quarterly Report on Form 10-Q for the quarter ended April 2,
          2000.
 10.19    Second Amended and Restated Credit Agreement dated as of
          April 21, 2000, by and among Registrant, LSI Logic Japan
          Semiconductor, ABN AMRO Bank and Lenders. Incorporated by
          reference to exhibits filed with the Registrant's Annual
          Report on Form 10-K for the year ended December 31, 2000.
 10.20    IntraServer Technology, Inc. 1998 Stock Option Plan.
          Incorporated by reference to exhibits filed with
          Registrant's Form S-8 (No. 333-38746) filed on June 7,
          2000.*
 10.21    DataPath Systems, Inc. Amended 1994 Stock Option Plan.
          Incorporated by reference to exhibits filed with
          Registrant's Form S-8 (No. 333-42888) filed on August 2,
          2000.*
 10.22    DataPath Systems, Inc. Amended and Restated 1997 Stock
          Option Plan. Incorporated by reference to exhibits filed
          with Registrant's Form S-8 (No. 333-42888) filed on August
          2, 2000.*
 10.23    Syntax Systems, Inc. Restated Stock Option Plan of January
          5, 1999. Incorporated by reference to exhibits filed with
          Registrant's Form S-8 (No. 333-52050) filed on December 18,
          2000.*


                                        92




EXHIBIT
NUMBER                            DESCRIPTION
- -------                           -----------
       
 10.24    C-Cube Microsystems Inc. Director Stock Option Plan.
          Incorporated by reference to exhibits z filed with
          Registrant's Form S-8 (No. 333-62960) filed on June 14,
          2001.*
 10.25    C-Cube Microsystems Inc. 2000 Stock Plan. Incorporated by
          reference to exhibits filed with Registrant's Form S-8 (No.
          333-62960) filed on June 14, 2001.*
 10.26    Wilfred J. Corrigan Employment Agreement dated as of
          September 20, 2001. Said document is included as an Exhibit
          to this Annual Report on Form 10-K for the year ended
          December 31, 2001.*
 10.27    First Amendment to Amended and Restated Participation
          Agreement by and among LSI Logic, ABN Amro Bank N.V.,
          Keybank National Association, FBTC Leasing Corp. as Lessor,
          ABN Amro Bank N.V., as agent for Lessors and Participants,
          dated as of August 2, 2001. Incorporated by reference to
          exhibits filed with Registrant's Quarterly Report on Form
          10-Q for the quarter ended September 30, 2001.
 10.28    Second Amendment to Amended and Restated Participation
          Agreement by and among LSI Logic, ABN Amro Bank N.V.,
          Keybank National Association, FBTC Leasing Corp. as Lessor,
          ABN Amro Bank N.V., as agent for Lessors and Participants,
          dated as of August 17, 2001. Incorporated by reference to
          exhibits filed with Registrant's Quarterly Report on Form
          10-Q for the quarter ended September 30, 2001.
 10.29    Third Amendment to Participation Agreement and Omnibus
          Amendment by and among LSI Logic, Banc of America Leasing &
          Capital LLC, as Lessor, Fleet National Bank, as Lessor Agent
          and as Agent and Participants, dated as of September 28,
          2001. Incorporated by reference to exhibits filed with
          Registrant's Quarterly Report on Form 10-Q for the quarter
          ended September 30, 2001.
 10.30    Participation Agreement by and among LSI Logic, First
          Security Bank, N.A. as Certificate Trustee, First Security
          Trust Company of Nevada, as Agent and Participants, dated as
          of April 20, 2001. Incorporated by reference to exhibits
          filed with Registrant's Quarterly Report on Form 10-Q for
          the quarter ended September 30, 2001.
 10.31    First Amendment to Participation Agreement by and among LSI
          Logic, Wells Fargo Bank Northwest, N.A. (f/k/a First
          Security Bank, N.A.), as Certificate Trustee, First Security
          Trust Company of Nevada, as Agent and Participants, dated as
          of August 2, 2001. Incorporated by reference to exhibits
          filed with Registrant's Quarterly Report on Form 10-Q for
          the quarter ended September 30, 2001.
 10.32    Second Amendment to Participation Agreement by and among LSI
          Logic, Wells Fargo Bank Northwest, N.A. (f/k/a First
          Security Bank, N.A.), as Certificate Trustee, First Security
          Trust Company of Nevada, as Agent and Participants, dated as
          of August 17, 2001. Incorporated by reference to exhibits
          filed with Registrant's Quarterly Report on Form 10-Q for
          the quarter ended September 30, 2001.
 10.33    Third Amendment to Participation Agreement and Omnibus
          Amendment by and among LSI Logic, Wells Fargo Bank
          Northwest, N.A., (f/k/a First Security Bank, N.A.), as
          Certificate Trustee, Wells Fargo Bank Nevada, National
          Association (f/k/a First Security Trust Company of Nevada),
          as Agent and Participants, dated as of September 28, 2001.
          Incorporated by reference to exhibits filed with
          Registrant's Quarterly Report on Form 10-Q for the quarter
          ended September 30, 2001.
 10.34    Indenture dated October 30, 2001 between LSI Logic
          Corporation, covering $490,000,000 amount of 4% Convertible
          Subordinated Notes due 2006. Incorporated by reference to
          exhibits filed with the Registrant's Form S-3 (No.
          333-81434), filed on January 25, 2002.
 13.1     Annual Report to Stockholders for the year ended December
          31, 2000 (to be deemed filed only to the extent required by
          the instructions for Reports on Form 10-K).
 21.1     List of Subsidiaries
 23.1     Consent of Independent Accountants
 24.1     Power of Attorney (See page 89)


- ---------------
* Denotes management contract or compensatory plan or arrangement

                                        93

EX-3.2

                                                                     Exhibit 3.2

                                     BY-LAWS

                                       OF

                              LSI LOGIC CORPORATION

                                    ARTICLE I

                                CORPORATE OFFICES

        1.1 REGISTERED OFFICE

        The registered office of the corporation shall be in the City of
Wilmington, County of New Castle, State of Delaware. The name of the registered
agent of the corporation at such location is The Corporation Trust Company.

        1.2 OTHER OFFICES

        The board of directors may at any time establish other offices at any
place or places where the corporation is qualified to do business.

                                   ARTICLE II

                            MEETINGS OF STOCKHOLDERS

        2.1 PLACE OF MEETINGS

        Meetings of stockholders shall be held at any place, within or outside
the State of Delaware, designated by the board of directors. In the absence of
any such designation, stockholders' meetings shall be held at the registered
office of the corporation.

        2.2 ANNUAL MEETING

        The annual meeting of stockholders shall be held each year on a date and
at a time designated by the board of directors. At the meeting, directors shall
be elected and any other proper business may be transacted.

        2.3 SPECIAL MEETING

        A special meeting of the stockholders may be called at any time only by
the board of directors, by the chairman of the board, by the president or by the
chief executive officer.

        If a special meeting is called by any person or persons other than the
board of directors, the request shall be in writing, specifying the time of such
meeting and the general nature of the







business proposed to be transacted, and shall be delivered personally or sent by
registered mail or by telegraphic or other facsimile transmission to the
secretary of the corporation. No business may be transacted at such special
meeting otherwise than specified in such notice. The secretary, upon receiving
the request, shall cause notice to be given to the stockholders entitled to
vote, in accordance with the provisions of Sections 2.4 and 2.5, and that a
meeting will be held at the time requested by the person or persons who called
the meeting, not less than thirty-five (35) nor more than sixty (60) days after
the receipt of the request. Nothing contained in this second paragraph of
Section 2.3 shall be construed as limiting, fixing or affecting the time when a
meeting of stockholders called by action of the board of directors may be held.

        2.4 NOTICE OF STOCKHOLDERS' MEETINGS

        All notices of meetings with stockholders shall be in writing and shall
be sent or otherwise given in accordance with Section 2.5 of these by-laws not
less than ten (10) nor more than sixty (60) days before the date of the meeting
to each stockholder entitled to vote at such meeting. The notice shall specify
the place, date, and hour of the meeting, and, in the case of a special meeting,
the purpose or purposes for which the meeting is called.

        2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE

        Written notice of any meeting of stockholders, if mailed, is given when
deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the corporation. An
affidavit of the secretary or an assistant secretary or of the transfer agent of
the corporation that the notice has been given shall, in the absence of fraud,
be prima facie evidence of the facts stated therein.

        2.6 QUORUM

        The holders of a majority of the stock issued and outstanding and
entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at all meetings of the stockholders for the transaction of
business except as otherwise provided by statute or by the certificate of
incorporation. If, however, such quorum is not present or represented at any
meeting of the stockholders, then either (i) the Chairman of the meeting or (ii)
the stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time, without notice
other announcement at the meeting, until a quorum is present or represented. At
such adjourned meeting at which a quorum is present or represented, any business
may be transacted that might have been transacted at the meeting as originally
noticed.

        2.7 ADJOURNED MEETING; NOTICE

        When a meeting is adjourned to another time or place, unless these
by-laws otherwise require, notice need not be given of the adjourned meeting if
the time and place thereof are


                                       2


announced at the meeting at which the adjournment is taken. At the adjourned
meeting the corporation may transact any business that might have been
transacted at the original meeting. If the adjournment is for more than thirty
(30) days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.

