LSI LOGIC CORP, S-3, 1999-07-29

LSI LOGIC CORP
S-3, 1999-07-29
SEMICONDUCTORS & RELATED DEVICES

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 29, 1999

REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

FORM S-3
REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933
------------------------

LSI LOGIC CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C>
DELAWARE 94-2712976
(STATE OR OTHER JURISDICTION OF INCORPORATION OR (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
ORGANIZATION)
</TABLE>

1551 MCCARTHY BOULEVARD
MILPITAS, CALIFORNIA 95035
(408) 433-8000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

DAVID E. SANDERS, ESQ.
VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
LSI LOGIC CORPORATION
1551 MCCARTHY BOULEVARD
MILPITAS, CALIFORNIA 95035
(408) 433-8000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)

COPIES TO:

<TABLE>
<S> <C>
LARRY W. SONSINI, ESQ. WILLIAM H. HINMAN, JR., ESQ.
JOHN A. FORE, ESQ. SHEARMAN & STERLING
EDWARD F. VERMEER, ESQ. 1550 EL CAMINO REAL
WILSON SONSINI GOODRICH & ROSATI, PROFESSIONAL MENLO PARK, CA 94025
CORPORATION (650) 330-2200
650 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94304
(650) 493-9300
</TABLE>

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.

If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
- ---------------

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
- ---------------

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]

CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SHARES AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED PER UNIT PRICE REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
% Convertible Subordinated Notes due
2006....................................... $287,500,000(1) 100% $287,500,000(1) $79,925.00
Common stock, $0.01 par value per share
issuable upon conversion of the Notes...... --(2) -- -- --(4)
Common stock, $0.01 par value per share...... 5,750,000(3) $51 1/2 $296,125,000 $82,322.75
- -------------------------------------------------------------------------------------------------------------------------------
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</TABLE>

(1) Includes over-allotment option of $37,500,000 Convertible Subordinated
Notes, which the underwriters have the option to purchase to cover over-
allotments, if any.

(2) Such indeterminate number of shares of Common Stock as shall be required for
issuance upon conversion of the Notes being registered hereunder.

(3) Includes over-allotment option of 750,000 shares of Common Stock, which the
underwriters have the option to purchase to cover over-allotments, if any.

(4) No additional consideration will be received for the Common Stock issuable
upon conversion of the Notes being registered hereunder and, therefore, no
registration fee is required pursuant to Rule 457(i).

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2

EXPLANATORY NOTE

This Registration Statement contains two forms of prospectus, one to be
used in connection with an offering of 5,000,000 shares of common stock of LSI
Logic Corporation (5,750,000 shares if the over-allotment option is exercised in
full) and one to be used in connection with an offering of approximately
$250,000,000 in aggregate principal amount of % Convertible Subordinated Notes
due 2006 by LSI Logic Corporation ($287,500,000 principal amount if the over-
allotment option is exercised in full). The complete debt prospectus follows
this explanatory note. The equity prospectus follows the debt prospectus. Final
forms of each prospectus will be filed with the Securities and Exchange
Commission pursuant to Rule 424(b).
<PAGE> 3

THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IN NOT PERMITTED.

PROSPECTUS (Subject to Completion)
Issued July 29, 1999

$250,000,000
[LSI Logic Logo]

% CONVERTIBLE SUBORDINATED NOTES DUE 2006
------------------------

Interest Payable on and
------------------------

HOLDERS MAY CONVERT THE NOTES INTO OUR COMMON STOCK AT ANY TIME BEFORE
, 2006, AT A CONVERSION PRICE OF $ PER SHARE, SUBJECT TO
ADJUSTMENT IN CERTAIN EVENTS.
------------------------

WE MAY NOT REDEEM ANY OF THE NOTES BEFORE , 2002, AS DESCRIBED IN
THE "DESCRIPTION OF NOTES" BEGINNING ON PAGE 51.