        2.8 CONDUCT OF BUSINESS

        The Chairman of any meeting of stockholders shall determine the order of
business and the procedure at the meeting, including such regulation of the
manner of voting and the conduct of business.

        2.9 VOTING

        The stockholders entitled to vote at any meeting of stockholders shall
be determined in accordance with the provisions of Section 2.12 of these
by-laws, subject to the provisions of Sections 217 and 218 of the General
Corporation Law of Delaware (relating to voting rights of fiduciaries, pledgors
and joint owners of stock and to voting trusts and other voting agreements).

        Except as provided in the last paragraph of this Section 2.9, or as may
be otherwise provided in the certificate of incorporation, each stockholder
shall be entitled to one vote for each share of capital stock held by such
stockholder.

        At a stockholders' meeting at which directors are to be elected, each
stockholder shall be entitled to cumulate votes (i.e., cast for any candidate a
number of votes greater than the number of votes greater than the number of
votes which such stockholder normally is entitled to cast) if the candidates'
names have been properly placed in nomination (in accordance with these by-laws)
prior to commencement of the voting and the stockholder requesting cumulative
voting has given notice prior to commencement of the voting of the stockholder's
intention to cumulate votes. If cumulative voting is properly requested, each
holder of stock, or of any class or classes or of a series or series thereof,
who elects to cumulate votes shall be entitled to as many votes as equals the
number of votes which (absent this provision as to cumulative voting) he would
be entitled to cast for the election of directors with respect to his shares of
stock multiplied by the number of directors to be elected by him, and he may
cast all of such votes for a single director or may distribute them among the
number to be voted for, or for any two or more of them, as he may see fit.

        2.10 WAIVER OF NOTICE

        Whenever notice is required to be given under any provision of the
General Corporation Law of Delaware or of the certificate of incorporation or
these by-laws, a written waiver thereof, signed by the person entitled to
notice, whether before or after the time stated therein, shall be deemed
equivalent to notice. Attendance of a person at a meeting shall constitute a
waiver of


                                       3


notice of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the stockholders need be specified in any written waiver of notice unless so
required by the certificate of incorporation or these by-laws.

        2.11 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING

        Unless otherwise provided in the certificate of incorporation, any
action required by this chapter to be taken at any annual or special meeting of
stockholders of a corporation, or any action that may be taken at any annual or
special meeting of such stockholders, may be taken without a meeting, without
prior notice, and without a vote if a consent in writing, setting forth the
action so taken, is signed by the holders of outstanding stock having not less
than the minimum number of votes that would be necessary to authorize or take
such action at a meeting at which all shares entitled to vote thereon were
present and voted.

        Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in writing. If the action which is consented to is such as
would have required the filing of a certificate under any section of the General
Corporation Law of Delaware if such action had been voted on by stockholders at
a meeting thereof, then the certificate filed under such section shall state, in
lieu of any statement required by such section concerning any vote of
stockholders, that written notice and written consent have been given as
provided in Section 228 of the General Corporation Law of Delaware.

        2.12 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS

        (a) Actions other than Written Consent. For the purpose of determining
the stockholders entitled to notice of or to vote at any meeting of stockholders
or any adjournment thereof, or entitled to receive payment of any dividend or
other distribution or the allotment of any rights, or entitled to exercise any
rights in respect of any change, conversion, or exchange of stock, or other
lawful purpose (other than the expression of consent to corporate action in
writing without a meeting) the directors may fix, in advance, a record date,
which, in the case of a meeting of stockholders, shall not be more than 60 days
nor less than 10 days before the date of such meeting. If no record date is
fixed, the record date for determining stockholders entitled to notice of or to
vote at a meeting of stockholders shall be at the close of business on the day
next preceding the day on which notice is given, or, if notice is waived, at the
close of business on the day next preceding the day on which the meeting is held
and the record date for determining stockholders for any other purpose pursuant
to this Section 2.12(a) shall be at the close of business on the day on which
the board of directors adopts the resolution relating thereto. A determination
of stockholders of record entitled to notice of or to vote at any meeting of
stockholders shall apply to any adjournment of the


                                       4


meeting; provided, however, that the board of directors may fix a new record
date for the adjourned meeting.

        (b) Action by Written Consent. In order that the corporation may
determine the stockholders entitled to consent to corporate action in writing
without a meeting, the board of directors may fix a record date, which record
date shall not precede the date upon which the resolution fixing the record date
is adopted by the board of directors. Any stockholder of record seeking to have
the stockholders authorize or take corporate action by written consent shall, by
written notice to the secretary, request the board of directors to fix a record
date. The board of directors may, at any time within ten (10) days after the
date on which such a request is received, adopt a resolution fixing the record
date (unless a record date has previously been fixed by the first sentence of
this Section 2.12(b)). If no record date has been fixed by the board of
directors pursuant to the first sentence of this Section 2.12(b) or otherwise
within ten (10) days of the date on which such a request is received, the record
date for determining stockholders entitled to consent to corporate action in
writing without a meeting, when no prior action by the board of directors is
required by applicable law, shall be the first date on which a signed written
consent setting forth the action taken or proposed to be taken is delivered to
the corporation by delivery to its registered office in Delaware, its principal
place of business, or to any officer or agent of the corporation having custody
of the book in which proceedings of meetings of stockholders are recorded.
Delivery shall be by hand or by certified or registered mail, return receipt
requested. If no record date has been fixed by the board of directors and prior
action by the board of directors is required by applicable law, the record date
for determining stockholders entitled to consent to corporate action in writing
without a meeting shall be at the close of business on the date on which the
Board of Directors adopts the resolution taking such prior action.

        In the event of the delivery, in the manner provided by this Section
2.12(b), to the corporation of the requisite written consent or consents to take
corporate action and/or any related revocation or revocations, the corporation
may engage independent inspectors of elections for the purpose of performing
promptly a ministerial review of the validity of the consents and revocations.
For the purpose of permitting the inspectors to perform such review, in the
event such inspectors are appointed, no action by written consent without a
meeting shall be effective until such date as such appointed independent
inspectors certify to the corporation that the consents delivered to the
corporation in accordance herewith represent at least the minimum number of
votes that would be necessary to take the corporate action. Nothing contained in
this Section 2.12(b) shall in any way be construed to suggest or imply that the
board of directors or any stockholder shall not be entitled to contest the
validity of any consent or revocation thereof, whether before or after any
certification by any independent inspectors, or to take any other action
(including, without limitation, the commencement, prosecution or defense of any
litigation with respect thereto, and the seeking of injunctive relief in such
litigation).

        Every written consent shall bear the date of signature of each
stockholder who signs the consent and no written consent shall be effective to
take the corporate action referred to therein


                                       5


unless, within sixty (60) days of the earliest dated written consent received in
accordance with this Section 2.12(b), a written consent or consents signed by a
sufficient number of holders to take such action are delivered to the
corporation in the manner prescribed herein.

        2.13 PROXIES

        Each stockholder entitled to vote at a meeting of stockholders or to
express consent or dissent to corporate action in writing without a meeting may
authorize another person or persons to act for him by a written proxy, signed by
the stockholder and filed with the secretary of the corporation, but no such
proxy shall be voted or acted upon after three (3) years from its date, unless
the proxy provides for a longer period. A proxy shall be deemed signed if the
stockholder's name is placed on the proxy (whether by manual signature,
typewriting, telegraphic transmission or otherwise) by the stockholder or the
stockholder's attorney-in-fact. The revocability of a proxy that states on its
face that it is irrevocable shall be governed by the provisions of Section
212(c) of the General Corporation Law of Delaware.

        2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE

        The officer who has charge of the stock ledger of a corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present. Such list shall
presumptively determine the identity of the stockholders entitled to vote at the
meeting and the number of shares held by each of them.

        2.15 INSPECTORS OF ELECTION

        Before any meeting of stockholders, the board of directors may appoint
an inspector or inspectors of election to act at the meeting or its adjournment.
If no inspector of election is so appointed, the chairman of the meeting may,
and on the request of any stockholder or a stockholder's proxy shall, appoint an
inspector or inspectors of election to act at the meeting. The number of
inspectors shall be either one (1) or three (3). If inspectors are appointed at
a meeting pursuant to the request of one (1) or more stockholders or proxies,
the holders of a majority of shares or their proxies present at the meeting
shall determine whether one (1) or three (3) inspectors are to be appointed. If
any person appointed as inspector fails to appear or fails or refuses to act,
the chairman of the meeting may, and upon the request of any stockholder or a
stockholder's proxy shall, appoint a person to fill that vacancy.


                                       6


        Such inspectors shall:

            (a) Determine the number of shares outstanding and the voting power
of each, the number of shares represented at the meeting, the existence of a
quorum, and the authenticity, validity and effect of proxies;

            (b) Receive votes, ballots or consents;

            (c) Hear and determine all challenges and questions in any way
arising in connection with the right to vote;

            (d) Count and tabulate all votes or consents;

            (e) Determine when the polls shall close;

            (f) Determine the result; and

            (g) Do any other acts that may be proper to conduct the election or
vote with fairness to all stockholders.

        2.16 NOMINATIONS AND PROPOSALS

        Nominations of persons for election to the board of directors and the
proposal of business to be considered by the stockholders may be made at any
meeting of stockholders only (a) pursuant to the corporation's notice of
meeting, (b) by or at the direction of the board of directors or (c) by any
stockholder of the corporation who was a stockholder of record at the time of
giving of notice provided for in these bylaws, who is entitled to vote at the
meeting and who complies with the notice procedures set forth in this Section
2.16.

        For nominations or other business to be properly brought before a
stockholders meeting by a stockholder pursuant to clause (c) of the preceding
sentence, the stockholder must have given timely notice thereof in writing to
the secretary of the corporation and such other business must otherwise be a
proper matter for stockholder action. To be timely, a stockholder's notice shall
be delivered to the secretary at the principal executive offices of the
corporation not later than the close of business on the 60th day nor earlier
than the close of business on the 90th day prior to the meeting; provided,
however, that in the event that less than 65 days notice of the meeting is given
to stockholders, notice by the stockholder to be timely must be so delivered not
earlier than the close of business on the seventh (7th) day following the day on
which the notice of meeting was mailed. In no event shall the public
announcement of an adjournment of a stockholders meeting commence a new time
period for the giving of a stockholder's notice as described above. Such
stockholder's notice shall set forth (a) as to each person whom the stockholder
proposes to nominate for election


                                       7


or reelection as a director all information relating to such person that is
required to be disclosed in solicitations of proxies for election of directors
in an election contest, or is otherwise required, in each case pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (or any
successor thereto) and Rule 14a-11 thereunder (or any successor thereto)
(including such person's written consent to being named in the proxy statement
as a nominee and to serving as a director if elected); (b) as to any other
business that the stockholder proposes to bring before the meeting, a reasonably
detailed description of the business desired to be brought before the meeting,
the reasons for conducting such business at the meeting and any material
interest in such business of such stockholder and the beneficial owner, if any,
on whose behalf the proposal is made; and (c) as to the stockholder giving the
notice and the beneficial owner, if any, on whose behalf the nomination or
proposal is made (i) the name and address of such stockholder, as they appear on
the corporation's books, and of such beneficial owner, and (ii) the class and
number of shares of the corporation which are owned beneficially and of record
by such stockholder and such beneficial owner. Notwithstanding any provision
herein to the contrary, no business shall be conducted at a stockholders meeting
except in accordance with the procedures set forth in this Section 2.16.

                                   ARTICLE III

                                    DIRECTORS

        3.1 POWERS

        Subject to the provisions of the General Corporation Law of Delaware and
any limitations in the certificate of incorporation or these by-laws relating to
action required to be approved by the stockholders or by the outstanding shares,
the business and affairs of the corporation shall be managed and all corporate
powers shall be exercised by or under the direction of the board of directors.

        3.2 NUMBER OF DIRECTORS

        The board of directors shall consist of eight (8) persons until changed
by a proper amendment of this Section 3.2.

        No reduction of the authorized number of directors shall have the effect
of removing any director before that director's term of office expires.

        3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS

        Except as provided in Section 3.4 of these by-laws, directors shall be
elected at each annual meeting of stockholders to hold office until the next
annual meeting. Directors need not be stockholders unless so required by the
certificate of incorporation or these by-laws, wherein other qualifications for
directors may be prescribed. Each director, including a director elected to fill
a


                                       8


vacancy, shall hold office until his successor is elected and qualified or until
his earlier resignation or removal.

        Election of directors need not be by written ballot.

        3.4 RESIGNATION AND VACANCIES

        Any director may resign at any time upon written notice to the attention
of the secretary of the corporation. When one or more directors so resigns and
the resignation is effective at a future date, a majority of the directors then
in office, including those who have so resigned, shall have power to fill such
vacancy or vacancies, the vote thereon to take effect when such resignation or
resignations shall become effective, and each director so chosen shall hold
office as provided in this section in the filling of other vacancies.

        Unless otherwise provided in the certificate of incorporation or these
by-laws:

            (i) Vacancies and newly created directorships resulting from any
increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled by a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director.

            (ii) Whenever the holders of any class or classes of stock or series
thereof are entitled to elect one or more directors by the provisions of the
certificate of incorporation, vacancies and newly created directorships of such
class or classes or series may be filled by a majority of the directors elected
by such class or classes or series thereof then in office, or by a sole
remaining director so elected.

        If at any time, by reason of death or resignation or other cause, the
corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may call a special meeting of stockholders in accordance with
the provisions of the certificate of incorporation or these by-laws, or may
apply to the Court of Chancery for a decree summarily ordering an election as
provided in Section 211 of the General Corporation Law of Delaware.

        If, at the time of filling any vacancy or any newly created
directorship, the directors then in office constitute less than a majority of
the whole board ( as constituted immediately prior to any such increase), then
the Court of Chancery may, upon application of any stockholder or stockholders
holding at least ten (10) percent of the total number of the shares at the time
outstanding having the right to vote for such directors, summarily order an
election to be held to fill any such vacancies or newly created directorships,
or to replace the directors chosen by the directors


                                       9


then in office as aforesaid, which election shall be governed by the provisions
of Section 211 of the General Corporation Law of Delaware as far as applicable.

        3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE

        The board of directors of the corporation may hold meetings, both
regular and special, either within or outside the State of Delaware.

        Unless otherwise restricted by the certificate of incorporation or these
by-laws, members of the board of directors, or any committee designated by the
board of directors, may participate in a meeting of the board of directors, or
any committee, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation in a meeting shall constitute presence in
person at the meeting.

        3.6 REGULAR MEETINGS

        Regular meetings of the board of directors may be held without notice at
such time and at such place as shall from time to time be determined by the
board.

        3.7 SPECIAL MEETINGS; NOTICE

        Special meetings of the board of directors for any purpose or purposes
may be called at any time by the chairman of the board, the president, the chief
executive officer, any vice president, the secretary or any two (2) directors.

        Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's address
as it is shown on the records of the corporation. If the notice is mailed, it
shall be deposited in the United States mail at least four (4) days before the
time of the holding of the meeting. If the notice is delivered personally or by
telephone or by telegram, it shall be delivered personally or by telephone or to
the telegraph company at least forty-eight (48) hours before the time of the
holding of the meeting. Any oral notice given personally or by telephone may be
communicated either to the director or to a person at the office of the director
who the person giving the notice has reason to believe will promptly communicate
it to the director. The notice need not specify the purpose or the place of the
meeting, if the meeting is to be held at the principal executive office of the
corporation.

        3.8 QUORUM

        At all meetings of the board of directors, a majority of the authorized
number of directors shall constitute a quorum for the transaction of business
and the act of a majority of the directors present at any meeting at which there
is a quorum shall be the act of the board of directors, except


                                       10


as may be otherwise specifically provided by statute or by the certificate of
incorporation. If a quorum is not present at any meeting of the board of
directors, then the directors present thereat may adjourn the meeting from time
to time, without notice other than announcement at the meeting, until a quorum
is present.

        A meeting at which a quorum is initially present may continue to
transact business notwithstanding the withdrawal of directors, if any action
taken is approved by at least a majority of the required quorum for that
meeting.

        3.9 WAIVER OF NOTICE

        Whenever notice is required to be given under any provision of the
General Corporation Law of Delaware or of the certificate of incorporation or
these by-laws, a written waiver thereof, signed by the person entitled to
notice, whether before or after the time stated therein, shall be deemed
equivalent to notice. Attendance of a person at a meeting shall constitute a
waiver of notice of such meeting, except when the person attends a meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the directors, or members of a committee of
directors, need to specified in any written waiver of notice unless so required
by the certificate of incorporation or these by-laws.

        3.10 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING

        Unless otherwise restricted by the certificate of incorporation or these
by-laws, any action required or permitted to be taken at any meeting of the
board of directors, or of any committee thereof, may be taken without a meeting
if all members of the board or committee, as the case may be, consent thereto in
writing and the writing or writings are filed with the minutes of proceedings of
the board or committee.

        3.11 FEES AND COMPENSATION OF DIRECTORS

        Unless otherwise restricted by the certificate of incorporation or these
by-laws, the board of directors shall have the authority to fix the compensation
of directors.

        3.12 APPROVAL OF LOANS TO OFFICERS

        The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or of its
subsidiary. including any officer or employee who is a director of the
corporation or its subsidiary, whenever, in the judgment of the directors, such
loan, guaranty or assistance may reasonably be expected to benefit the
corporation. The loan, guaranty or other assistance may be with or without
interest and may be unsecured, or secured in


                                       11


such manner as the board of directors shall approve, including, without
limitation, a pledge of shares of stock of the corporation. Nothing in this
section contained shall be deemed to deny, limit or restrict the powers of
guaranty or warranty of the corporation at common law or under any statute.