THE NOTES ARE SUBORDINATED IN RIGHT OF PAYMENT TO ALL OF OUR SENIOR DEBT AND ARE
SUBORDINATED BY OPERATION OF LAW TO ALL LIABILITIES (INCLUDING TRADE PAYABLES)
OF OUR SUBSIDIARIES. THE NOTES WILL RANK EQUALLY TO OUR 4 1/4% CONVERTIBLE
SUBORDINATED NOTES DUE 2004.
------------------------

FOR A MORE DETAILED DESCRIPTION OF THE NOTES, SEE "DESCRIPTION OF NOTES"
BEGINNING ON PAGE 51.
------------------------

CONCURRENT WITH THIS OFFERING OF NOTES, WE ARE CONDUCTING A SEPARATE OFFERING OF
5,000,000 SHARES OF OUR COMMON STOCK. THE OFFERING OF NOTES IS NOT CONDITIONED
ON THE COMPLETION OF OUR OFFERING OF COMMON STOCK.
------------------------

OUR COMMON STOCK IS LISTED ON THE NEW YORK STOCK EXCHANGE COMPOSITE TAPE UNDER
THE SYMBOL "LSI." ON JULY 27, 1999, THE REPORTED LAST SALE PRICE OF OUR COMMON
STOCK ON THE NEW YORK STOCK EXCHANGE COMPOSITE TAPE WAS $51 1/2 PER SHARE.
------------------------

INVESTING IN THE NOTES OR OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 9 OF THIS PROSPECTUS.
------------------------

PRICE 100% AND ACCRUED INTEREST, IF ANY
------------------------

The Securities and Exchange Commission and state securities regulators have not
approved or disapproved of these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.

We have granted the underwriters the right to purchase up to an additional
$37,500,000 principal amount of notes to cover over-allotments. Morgan Stanley &
Co. Incorporated expects to deliver the notes to purchasers on , 1999.
------------------------
MORGAN STANLEY DEAN WITTER
BANCBOSTON ROBERTSON STEPHENS
J.P. MORGAN & CO.
MERRILL LYNCH & CO.

, 1999
<PAGE> 4

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Incorporation of Certain Documents by
Reference................................ 3
Forward-Looking Statements................. 4
Prospectus Summary......................... 5
Risk Factors............................... 8
Use of Proceeds............................ 18
Common Stock Price Range................... 18
Dividend Policy............................ 18
Capitalization............................. 19
Selected Consolidated Financial Data....... 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 22
</TABLE>

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Business................................... 40
Management................................. 49
Description of Notes....................... 51
Description of Capital Stock............... 57
Certain Federal Income Tax
Considerations........................... 61
Underwriters............................... 66
Legal Matters.............................. 67
Independent Accountants.................... 67
Available Information...................... 67
Trademark Acknowledgements................. 67
Index to Consolidated Financial
Statements............................... F-1
</TABLE>

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

You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in the prospectus. We are offering to sell the notes and seeking
offers to buy the notes only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of the notes.

Until , 1999, all dealers that buy, sell or trade the notes,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The Commission allows us to "incorporate by reference" into this prospectus
the information we filed with the Commission. This means that we can disclose
important information by referring you to those documents. The information
incorporated by reference is considered to be a part of this prospectus.
Information that we file later with the Commission will automatically update and
supersede this information. We incorporate by reference the documents listed
below and any future filings made by us with the Commission under Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act until our offering is complete.

- The description of the common stock in our Registration Statement on Form
8-A filed on August 29, 1989, under Section 12(g) of the Exchange Act.

- The description of our Amended and Restated Preferred Shares Rights
Agreement in our Registration Statement on Form 8-A-12G/A filed on
December 8, 1998, under Section 12(g) of the Exchange Act.

- Annual Report on Form 10-K filed on March 5, 1999 and 10-K/A filed on
July 28, 1999 for the fiscal year ended December 31, 1998.

- Quarterly Report on Form 10-Q/A for the fiscal quarter ended September
27, 1998, filed on April 8, 1999.

- Quarterly Report on Form 10-Q for the fiscal quarter ended March 28,
1999, filed on May 12, 1999.

- Quarterly Report on Form 10-Q for the fiscal quarter ended June 27, 1999,
filed on July 28, 1999.

3
<PAGE> 5

You may request a copy of these filings, at no cost, by writing or
telephoning us at the following address:

Investor Relations
LSI Logic Corporation
1551 McCarthy Boulevard
Milpitas, California 95035
(408) 433-6777

You should rely only on the information incorporated by reference or
provided in this prospectus. We have not authorized anyone else to provide you
with different information. We are not making an offer of these securities in
any state where the offer is not permitted. You should not assume the
information in this prospectus is accurate as of any date other than the date on
the front of those documents.

FORWARD-LOOKING STATEMENTS

This prospectus and the documents incorporated herein by reference contain
"forward-looking statements" within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act, that involve risks and uncertainties,
such as statements concerning: growth and future operating results; future
customer benefits attributable to our products; developments in our markets and
strategic focus; new products and product enhancements; potential acquisitions
and the integration of acquired businesses, products and technologies; strategic
relationships; and future economic, business and regulatory conditions. Such
forward-looking statements are generally accompanied by words such as
"anticipate," "expect," "intend" or other words that convey uncertainty of
future events or outcomes. Statements made herein are as of the date of this
prospectus and should not be relied upon as of any subsequent date. The section
below entitled "Risk Factors" sets forth certain factors that could cause our
actual future results to differ materially from these forward-looking
statements. These factors and other cautionary statements made in this
prospectus should be read as being applicable to all related forward-looking
statements whenever they appear or are incorporated by reference herein.

4
<PAGE> 6

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information contained elsewhere in this prospectus and financial statements,
including the notes thereto, included or incorporated by reference in this
prospectus. This summary does not contain all of the information that you should
consider before investing in the notes. You should read the entire prospectus
carefully, including "Risk Factors" and the financial statements before making
an investment decision. Unless otherwise specified, all information herein
assumes no exercise of the underwriters' over-allotment option.

LSI LOGIC CORPORATION

We are a worldwide leader in the design, development, manufacture and
marketing of high performance application specific integrated circuits and
application specific standard products. Our submicron process technologies,
combined with our CoreWare design methodology, enable us to integrate system
level solutions on a single chip. We tailor our products to the specific
application requirements of original equipment manufacturers and other customers
in the following markets:

- networking,

- telecom/wireless,

- consumer,

- computer,

- storage components, and

- storage systems.

Many of our customers are worldwide leaders in their end markets. Our
customers include:

- Cisco Systems, Inc.,

- Compaq Computer Corporation,

- Hewlett-Packard Company,

- IBM Corporation,

- NCR,

- Sony Corporation, and

- Sun Microsystems, Inc.

Since our inception, we have based our technology and our business strategy
on integrating increasingly complex electronic building blocks onto a few chips
or a single chip. High-level, industry-standard building blocks of the type that
were previously independent chips, such as microprocessors, networking
controllers, digital signal processors and video compression engines, are used
as "cores" that are connected electronically, along with a customer's
proprietary logic and memory, to form an entire system on a single chip.
Consequently, our customers achieve higher system performance, lower system cost
and faster time-to-market with a differentiated product.

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. In December 1998, we began
production in a state-of-the-art facility in Gresham, Oregon. The new facility
is equipped for advanced manufacturing operations and designed to accommodate
our expansion requirements well into the foreseeable future. Our production
operations in the United States and Japan, as well as those of our assembly and
test subcontractors in Asia, are ISO certified, an important international
measure for quality.

We market our products and services worldwide through direct sales,
marketing and field technical staff and through independent sales
representatives and distributors. In addition, we specifically market our
storage system products to original equipment manufacturing and end users
through value added resellers.

We were originally incorporated in California in 1980. In 1987, we were
reincorporated in Delaware. Our principal offices are located at 1551 McCarthy
Boulevard, Milpitas, California 95035, and our telephone number is (408)
433-8000. Our home page on the Internet is at www.lsilogic.com.