        3.13 REMOVAL OF DIRECTORS

        Unless otherwise restricted by statute, by the certificate of
incorporation or by these by-laws, any director or the entire board of directors
may be removed, with or without cause, by the holders of a majority of the
shares then entitled to vote at an election of directors; provided, however,
that, so long as shareholders of the corporation are entitled to cumulative
voting, if less than the entire board is to be removed, no director may be
removed without cause if the votes cast against his removal would be sufficient
to elect him if then cumulatively voted at an election of the entire board of
directors.

        No reduction of the authorized number of directors shall have the effect
of removing any director prior to the expiration of such director's term of
office.

                                   ARTICLE IV

                                   COMMITTEES

        4.1 COMMITTEES OF DIRECTORS

        The board of directors may, by resolution passed by a majority of the
whole board, designate one or more committees, with each committee to consist of
one or more of the directors of the corporation. The board may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the board of
directors to act at the meeting in the place of any such absent or disqualified
member. Any such committee, to the extent provided in the resolution of the
board of directors or in the by-laws of the corporation, shall have and may
exercise all the powers and authority of the board of directors in the
management of the business and affairs of the corporation, and may authorize the
seal of the corporation to be affixed to all papers that may require it; but no
such committee shall have the power or authority to (i) amend the certificate of
incorporation (except that a committee may, to the extent authorized in the
resolution or resolutions providing for the issuance of shares of stock adopted
by the board of directors as provided in Section 151(a) of the General
Corporation Law of Delaware, fix the designations and any of the preferences or
rights of such shares relating to dividends, redemption, dissolution, any
distribution of assets of the corporation or the conversion into, or the
exchange of such shares for, shares of any other class or classes or any other
series of the same or any other class or classes of


                                       12


stock of the corporation or fix the number of shares of any series of stock or
authorize the increase or decrease of the shares of any series), (ii) adopt an
agreement of merger or consolidation under Sections 251 or 252 of the General
Corporation Law of Delaware, (iii) recommend to the stockholders the sale, lease
or exchange of all or substantially all of the corporation's property and
assets, (iv) recommend to the stockholders a dissolution of the corporation or a
revocation of a dissolution, or (v) amend the by-laws of the corporation; and,
unless the board resolution establishing the committee, the by-laws or the
certificate of incorporation expressly so provide, no such committee shall have
the power or authority to declare a dividend, to authorize the issuance of
stock, or to adopt a certificate of ownership and merger pursuant to Section 253
of the General Corporation Law of Delaware.

        4.2 COMMITTEE MINUTES

        Each committee shall keep regular minutes of its meetings and report the
same to the board of directors when required.

        4.3 MEETINGS AND ACTION OF COMMITTEES

        Meetings and actions of committees shall be governed by, and held and
taken in accordance with, the provisions of Article III of these by-laws,
Section 3.5 (place of meetings and meetings by telephone), Section 3.6 (regular
meetings), Section 3.7 (special meetings and notice), Section 3.8 (quorum),
Section 3.9 (waiver of notice), and Section 3.10 (action without a meeting),
with such changes in the context of those by-laws as are necessary to substitute
the committee and its members for the board of directors and its members;
provided, however, that the time of regular meetings of committees may be
determined either by resolution of the board of directors or by resolution of
the committee, that special meetings of committees may also be called by
resolution of the board of directors and that notice of special meetings of
committees shall also be given to all alternate members, who shall have the
right to attend all meetings of the committee. The board of directors may adopt
rules for the government of any committee not inconsistent with the provisions
of these by-laws.

                                    ARTICLE V

                                    OFFICERS

        5.1 OFFICERS

        The officers of the corporation shall be a president, a secretary, and a
chief financial officer. The corporation may also have, at the discretion of the
board of directors, a chairman of the board, chief executive officer, one or
more vice presidents, one or more assistant secretaries, one or more assistant
treasurers, and any such officers as may be appointed in accordance with the
provisions of Section 5.3 of these by-laws. Any number of offices may be held by
the same person.


                                       13


        5.2 APPOINTMENT OF OFFICERS

        The officers of the corporation, except such officers as may be
appointed in accordance with the provisions of Section 5.3 or 5.5 of these
by-laws, shall be appointed by the board of directors, subject to the rights, if
any, of an officer under any contract of employment.

        5.3 SUBORDINATE OFFICERS

        The board of directors may appoint, or empower the president or chief
executive officer to appoint, such other officers and agents as the business of
the corporation may require, each of whom shall hold office for such period,
have such authority, and perform such duties as are provided in these by-laws or
as the board of directors may from time to time determine. Executive officers of
the corporation shall only be those officers expressly designated as such by the
board of directors.

        5.4 REMOVAL AND RESIGNATION OF OFFICERS

        Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by an
affirmative vote of the majority of the board of directors at any regular or
special meeting of the board or, except in the case of an officer chosen by the
board of directors, by any officer upon whom such power of removal may be
conferred by the board of directors.

        Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.

        5.5 VACANCIES IN OFFICE

        Any vacancy occurring in any office of the corporation shall be filled
by the board of directors if such officer was appointed by the board of
directors, or by such other person as appointed by the board of directors to
fill such vacancy.

        5.6 CHAIRMAN OF THE BOARD

        The chairman of the board, if such an officer be elected, shall, if
present, preside at meetings of the board of directors and exercise and perform
such other powers and duties as may from time to time be assigned to him by the
board of directors or as may be prescribed by these by-laws. If there is no
president, or chief executive officer then the chairman of the board shall also
be the chief


                                       14


executive officer of the corporation and shall have the powers and duties
prescribed in Section 5.7 of these by-laws.

        5.7 CHIEF EXECUTIVE OFFICER

        Subject to such supervisory powers, if any, as may be given by the board
of directors to the chairman of the board, if there be such an officer, the
chief executive officer of the corporation shall, subject to the control of the
board of directors, have general supervision, direction, and control of the
business and the officers of the corporation. He shall preside at all meetings
of the stockholders and, in the absence or nonexistence of a chairman of the
board, at all meetings of the board of directors. He shall have the general
powers and duties of management usually vested in the chief executive officer of
a corporation and shall have such other powers and duties as may be prescribed
by the board of directors or these by-laws.

        5.8 PRESIDENT

        Subject to such powers as may be given by these by-laws or the board of
directors to the chairman of the board or the chief executive officer, if there
be such officers, the president shall have general supervision, direction and
control of the business and other officers of the corporation. He shall have the
general powers and duties of management usually vested in the president of the
corporation, and such other powers and duties as may be prescribed by the board
of directors or these by-laws.

        5.9 VICE PRESIDENTS

        In the absence or disability of the president and chief executive
officer, the vice presidents, if any, in order of their rank as fixed by the
board of directors or, if not ranked, a vice president designated by the board
of directors, shall perform all the duties of the president and when so acting
shall have all the powers of, and be subject to all the restrictions upon, the
president and chief executive officer. The vice presidents shall have such other
powers and perform such other duties as from time to time may be prescribed for
them respectively by the board of directors, these by-laws, the president, chief
executive officer or the chairman of the board.

        5.10 SECRETARY

        The secretary shall keep or cause to be kept, at the principal executive
office of the corporation or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of directors, committees
of directors, and stockholders. The minutes shall show the time and place of
each meeting, whether regular or special (and, if special, how authorized and
the notice given), the names of those present at directors' meetings or
committee meetings, the number of shares present or represented at stockholders'
meetings, and the proceedings thereof.


                                       15


        The secretary shall keep, or cause to be kept, at the principal
executive office of the corporation at the office of the corporation's transfer
agent or registrar, as determined by resolution of the board of directors, a
share register, or a duplicate share register, showing the names of all
stockholders and their addresses, the number and classes of shares held by each,
the number and date of certificates evidencing such shares, and the number and
date of cancellation of every certificate surrendered for cancellation.

        The secretary shall give, or cause to be given, notice of all meetings
of the stockholders and of the board of directors required to be given by law or
by these by-laws. He shall keep the seal of the corporation, if one be adopted,
in safe custody and shall have such other powers and perform such other duties
as may be prescribed by the board of directors or by these by-laws.

        5.11 CHIEF FINANCIAL OFFICER

        The chief financial officer shall keep and maintain, or cause to be kept
and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital
retained earnings, and shares. The books of account shall at all reasonable
times be open to inspection by any director.

        The chief financial officer shall deposit all moneys and other valuables
in the name and to the credit of the corporation with such depositories as may
be designated by the board of directors. He shall disburse the funds of the
corporation as may be ordered by the board of directors, shall render to the
president, chief executive and directors, whenever they request it, an account
of all his transactions as chief financial officer and of the financial
condition of the corporation, and shall have other powers and perform such other
duties as may be prescribed by the board of directors or the by-laws.

        5.12 REPRESENTATION OF SHARES OF OTHER CORPORATIONS

        The chairman of the board, the president, chief executive officer, any
vice president, the treasurer, the secretary or assistant secretary of this
corporation, or any other person authorized by the board of directors or the
president, or the chief executive officer or a vice president, is authorized to
vote, represent, and exercise on behalf of this corporation all rights incident
to any and all shares of any other corporation or corporations standing in the
name of this corporation. The authority granted herein may be exercised either
by such person directly or by any other person authorized to do so by proxy or
power of attorney duly executed by such person having the authority.


                                       16


        5.13 AUTHORITY AND DUTIES OF OFFICERS

        In addition to the foregoing authority and duties, all officers of the
corporation shall respectively have such authority and perform such duties in
the management of the business of the corporation as may be designated from time
to time by the board of directors or the stockholders.

                                   ARTICLE VI

                                    INDEMNITY

        6.1 THIRD PARTY ACTIONS

        The corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending, or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director or officer of the corporation, or that such
director or officer is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture trust or other enterprise (collectively "Agent"), against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement (if
such settlement is approved in advance by the Company, which approval shall not
be unreasonably withheld) actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation, and, with the respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interest of the
corporation, and, with the respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was lawful.

        6.2 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION

        The corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that he is or was a Agent (as defined in Section 6.1) against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in manner he reasonably believed to be in or not opposed to the
best interests of the corporation and except that no indemnification shall be
made in respect of any claim, issue or matter as to which such person shall have
been adjudged to be liable to the corporation unless and only to the extent that
the Delaware Court of Chancery or the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability but in view of all the


                                       17


circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Delaware Court of Chancery or such other
court shall deem proper.

        6.3 SUCCESSFUL DEFENSE

        To the extent that an agent of the corporation has been successful on
the merits or otherwise in defense of any action, suit or proceeding referred to
in Sections 6.1 and 6.2, or in defense of any claim, issue or matter therein, he
shall be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith.

        6.4 DETERMINATION OF CONDUCT

        Any indemnification under Sections 6.1 and 6.2 (unless ordered by a
court) shall be made by the corporation only as authorized in the specific case
upon a determination that the indemnification of the Agent is proper in the
circumstances because he has met the applicable standard of conduct set forth in
Sections 6.1 and 6.2. Such determination shall be made (1) by the Board of
Directors or an executive committee by a majority vote of a quorum consisting of
directors who were not parties to such action, suit or proceeding, or (2) or if
such quorum is not obtainable or, even if obtainable, a quorum of disinterested
directors so directs, by independent legal counsel in a written opinion, or (3)
by the stockholders.

        6.5 PAYMENT OF EXPENSES IN ADVANCE

        Expenses incurred in defending a civil or criminal action, suit or
proceeding shall be paid by the corporation in advance of the final disposition
of such action, suit or proceeding upon receipt of an undertaking by or on
behalf of the director, officer, employee or agent to repay such amount if it
shall ultimately be determined that he is not entitled to be indemnified by the
corporation as authorized in this Article VI.

        6.6 INDEMNITY NOT EXCLUSIVE

        The indemnification and advancement of expenses provided or granted
pursuant to the other subsections of this section shall not be deemed exclusive
of any other rights to which those seeking indemnification or advancement of
expenses may be entitled under any by-law, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his official capacity
and as to action in another capacity in another capacity while holding such
office.

        6.7 INSURANCE INDEMNIFICATION

        The corporation shall have the power to purchase and maintain insurance
on behalf of any person who is or was an Agent of the corporation, or is or was
serving at the request of the corporation, as a director, officer, employee or
agent of another corporation, partnership, joint


                                       18


venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the corporation would have the power to indemnify him against
such liability under the provisions of this Article VI.

        6.8 THE CORPORATION

         For purposes of this Article VI, references to "the corporation" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors and officers, so that any person who is or
was a director or Agent of such constituent corporation, or is or was serving at
the request of such constituent corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, shall stand in the same position under and subject to the provisions
of this Article VI (including, without limitation the provisions of Section 6.4)
with respect to the resulting or surviving corporation as he would have with
respect to such constituent corporation if its separate existence had continued.

        6.9 EMPLOYEE BENEFIT PLANS

        For purposes of this Article VI, references to "other enterprises" shall
include employee benefit plans; references to "fines" shall include any excise
taxes assessed on a person with respect to an employee benefit plan; and
references to "serving at the request of the corporation" shall include any
service as a director, officer, employee, or agent of the corporation which
imposes duties on, or involves services by, such director, officer, employee, or
agent with respect to an employee benefit plan, its participants, or
beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the corporation" as referred to in this Article
VI.

        6.10 INDEMNITY FUND

        Upon resolution passed by the Board, the corporation may establish a
trust or other designated account, grant a security interest or use other means
(including, without limitation, a letter of credit), to ensure the payment of
certain of its obligations arising under this Article VI and/or agreements which
may be entered into between the corporation and its officers and directors from
time to time.

        6.11 INDEMNIFICATION OF OTHER PERSONS

        The provisions of this Article VI shall not be deemed to preclude the
indemnification of any person who is not an Agent (as defined in Section 6.1),
but whom the corporation has the power or obligation to indemnify under the
provisions of the General Corporation Law of the State of


                                       19


Delaware or otherwise. The corporation may, in its sole discretion, indemnify an
employee, trustee or other agent as permitted by the General Corporation Law of
the State of Delaware. The corporation shall indemnify an employee, trustee or
other agent where required by law.

        6.12 SAVING CLAUSE

        If this Article or any portion thereof shall be invalidated on any
ground by any court of competent jurisdiction, then the corporation shall
nevertheless indemnify each Agent against expenses (including attorney's fees),
judgments, fines and amounts paid in settlement with respect to any action,
suit, proceeding or investigation, whether civil, criminal or administrative,
and whether internal or external, including a grand jury proceeding and an
action or suit brought by or in the right of the corporation, to the full extent
permitted by any applicable portion of this Article that shall not have been
invalidated, or by any other applicable law.

        6.13 CONTINUATION OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES

        The indemnification and advancement of expenses provided by, or granted
pursuant to, this Article VI shall, unless otherwise provided when authorized or
ratified, continue as to a person who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of the heirs, executors and
administrators of such a person.

                                   ARTICLE VII

                               RECORDS AND REPORTS

        7.1 MAINTENANCE AND INSPECTION OF RECORDS

        The corporation shall, either at its principal executive office or at
such place or places as designated by the board of directors, keep a record of
its stockholders listing their names and addresses and the number and class of
shares held by each stockholder, a copy of these by-laws as amended to date,
accounting books, and other records.

        Any stockholder of record, in person or by attorney or other agent,
shall, upon written demand under oath stating the purpose thereof, have the
right during the usual hours for business to inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent to so act on
behalf of the stockholder. The demand under oath shall be directed to the
corporation at its registered office in Delaware or at its principal place of
business.


                                       20


        7.2 INSPECTION BY DIRECTORS

        Any director shall have the right to examine the corporation's stock
ledger, a list of its stockholders, and its other books and records for a
purpose reasonably related to his position as a director. The Court of Chancery
is hereby vested with the exclusive jurisdiction to determine whether a director
is entitled to the inspection sought. The Court may summarily order the
corporation to permit the director to inspect any and all books and records, the
stock ledger, and the stock list and to make copies or extracts therefrom. The
Court may, in its discretion, prescribe any limitations or conditions with
reference to the inspection, or award such other and further relief as the Court
may be deem just and proper.

        7.3 ANNUAL STATEMENT TO STOCKHOLDERS

        The board of directors shall present at each annual meeting, and at any
special meeting of the stockholders when called for by vote of the stockholders,
a full and clear statement of the business and condition of the corporation.

                                  ARTICLE VIII

                                 GENERAL MATTERS

        8.1 CHECKS

        From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money,, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and only the persons so authorized
shall sign or endorse those instruments.

        8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS

        The board of directors, except as otherwise provided in these by-laws,
may authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the board of directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.


                                       21


        8.3 STOCK CERTIFICATES; PARTLY PAID SHARES

        The shares of a corporation shall be represented by certificates,
provided that the board of directors of the corporation may provide by
resolution or resolutions that some or all of any or all classes or series of
its stock shall be uncertificated shares. Any such resolution shall not apply to
shares represented by a certificate until such certificate is surrendered to the
corporation. Notwithstanding the adoption of such a resolution by the board of
directors, every holder of stock represented by certificates and upon request
every holder of uncertificated shares shall be entitled to have a certificate
signed by, or in the name of the corporation by the chairman or vice-chairman of
the board of directors, or the president or vice-president, and by the chief
financial officer or an assistant treasurer, or the secretary or an assistant
secretary of such corporation representing the number of shares registered in
certificate form. Any or all of the signatures on the certificate may be a
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate has ceased to be
such officer, transfer agent or registrar before such certificate is issued, it
may be issued by the corporation with the same effect as if he were such
officer, transfer agent or registrar at the date of issue.

        The corporation may issue the whole or any part of its shares as partly
paid and subject to call for the remainder of the consideration to be paid
therefor. Upon the face or back of each stock certificate issued to represent
any such partly paid shares, upon the books and records of the corporation in
the case of uncertificated partly paid shares, the total amount of the
consideration to be paid therefor and the amount paid thereon shall be stated.
Upon the declaration of any dividend on fully paid shares, the corporation shall
declare a dividend upon partly paid shares of the same class, but only upon the
basis of the percentage of the consideration actually paid thereon.

        8.4 SPECIAL DESIGNATION ON CERTIFICATES

        If the corporation is authorized to issue more than one class of stock
or more than one series of any class, then the powers, the designations, the
preferences, and the relative, participating, optional or other special rights
of each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General Corporation Law of
Delaware, in lieu of the foregoing requirements there may be set forth on the
face or back of the certificate that the corporation shall issue to represent
such class or series of stock a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, the designations,
the preferences, and the relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.