5
<PAGE> 7

SUMMARY CONSOLIDATED FINANCIAL DATA

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31,(1) JUNE 30,
------------------------------------------------------------ -------------------
1994 1995 1996 1997 1998 1998 1999
-------- ---------- ---------- ---------- ---------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AND RATIO DATA) (UNAUDITED)
-------------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................... $923,663 $1,288,790 $1,271,855 $1,322,626 $1,516,891 $669,002 $964,629
Operating income (loss)(2)............. 149,589 316,823 191,749 194,936 (128,359) 70,380 39,006
Net income (loss)(2)................... 103,146 238,663 150,362 164,981 (139,478) 62,795 (77,933)
Basic earnings (loss) per share........ .95 1.89 1.15 1.17 (.97) .44 (.54)
Shares used in computing basic earnings
(loss) per share..................... 108,141 126,028 131,181 140,880 143,153 142,868 144,883

Diluted earnings (loss) per share...... .86 1.72 1.08 1.14 (.97) .43 (.52)
Shares used in computing diluted
earnings (loss) per share............ 127,233 142,113 145,423 146,446 143,153 144,377 149,614

OTHER DATA:
Ratio of earnings to fixed
charges(4)........................... 5.7x 11.4x 7.2x 10.6x -- 9.5x 1.7x
</TABLE>

<TABLE>
<CAPTION>
JUNE 30, 1999
------------------------------------------------------
ACTUAL AS ADJUSTED(5) AS FURTHER ADJUSTED(6)
---------- -------------- ----------------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $ 345,143 $ 345,143 $
Working capital............................................. 518,402 588,439
Total assets................................................ 2,755,715 2,763,590
Total debt.................................................. 719,987 727,862
Stockholders' equity........................................ 1,486,083 1,486,083
</TABLE>

- ---------------
(1) Our fiscal years ended on December 31 in 1997 and 1998, and the Sunday
closest to December 31 in 1994, 1995 and 1996. For presentation purposes,
this prospectus and the Annual Consolidated Financial Statements refer to
December 31 as year end.

(2) In 1998, we recorded a $146 million charge for acquired in-process research
and development associated with the acquisition of Symbios and a $75 million
charge for restructuring. See Notes 2 and 3 of Notes to Annual Consolidated
Financial Statements. For the six months ended June 30, 1999, we recorded a
$4.6 million charge for in-process technology associated with the
acquisition of ZSP Corporation on April 14, 1999, restructuring and merger
costs primarily in connection with the merger with SEEQ and a $92 million
charge for a cumulative effect of a change in accounting principle, net of
tax, associated with the unamortized preproduction balance associated with
the Gresham manufacturing facility. See Notes 2, 3 and 9 to the notes to the
unaudited consolidated condensed financial statements for the six months
ended June 30, 1999.

(3) Diluted earnings per share for the year ended December 31, 1998 and for the
six month period ended June 30, 1999, would have been $0.68 per share and
$0.28 per share, respectively, using a 25% effective tax rate on pre-tax
income, if the following items were excluded: (i) the acquired in-process
research and development charge of $145.5 million for the year ended
December 31, 1998 and $4.6 million for the six month period ended June 30,
1999, respectively, (ii) the restructuring and merger related charges of
$75.4 million for the year ended December 31, 1998 and $5.9 million for the
six month period ended June 30, 1999, respectively, (iii) the amortization
of intangibles of $22.4 million for the year ended December 31, 1998 and
$23.0 million for the six month period ended June 30, 1999, respectively,
(iv) net other non-recurring charges of $9.1 million for the year ended
December 31, 1998 and (v) the cumulative effect of a change in accounting
principle of $92 million for the six months ended June 30, 1999.