                                       22


        8.5 LOST CERTIFICATES

        Except as provided in this Section 8.5, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and cancelled at the same time. The corporation
may issue a new certificate of stock or uncertificated shares in the place of
any certificate theretofore issued by it, alleged to have been lost, stolen or
destroyed, and the corporation may require the owner of the lost, stolen or
destroyed certificate, or his legal representative, to give the corporation a
bond sufficient to indemnify it against any claim that may be made against it on
account of the alleged loss, theft or destruction of any such certificate or the
issuance of such new certificate or uncertificated shares.

        8.6 CONSTRUCTION; DEFINITIONS

        Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the General Corporation Law of Delaware, shall
govern the construction of these by-laws. Without limiting the generality of
this provision, the singular number includes the plural, the plural number
includes the singular, and the term "person" includes both a corporation and a
natural person.

        8.7 DIVIDENDS

        The directors of the corporation, subject to any restrictions contained
in (i) the General Corporation Law of Delaware or (ii) the certificate of
incorporation, may declare and pay dividends upon the shares of its capital
stock. Dividends may be paid in cash, in property, or in shares of the
corporation's capital stock.

        The directors of the corporation may set apart out of any of the funds
of the corporation available for dividends a reserve or reserves for any proper
purpose and may abolish any such reserve. Such purposes shall include but not be
limited to equalizing dividends, repairing or maintaining any property of the
corporation, and meeting contingencies.

        8.8 FISCAL YEAR

        The fiscal year of the corporation shall be fixed by resolution of the
board of directors and may be changed by the board of directors.

        8.9 SEAL

        The corporation may adopt a corporate seal, which may be altered at
pleasure, and may use the same by causing it or a facsimile thereof, to be
impressed or affixed or in any other manner reproduced.


                                       23


        8.10 TRANSFER OF STOCK

        Upon surrender to the corporation or the transfer agent of the
corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignation or authority to transfer, it shall be the
duty of the corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate, and record the transaction in its books.

        8.11 STOCK TRANSFER AGREEMENTS

        The corporation shall have power to enter into and perform any agreement
with any number of stockholders of any one or more classes of stock of the
corporation to restrict the transfer of shares of stock of the corporation of
any one or more classes owned by such stockholders in any manner not prohibited
by the General Corporation Law of Delaware.

        8.12 REGISTERED STOCKHOLDERS

        The corporation shall be entitled to recognize the exclusive right of a
person registered on its books as the owner of shares to receive dividends and
to vote as such owner, shall be entitled to hold liable for calls and
assessments the person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of another person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.

                                   ARTICLE IX

                                   AMENDMENTS

        The by-laws of the corporation may be adopted, amended or repealed by
the stockholders entitled to vote; provided, however, that the corporation may,
in its certificate of incorporation, confer the power to adopt, amend or repeal
by-laws upon the directors. The fact that such power has been so conferred upon
the directors shall not divest the stockholders of the power, nor limit their
power to adopt, amend or repeal by-laws.


                                       24

EX-10.26

                                                                   Exhibit 10.26

                             LSI LOGIC CORPORATION

                    WILFRED J. CORRIGAN EMPLOYMENT AGREEMENT

        This Agreement is made by and between LSI Logic Corporation ("the
Company"), and you, Wilfred J. Corrigan, as of September 20, 2001 (the
"Effective Date").

        1. Duties and Scope of Employment.

               (a) Positions and Duties. You will continue to serve as Chief
Executive Officer ("CEO") and Chairman of the Company's Board of Directors
("Chairman"). You will render such business and professional services in the
performance of your duties, consistent with your position within the Company, as
may reasonably be assigned to you by the Board of Directors (the "Board"). If
the Board appoints a different CEO during your term of employment with the
Company, you will serve as the employee Chairman of the Company. Your term of
employment with the Company is referred to as the "Employment Term".

               (b) Obligations. During the Employment Term, you will devote your
full business efforts and time to the Company and such of its subsidiaries as
the Board may designate. During the Employment Term, you will not engage in any
other employment, occupation or consulting activity for any direct or indirect
remuneration without the prior approval of the Board (which approval will not be
unreasonably withheld), except that without the approval of the Board, and to
the extent that such service does not substantially interfere with your duties
under this Agreement, you may serve in any capacity with any civic, educational
or charitable organization and on any board of directors on which you presently
serve.

        2. Employee Benefits. During the Employment Term, you will be eligible
to participate in all Company employee benefit plans that are applicable to
executive officers of the Company, as such plans may exist from time to time and
at a level commensurate with your position.

        3. Vacation. During the Employment Term, you will be entitled to the
same amount of paid vacation time as other executive officers of the Company.

        4. At-Will Employment. Your employment with the Company constitutes
"at-will" employment. You and the Company acknowledge that this employment
relationship may be terminated at any time, upon written notice to the other
party, with or without good cause or for any or no cause, at the option of
either you or the Company. However, as described in this Agreement, you may be
entitled to severance benefits depending upon the circumstances of your
termination of employment.

        5. Business Expenses. The Company will pay or reimburse you for all
business expenses incurred while performing your duties under this Agreement.
Such reimbursements will be in accordance with the Company's established
policies, as they may exist from time to time.



        6. Compensation.

           (a) Base Salary. During the Employment Term, the Company will pay you
as compensation for your services a base salary as determined by the Board from
time to time (the "Base Salary"). The Base Salary will be paid through payroll
periods that are consistent with the Company's normal payroll practices, but in
any case not less frequently than once per month.

           (b) Annual Bonus. For each calendar year during which you are CEO,
you will be eligible to receive a bonus based upon the achievement of one or
more performance goals specified by the Compensation Committee of the Board (the
"Committee"), as provided in the Company's Chief Executive Officer Incentive
Plan or another similar plan adopted by the Company (the "Bonus Plan"). The
actual amount of the bonus (if any) payable to you for any year will depend upon
the extent to which the applicable performance goal(s) have been satisfied. In
determining the bonus formula for any year, the Committee may (but will not be
required to) specify a target bonus (the "Target Bonus") to be paid if the
performance goal(s) specified by the Committee are exactly 100% achieved (with
the actual bonus payable being increased or decreased for over- or
underachievement of the performance goal(s)). For purposes of Section 7 below,
if the Committee does not specify a Target Bonus for a particular year, your
Target Bonus for that year will be deemed to equal 50% of the maximum annual
bonus payable under the Bonus Plan.

        7. Severance.

           (a) Termination Other than for Cause; Termination as a Result of
Death or Disability. If the Company terminates your employment for any reason
other than "Cause" (as defined below) or if your employment terminates as a
result of your death or "Disability" (as defined below), then you will be
entitled to the following:

               (i) Option Acceleration and Time to Exercise. Any then unexpired
Company stock options that were granted after the Effective Date, your Company
stock option grant no. 018891, dated November 11, 1999 (if then unexpired), and
your Company stock option grant no. 025112, dated April 2, 2001 (if then
unexpired) will immediately become fully vested and exercisable. In addition,
with respect to each option described in the preceding sentence, you will have
the respective full term of each such option to exercise the option.

               (ii) Other Benefits. You will be paid a lump sum equal to: (1)
thirty-six (36) months of your Base Salary (as in effect immediately prior to
the date of your employment termination), and (2) 300% of your Target Bonus for
the year in which the employment termination occurs. In addition, the Company
shall provide you with (a) health, dental and vision coverage benefits during
the period of twenty-four (24) months following the date of your employment
termination, provided, however, that you elect continuation coverage pursuant to
the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended
("COBRA"), within the time period prescribed pursuant to COBRA, and (b) life
insurance benefits during the period of eighteen (18) months following the date
of your employment termination, at the same level as each of such benefits were
in effect for you on the day immediately preceding the date of your employment
termination.


                                      -2-


               (iii) Accrued Wages and Vacation; Expenses. The Company will pay
you: (1) any unpaid Base Salary due for periods prior to the date of your
employment termination; (2) all of your accrued and unused vacation through the
date of your employment termination; and (3) following your submission of proper
expense reports, the total unreimbursed amount of all expenses that you
reasonably and necessarily incurred in connection with the business of the
Company prior to the date of your employment termination. These payments will be
made promptly upon your employment termination and within the period of time
mandated by law.