6
<PAGE> 8

(4) Computed by dividing (i) earnings before taxes adjusted for fixed charges,
minority interest and capitalized interest net of amortization by (ii) fixed
charges, which includes interest expense and capitalized interest incurred,
plus the portion of interest expense under operating leases deemed by us to
be representative of the interest factor, plus amortization of debt issuance
costs. In 1998, earnings were inadequate to cover fixed charges by $140
million.

(5) Reflects the issuance of the notes offered by this prospectus (assuming no
exercise of the underwriters' over-allotment option) and the application of
the proceeds from this offering (after deducting estimated expenses of this
offering).

(6) Reflects the issuance of the notes offered by this prospectus and the
concurrent issuance of 5,000,000 shares of our common stock (assuming no
exercise of the underwriters' over-allotment option in either case) and the
application of the proceeds from both offerings (after deducting estimated
expenses of both offerings). This offering is not conditioned on the
completion of our offering of common stock.

7
<PAGE> 9

THE OFFERING

SECURITIES OFFERED......... $250,000,000 principal amount of % convertible
subordinated notes due 2006 (plus an additional
$37,500,000 principal amount if the underwriters'
over-allotment option is exercised in full).

INTEREST................... % per year. We will pay interest semi-annually in
arrears in cash on and
of each year, beginning
, 2000.

CONVERSION................. The notes will be convertible into common stock at
the option of the holder at any time prior to
maturity at a conversion price of $ per share,
subject to adjustment in certain events.

SUBORDINATION.............. The notes are subordinated to all of our existing
and future senior indebtedness. As of June 30,
1999, we had approximately $133 million of
indebtedness outstanding that would have
constituted senior indebtedness (after repayment of
a portion of the indebtedness outstanding under our
existing credit facility with proceeds of this
offering), and our subsidiaries had approximately
$144 million of indebtedness and other liabilities
outstanding to which the notes would have been
effectively subordinated (including trade and other
payables but excluding approximately $71 million of
indebtedness guaranteed by us and included above as
senior indebtedness, intercompany liabilities and
liabilities of a type not required to be reflected
on a balance sheet in accordance with generally
accepted accounting principles). The notes offered
by this prospectus will rank equally with our
outstanding 4 1/4% convertible subordinated notes
due 2004 in an aggregate principal amount of $345
million. Neither we nor our subsidiaries are
limited from incurring additional debt under the
indenture.

OPTIONAL REDEMPTION........ At any time on or after , 2002, we
may redeem the notes on at least 30 days' notice,
in whole or in part, at the redemption prices
listed in this prospectus together with accrued
interest.

FUNDAMENTAL CHANGE......... In the event of a fundamental change you will have
the right to require us to redeem all of any part
of your notes at 100% of the principal amount to be
redeemed plus accrued interest.

SINKING FUND............... None.

USE OF PROCEEDS............ We intend to use the proceeds of this offering and
the concurrent offering of our common stock to
repay indebtedness under our existing credit
facility and for general corporate purposes. To the
extent that we do not consummate the concurrent
offering of our common stock, we intend to use the
proceeds of this offering to repay indebtedness
under our existing credit facility.

NYSE SYMBOL................ LSI.

CONCURRENT OFFERING........ Concurrent with this offering of the notes we are
conducting a separate offering of 5,000,000 shares
of our common stock. This offering is not
conditioned on the completion of our offering of
common stock.

8
<PAGE> 10

RISK FACTORS

Before you invest in the notes or shares of common stock underlying the
notes, you should be aware of various risks, including those described below.
You should carefully consider these risk factors, together with all of the other
information included or incorporated by reference in this prospectus, before you
decide whether to purchase the notes. The risks set out below are not the only
risks we face.

If any of the following risks occur, our business, financial condition and
results of operations could be materially adversely affected. In such case, the
trading price of the notes and common stock could decline, and you may lose all
or part of your investment.

Keep these risk factors in mind when you read "forward-looking" statements
elsewhere in this prospectus 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 future events and circumstances
could differ significantly from those anticipated in the forward-looking
statements.

IF WE ARE NOT ABLE TO IMPLEMENT NEW PROCESS TECHNOLOGIES SUCCESSFULLY, OUR
OPERATING RESULTS AND FINANCIAL CONDITION WILL BE ADVERSELY IMPACTED.

The semiconductor industry is intensely competitive and characterized by
constant technological change, rapid product obsolescence and evolving industry
standards. We believe that 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 adopt and implement emerging
industry standards and 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, or cores, and integration of our
CoreWare libraries into our design capabilities. Our cores and ASSPs 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 ASSPs or cores 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.

DISRUPTION OF OUR MANUFACTURING FACILITIES COULD CAUSE DELAYS IN SHIPMENTS OF
PRODUCTS TO OUR CUSTOMERS AND COULD RESULT IN CANCELLATION OF ORDERS OR LOSS OF
CUSTOMERS.

A variety of reasons, including work stoppages, fire, earthquake, flooding
or other natural disasters, or Year 2000 related problems could cause disruption
of operations at any of our primary manufacturing facilities or at any of our
assembly subcontractors. Although we carry business interruption insurance, the
disruption could result in delays in shipments of products to our customers. We
cannot assure you that alternate production capacity would be available if a
major disruption were to occur, or that if it were available, it could be
obtained on favorable terms. A disruption could result in cancellation of orders
or loss of customers. The loss would result in a material adverse impact on our
operating results and financial condition.

OUR LACK OF LONG-TERM VOLUME PRODUCTION CONTRACTS WITH OUR CUSTOMERS COULD
RESULT IN INSUFFICIENT CUSTOMER ORDERS WHICH WOULD RESULT IN UNDERUTILIZATION OF
OUR MANUFACTURING FACILITIES.

We generally do not have long-term volume production contracts with our
customers. We cannot control whether and to what extent customers place orders
for any specific ASIC design or ASSPs and the quantities of products included in
those orders. Insufficient orders will result in underutilization of our
manufacturing facilities and would adversely impact our operating results and
financial condition.

9
<PAGE> 11

BRINGING OUR NEW WAFER FABRICATION FACILITY TO FULL OPERATING CAPACITY COULD
TAKE LONGER AND COST MORE THAN ANTICIPATED.

Our new wafer fabrication facility in Gresham, Oregon, began production in
December 1998. The Gresham facility is a sophisticated, highly complex,
state-of-the-art factory. Actual production rates depend upon the reliable
operation and effective integration of a variety of hardware and software
components. We cannot assure you that all of these components will be fully
functional or successfully integrated within the currently projected schedule or
that the facility will achieve the forecasted yield targets. Our inability to
achieve and maintain acceptable production capacity and yield levels could have
a material adverse impact on our operating results and financial condition.

In addition, the amount of capital expenditures required to bring the
facility to full operating capacity could be greater than we currently
anticipate. Higher costs to bring the facility to full operating capacity will
reduce margins and could have a material adverse impact on our results of
operations and financial condition. As of June 30, 1999, we have spent
approximately $789 million in capital expenditures on the Gresham facility. We
plan to spend no more than $250 million in capital expenditures in 1999,
approximately $84 million of which relate to the Gresham facility.

OUR LACK OF GUARANTEED SUPPLY ARRANGEMENTS WITH OUR SUPPLIERS COULD RESULT IN
OUR INABILITY TO OBTAIN SUFFICIENT RAW MATERIALS FOR USE IN THE PRODUCTION OF
OUR PRODUCTS.

We use a wide range of raw materials in the production of our
semiconductors, host adapter boards and storage systems products, including
silicon wafers, processing chemicals, and electronic and mechanical components.
We generally do not have guaranteed supply arrangements with our suppliers and
do not maintain an extensive inventory of materials for manufacturing. Some of
these materials we purchase from a limited number of vendors, and some we
purchase from a single supplier. On occasion, we have experienced difficulty in
securing an adequate volume and quality of materials. We cannot assure you that
if we have difficulty in obtaining materials or components in the future
alternative suppliers will be available, or that available suppliers will
provide materials and components in a timely manner or on favorable terms. If we
cannot obtain adequate materials for manufacture of products, there could be a
material impact on our operating results and financial condition.