          (b) Certain Voluntary Resignations. If you voluntarily resign as CEO
for any reason other than your death or Disability and the Company asks you to
remain as the employee Chairman and you agree to do so, then you will be
entitled to receive the following:

               (i) Option Vesting and Time to Exercise. The vesting schedule of
any unvested Company stock option granted after the Effective Date that remains
outstanding on the effective date of your resignation (the "Resignation Date"),
of your Company stock option grant no. 018891, dated November 11, 1999 (if then
unexpired and to the extent not yet vested), and of your Company stock option
grant no. 025112, dated April 2, 2001 (if then unexpired and the extent not yet
vested) automatically will be converted to a monthly vesting schedule pursuant
to the following rules. The number of shares that will be scheduled to vest on
each "Monthly Vesting Date" will equal the "Monthly Vesting Amount." The Monthly
Vesting Amount equals the product of the total number of unvested shares covered
by the option on the Resignation Date, and the "Vesting Multiplier." The Vesting
Multiplier equals the reciprocal of the number of full months (but in no event
more than 36) between the Resignation Date and the date on which the option
originally was scheduled to become fully vested (the "Final Vesting Date"). The
Monthly Vesting Date is the monthly anniversary of the Final Vesting Date. The
Monthly Vesting Amount actually will vest on any Monthly Vesting Date only if
you still are Chairman on that Monthly Vesting Date, subject to the following:
if, before your options become fully vested in accordance with the rules of this
Section 7(b)(i), the Company terminates your employment for any reason other
than Cause or if your employment terminates as a result of your death or
Disability, then all of your then unexpired Company stock options (whether
granted before, on or after the Effective Date) will immediately become fully
vested and exercisable. In addition, with respect to each option described in
this Section 7(b)(i), you will have the respective full term of each such option
to exercise the vested part of the option.

               (ii) Examples of Option Vesting Rules. The vesting rules of
Section 7(b)(i) are illustrated by the following examples. Assume that the
Resignation Date is June 1, 2007, and that the Company asks you to remain as
Chairman and you agree to do so. (1) Also assume that you have an option that
covers 240,000 unvested shares on the Resignation Date and the Final Vesting
Date is April 15, 2011. Therefore, the number of full months remaining until the
Final Vesting Date is forty six, and the Vesting Multiplier is the reciprocal of
36. The Monthly Vesting Amount is 6,667 shares (6,655 shares on the last Monthly
Vesting Date, due to rounding). The Monthly Vesting Date is the 15th of each
month, commencing June 15, 2007. (2) Assume the same facts as in the preceding
example, except that the Final Vesting Date is November 20, 2007. Therefore, the
number of full months remaining until the Final Vesting Date is five, and the
Vesting Multiplier is the reciprocal of 5. The Monthly Vesting Amount is 48,000
shares. The Monthly Vesting Date is the 20th of each month, commencing June 20,
2007.


                                      -3-


               (iii) Other Benefits. You will be paid a lump sum equal to: (1)
thirty-six (36) months of your Base Salary (as in effect immediately prior to
the date of your employment termination), and (2) 300% of your Target Bonus for
the year in which the employment termination occurs. In addition, the Company
shall provide you with (a) health, dental and vision coverage benefits during
the period of twenty-four (24) months following the end of the Employment Term;
provided, however, that you elect continuation coverage pursuant to the
Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"),
within the time period prescribed pursuant to COBRA, and (b) life insurance
benefits during the period of eighteen (18) months following the Employment
Term, at the same level as each of such benefits were in effect for you on the
day immediately preceding the date of your employment termination.

               (iv) Accrued Wages and Vacation; Expenses. The Company will pay
you: (1) any unpaid Base Salary due for periods prior to the Resignation Date;
(2) all of your accrued and unused vacation through the Resignation Date; and
(3) following your submission of proper expense reports, the total unreimbursed
amount of all expenses that you reasonably and necessarily incurred in
connection with the business of the Company prior to the Resignation Date. These
payments will be made promptly following the Resignation Date.

           (c) Certain Voluntary Terminations. If you voluntarily terminate your
employment as CEO for any reason other than your death or Disability and the
Company does not ask you to remain as Chairman, then you will be entitled to
receive the following:

               (i) Option Acceleration and Time to Exercise. Any then unexpired
Company stock options that were granted after the Effective Date, your Company
stock option grant no. 018891, dated November 11, 1999 (if then unexpired), and
your Company stock option grant no. 025112, dated April 2, 2001 (if then
unexpired) will immediately become fully vested and exercisable. In addition,
with respect to each option described in the preceding sentence, you will have
the respective full term of each such option to exercise the option.

               (ii) Other Benefits. You will be paid a lump sum equal to: (1)
thirty-six (36) months of your Base Salary (as in effect immediately prior to
the date of your employment termination), and (2) 300% of your Target Bonus for
the year in which the employment termination occurs. In addition, the Company
shall provide you with (a) health, dental and vision coverage benefits during
the period of twenty-four (24) months following the date of your employment
termination, provided, however, that you elect continuation coverage pursuant to
the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended
("COBRA"), within the time period prescribed pursuant to COBRA, and (b) life
insurance benefits during the period of eighteen (18) months following the date
of your employment termination, at the same level as each of such benefits were
in effect for you on the day immediately preceding the date of your employment
termination.

               (iii) Accrued Wages and Vacation; Expenses. The Company will pay
you: (1) any unpaid Base Salary due for periods prior to the date of your
employment termination; (2) all of your accrued and unused vacation through the
date of your employment termination; and (3) following your submission of proper
expense reports, the total unreimbursed amount of all expenses that you
reasonably and necessarily incurred in connection with the business of the
Company prior


                                      -4-


to the date of your employment termination. These payments will be made promptly
upon your employment termination and within the period of time mandated by law.

           (d) Termination for Cause; Other Voluntary Terminations. If (1) the
Company terminates your employment for Cause or (2) if you voluntarily terminate
your employment for any reason (other than your death or Disability) and the
Company asks you to remain as Chairman but you do not agree to do so, then you
will receive: (i) the Base Salary owed to you through the date of your
employment termination, (ii) any bonus earned under Section 6(b) prior to the
date of your employment termination, (iii) all accrued vacation, expense
reimbursements and any other benefits due to you through the date of your
employment termination in accordance with the Company's then existing employee
benefit plans and policies, and (iv) such other compensation or benefits from
the Company as may be required by law (for example, COBRA benefits under Section
4980B of the Code) or as part of your other employment-related agreements. Thus,
for example, vesting of your Company stock options will cease upon your
termination of employment and you will have until the earlier of ninety (90)
days after your termination of employment or the normal expiration date of your
option(s) to exercise any vested but unexpired options.

        8. Golden Parachute Excise Tax Gross-Up. In the event that the benefits
provided for in this Agreement or otherwise payable to you constitute "parachute
payments" within the meaning of Section 280G of the Internal Revenue Code of
1986, as amended (the "Code") and will be subject to the excise tax imposed by
Section 4999 of the Code, then you will receive a payment from the Company
sufficient to pay such excise tax, plus (ii) an additional payment from the
Company sufficient to pay the excise tax and federal and state income and
employment taxes arising from the payments made to you by the Company pursuant
to this sentence. Unless you and the Company otherwise agree in writing, the
determination of your excise tax liability and the amount required to be paid
under this Section 8 will be made in writing by the independent auditors who are
primarily used by the Company immediately prior to the change of control (the
"Accountants"). For purposes of making the calculations required by this Section
8, the Accountants may make reasonable assumptions and approximations concerning
applicable taxes and may rely on reasonable, good faith interpretations
concerning the application of Sections 280G and 4999 of the Code. You and the
Company will furnish to the Accountants such information and documents as the
Accountants may reasonably request in order to make a determination under this
Section 8. The Company will bear all costs the Accountants may reasonably incur
in connection with any calculations contemplated by this Section 8.

        9. Maximum Deductibility for the Company. To the extent a payment under
this Agreement would be subject to the Section 162(m) limit of the Code, the
Board may elect to defer such payment until the first date when the payment
would not be subject to the limit.

        10. Definition of Terms. The following terms referred to in this
Agreement shall have the following meanings:

            (a) Cause. "Cause" means termination due to your willful engagement
in misconduct that is demonstrably and materially injurious to the Company and
its subsidiaries taken as a whole. No act, or failure to act, on your part will
be considered "willful" unless done, or omitted to be done, by you not in good
faith and without reasonable belief that your action or


                                      -5-


omission was in the best interest of the Company or its subsidiaries.
Notwithstanding the foregoing, you will not be deemed to have been terminated
for Cause unless and until there shall have been delivered to you a copy of a
resolution duly adopted by the affirmative vote of not less than three-quarters
of the entire membership of the Company's Board of Directors at a meeting of the
Board called and held for the purpose (after reasonable notice to you and an
opportunity for you, together with your counsel, to be heard before the Board),
finding that in the good faith opinion of the Board you were guilty of
misconduct as set forth above and specifying the particulars thereof in detail.

            (b) Disability. "Disability" means your being unable to perform the
principal functions of your duties due to a physical or mental impairment, but
only if such inability has lasted or is reasonably expected to last for at least
twelve (12) months. The Board will determine whether a Disability exists based
on evidence provided by one or more physicians selected by the Board.

        11. Assignment. This Agreement will be binding upon and inure to the
benefit of (a) your heirs, executors and legal representatives upon your death
and (b) any successor of the Company. Any such successor of the Company will be
deemed substituted for the Company under the terms of this Agreement for all
purposes. For this purpose, "successor" means any person, firm, corporation or
other business entity which at any time, whether by purchase, merger or
otherwise, directly or indirectly acquires all or substantially all of the
assets or business of the Company. None of your rights to receive any form of
compensation payable pursuant to this Agreement may be assigned or transferred
except by will or the laws of descent and distribution. Any other attempted
assignment, transfer, conveyance or other disposition of your right to
compensation or other benefits will be null and void.

        12. Legal Fees. The Company will reimburse you for your reasonable,
direct costs of obtaining counsel to review this Agreement. In addition, the
Company will reimburse all reasonable legal fees and expenses incurred by you in
contesting any termination or in seeking to obtain or enforce any right or
benefit provided by this Agreement.

        13. Notices. All notices, requests, demands and other communications
called for hereunder shall be in writing and will be deemed given (i) on the
date of delivery if delivered personally, (ii) one (1) day after being sent by a
well established commercial overnight service, or (iii) four (4) days after
being mailed by registered or certified mail, return receipt requested, prepaid
and addressed to the parties or their successors at the following addresses, or
at such other addresses as the parties may later designate in writing:

        If to the Company:

        LSI Logic Corporation
        1551 McCarthy Boulevard
        Milpitas, CA 95035

        Attn: Vice President, General Counsel and Corporate Secretary

        If to you:


                                      -6-


        at your last residential address known by the Company.

        14. Severability. In the event that any provision hereof becomes or is
declared by a court of competent jurisdiction to be illegal, unenforceable or
void, this Agreement will continue in full force and effect without said
provision.

        15. Confidentiality. You agree to use your best efforts to maintain in
confidence the existence of this Agreement, the contents and terms of this
Agreement, including any documents incorporated by reference, and the
consideration for this Agreement (hereinafter collectively referred to as
"Employment Information"). You agree to take every reasonable precaution to
prevent disclosure of any Employment Information to third parties, and agree
that there will be no publicity, directly or indirectly, concerning any
Employment Information. You agree to take every precaution to disclose
Employment Information only to those attorneys, accountants, governmental
entities and family members who have a reasonable need to know of such
Employment Information. After termination of employment for any reason, you will
continue to maintain the confidentiality of all Employment Information.

        16. Entire Agreement. This Agreement, the Chief Executive Officer
Incentive Plan, and agreements evidencing the options represent the entire
agreement and understanding between the Company and you concerning your
employment relationship with the Company or any of its subsidiaries, and
supersedes and replaces any and all prior agreements and understandings
concerning your employment relationship with the Company. For example (but not
by way of limitation), your 1998 Change of Control Severance Agreement no longer
is effective and you will not be entitled to receive any benefits under that
agreement.

        17. Arbitration and Equitable Relief.

            (a) Except as provided in Section 16(d) below, you and the Company
agree that to the extent permitted by law, any dispute or controversy arising
out of, relating to, or in connection with this Agreement, or the
interpretation, validity, construction, performance, breach, or termination
thereof will be settled by arbitration to be held in the County of Santa Clara,
California, in accordance with the National Rules for the Resolution of
Employment Disputes then in effect of the American Arbitration Association (the
"Rules"). The arbitrator may grant injunctions or other relief in such dispute
or controversy. The decision of the arbitrator will be final, conclusive and
binding on the parties to the arbitration. Judgment may be entered on the
arbitrator's decision in any court having jurisdiction.

            (b) The arbitrator will apply California law to the merits of any
dispute or claim (with the exception of its conflict of laws provisions). You
hereby expressly consent to the personal jurisdiction of the state and federal
courts located in California for any action or proceeding arising from or
relating to this Agreement and/or relating to any arbitration in which the
parties are participants.

            (c) The Company will pay the direct costs and expenses of the
arbitration. The Company will pay your counsel fees and expenses.


                                      -7-


               (d) The Company or you may apply to any court of competent
jurisdiction for a temporary restraining order, preliminary injunction, or other
interim or conservatory relief, as necessary to enforce the provisions of this
Agreement, without breach of this arbitration agreement and without abridgement
of the powers of the arbitrator.

               (e) You understand that nothing in this Section 16 modifies your
at-will status. Either the Company or you can terminate the employment
relationship at any time, with or without cause.

               (f) YOU HAVE READ AND UNDERSTAND THIS SECTION 16, WHICH DISCUSSES
ARBITRATION. YOU UNDERSTAND THAT BY SIGNING THIS AGREEMENT, YOU AGREE TO THE
EXTENT PERMITTED BY LAW, TO SUBMIT ANY FUTURE CLAIMS ARISING OUT OF, RELATING
TO, OR IN CONNECTION WITH THIS AGREEMENT, OR THE INTERPRETATION, VALIDITY,
CONSTRUCTION, PERFORMANCE, BREACH, OR TERMINATION THEREOF TO BINDING
ARBITRATION, AND THAT THIS ARBITRATION CLAUSE CONSTITUTES A WAIVER OF YOUR RIGHT
TO A JURY TRIAL AND RELATES TO THE RESOLUTION OF ALL DISPUTES RELATING TO ALL
ASPECTS OF THE EMPLOYER/EXECUTIVE RELATIONSHIP, INCLUDING BUT NOT LIMITED TO,
THE FOLLOWING CLAIMS:

                   (i) ANY AND ALL CLAIMS FOR WRONGFUL DISCHARGE OF EMPLOYMENT;
BREACH OF CONTRACT, BOTH EXPRESS AND IMPLIED; BREACH OF THE COVENANT OF GOOD
FAITH AND FAIR DEALING, BOTH EXPRESS AND IMPLIED; NEGLIGENT OR INTENTIONAL
INFLICTION OF EMOTIONAL DISTRESS; NEGLIGENT OR INTENTIONAL MISREPRESENTATION;
NEGLIGENT OR INTENTIONAL INTERFERENCE WITH CONTRACT OR PROSPECTIVE ECONOMIC
ADVANTAGE; AND DEFAMATION;

                   (ii) ANY AND ALL CLAIMS FOR VIOLATION OF ANY FEDERAL STATE OR
MUNICIPAL STATUTE, INCLUDING, BUT NOT LIMITED TO, THE AMERICANS WITH
DISABILITIES ACT OF 1990, THE FAIR LABOR STANDARDS ACT, AND ANY LAW OF ANY
STATE; AND

                   (iii) ANY AND ALL CLAIMS ARISING OUT OF ANY OTHER LAWS AND
REGULATIONS RELATING TO EMPLOYMENT OR EMPLOYMENT DISCRIMINATION.

        18. No Oral Modification, Cancellation or Discharge. This Agreement may
be changed or terminated only in writing (signed by you and another member of
the Board of Directors).

        19. Withholding. The Company is authorized to withhold, or cause to be
withheld, from any payment or benefit under this Agreement the full amount of
any applicable withholding taxes.

        20. Governing Law. This Agreement will be governed by the laws of the
State of California (with the exception of its conflict of laws provisions).


                                      -8-


        21. Acknowledgment. You acknowledge that you have had the opportunity to
discuss this matter with and obtain advice from your private attorney, have had
sufficient time to, and have carefully read and fully understand all the
provisions of this Agreement, and are knowingly and voluntarily entering into
this Agreement.

                            [SIGNATURES ON NEXT PAGE]


                                      -9-


        IN WITNESS WHEREOF, the undersigned have executed this Agreement on the
respective dates set forth below:


        WILFRED J. CORRIGAN

        -----------------------------
        Wilfred J. Corrigan


        LSI LOGIC CORPORATION

        -----------------------------
        Name:  David G. Pursel
        Title: Vice-President, General Counsel, Secretary

                                      -10-

EX-21.1

                                                                    EXHIBIT 21.1

                              LIST OF SUBSIDIARIES

             LSI Logic Resale Corporation
             C-Cube Microsystems, Inc. (Semi 1)
             Mint Technology, Inc.
             LSI Logic Export Sales Corporation
             LSI Logic Asia Inc.
             LSI Leasing
             Symbios International Inc. (Cayman)
             LSI Logic Storage Systems Inc.
             LSI Logic Netherlands B.V. (a Holding Company)
             LSI Logic International Services, Inc.
             LSI Logic HK Holdings (Cayman)

EX-23.1

                                                                    EXHIBIT 23.1

                       CONSENT OF INDEPENDENT ACCOUNTANTS

     We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 2-867474, No. 2-91907, No. 2-98732, No. 33-6188, No.
33-6203, No. 33-13265, No. 33-17720, No. 33-30385, No. 33-30386, No. 33-36249,
No. 33-41999, No. 33-42000, No. 33-53054, No. 33-66548, No. 33-66546, No.
33-55631, No. 33-55633, No. 33-66697, No. 33-59981, No. 33-59985, No. 33-59987,
No. 333-12887, No. 333-34285, No. 333-57563, No. 333-62159, No. 333-74627, No.
333-81433, No. 333-81435, No. 333-81437, No. 333-90951, No. 333-95421, No.
333-38746, No. 333-42888, No. 333-43306, No. 333-46436, No. 333-52050, No.
333-53584, No. 333-57152, No. 333-62960, No. 333-66238, No. 333-66240, No.
333-69380, No. 333-71900) and related S-8 prospectuses of LSI Logic Corporation
of our report dated January 23, 2002, relating to the financial statements and
financial statement schedule, which appears on page 82 of this Annual Report on
Form 10-K for the year ended December 31, 2001.

- -s- PricewaterhouseCoopers LLP

San Jose, California
March 25, 2002