HIGH CAPITAL REQUIREMENTS AND HIGH FIXED COSTS CHARACTERIZE OUR BUSINESS, AND WE
FACE A RISK THAT REQUIRED CAPITAL MIGHT BE UNAVAILABLE WHEN WE NEED IT.

In order to remain competitive, we must continue to make significant
investments in new facilities and capital equipment. We spent $330 million in
1998 and $29 million in the first two fiscal quarters of 1999, net of
retirements and refinancings, on investments in new facilities and capital
equipment, not including facilities and capital equipment acquired with Symbios.
We expect to spend no more than $250 million during 1999. We expect to continue
to make significant investments in new facilities and capital equipment. We
believe that we will be able to meet our operating and capital requirements and
obligations for the foreseeable future using existing liquid resources, funds
generated from our operations and our ability to borrow funds. We believe that
our level of liquid resources is important, and we may seek additional equity or
debt financing from time to time. However, we cannot assure you that additional
financing will be available when needed or, if available, will be on favorable
terms. Moreover, any future equity or convertible debt financing will decrease
existing stockholders' percentage equity ownership and may result in dilution,
depending on the price at which the equity is sold or the debt is converted. 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.

10
<PAGE> 12

THE NATURE OF OUR INDUSTRY COULD CREATE FLUCTUATIONS IN OUR OPERATING RESULTS
WHICH COULD RESULT IN A SUDDEN AND SIGNIFICANT DROP IN THE PRICE OF OUR STOCK
AND OTHER SECURITIES, PARTICULARLY ON A SHORT-TERM BASIS.

Future operating results will continue to be subject to quarterly
variations based upon a wide variety of factors including:

- The cyclical nature of both the semiconductor industry and the markets
addressed by our products,

- The availability and extent of utilization of manufacturing capacity,

- Erosion in the price of our products, and

- The timing of new product introductions, the ability to develop and
implement new technologies and other competitive factors.

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, and 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, their aggregate effect could
result in significant volatility in future performance and the trading prices of
our common stock and the notes. Our failure to meet the performance expectations
published by external sources could result in a sudden and significant drop in
the price of our common stock, the notes and other securities, particularly on a
short-term basis.

IF WE ARE UNABLE TO COMPETE EFFECTIVELY WITH EXISTING OR NEW COMPETITORS,
RESULTING LOSS OF COMPETITIVE POSITION COULD RESULT IN PRICE REDUCTIONS, FEWER
CUSTOMER ORDERS, REDUCED REVENUES, REDUCED GROSS MARGINS AND LOST MARKET SHARE.

We compete in markets that are intensely competitive, and which exhibit
both rapid technological changes and continued price erosion. Our competitors
include many large domestic and foreign companies that have substantially
greater financial, technical and management resources than us. Several major
diversified electronics companies offer ASIC products and/or other products that
are competitive with our product lines. Other competitors are smaller,
specialized and emerging companies attempting to sell products in particular
markets that we also target. In addition, we face competition from some
companies whose strategy is to provide a portion of the products and services
that we offer. For example, these competitors may offer semiconductor design
services, license design tools, and/or provide support for obtaining products at
an independent foundry. Some of our large customers, some of whom may have
licensed elements of our process and product technologies, may develop internal
design and production operations to produce their own ASICs, thereby displacing
our products. Therefore, we cannot assure you that we will be able to continue
to compete effectively with our existing or new competitors. Loss of competitive
position could result in price reductions, fewer customer orders, reduced
revenues, reduced gross margins, and loss of market share, any of which would
affect our operating results and financial condition.

To remain competitive, we continue to evaluate our worldwide manufacturing
operations, looking for additional cost savings and technological improvements.
If we are not able to implement successfully new process technologies and to
achieve volume production of new products at acceptable yields, our operating
results and financial condition may be affected.

11
<PAGE> 13

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

- 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,

- Properly identify target markets,

- Respond effectively to new technological changes or new product
announcements by others,

- Reduce semiconductor chip size, increase device performance and improve
manufacturing yields,

- Adapt products and processes to technological changes, and

- Adopt and/or set emerging industry standards.

We cannot assure you that our design, development and introduction
schedules for new products or enhancements to our existing and future products
will be met. In addition, we cannot assure you that these products or
enhancements will achieve market acceptance, or that we will be able to sell
these products at prices that are favorable to us.

OUR SIGNIFICANT INVESTMENTS IN RESEARCH AND DEVELOPMENT BEFORE WE CONFIRM THE
TECHNICAL FEASIBILITY AND COMMERCIAL VIABILITY OF A PRODUCT PRESENT RISKS THAT
WE WILL BE UNABLE TO RECOVER THE DEVELOPMENT COSTS ASSOCIATED WITH SUCH PRODUCT.

We must continue to make significant investments in research and
development in order to continually enhance the performance and functionality of
our products, to keep pace with competitive products and to satisfy customer
demands for improved performance, features and functionality. Technical
innovations are inherently complex and require long development cycles and
appropriate professional staffing. We must complete development of such
innovations before they are obsolete, and make them sufficiently compelling to
attract customers. Also, we must incur substantial research and development
costs before we confirm the technical feasibility and commercial viability of a
product. Therefore, we spend substantial resources determining the feasibility
of certain innovations that may not lead to a product but may instead result in
numerous dead ends and sunk costs. We cannot assure you that revenues from
future products or product enhancements will be sufficient to recover the
development costs associated with such products or enhancements. Moreover, we
may not be able to secure the financial resources necessary to fund future
development.

OUR ACQUISITION AND INVESTMENT ALLIANCE ACTIVITIES COULD DISRUPT OUR ONGOING
BUSINESS.

We intend to continue to make investments in companies, products and
technologies, either through acquisitions or investment alliances. We are
currently evaluating potential acquisition and investment alliances and will
continue to do so on an ongoing basis. We do not currently have any commitments
for a material acquisition or investment alliance. Acquisitions and investment
activities often involve risks, including:

- We may experience difficulty in assimilating the acquired operations and
employees,

- We may be unable to retain the key employees of the acquired operation,

- The acquisition or investment may disrupt our ongoing business,

- We may not be able to incorporate successfully the acquired technology
and operations into our business and maintain uniform standards,
controls, policies and procedures, and

- We may lack the experience to enter into new markets, products or
technologies.

12
<PAGE> 14

Some of these factors are beyond our control. Failure to manage growth
effectively and to integrate acquisitions would affect our operating results or
financial condition.

CHANGES IN FOREIGN CURRENCY EXCHANGE RATES COULD AFFECT OUR OPERATIONS OR CASH
FLOWS.

We have international subsidiaries that operate and sell our products
globally. Our international sales totaled approximately $560 million in 1998 and
$373 million in the first two fiscal quarters of 1999. Further, we purchase a
substantial portion of our raw materials and equipment from foreign suppliers,
and we incur labor and other operating costs in foreign currencies, particularly
in our Japanese manufacturing facilities. As a result, we are exposed to changes
in foreign currency exchange rates or weak economic conditions in the other
countries.

Our debt obligations in Japan totaled approximately 8.6 billion yen,
approximately $71 million, at June 30, 1999. These obligations expose us to
exchange rate fluctuations for the period of time from the start of the
transaction until it is settled. In recent years, the yen has fluctuated
substantially against the U.S. dollar. We use forward exchange, currency swap,
interest rate swap and option contracts to manage our exposure to currency
fluctuations and changes in interest rates. There were no interest rate swap or
currency swap contracts outstanding as of June 30, 1999. We cannot assure you,
however, that such hedging transactions will eliminate exposure to currency rate
fluctuations and changes in interest rates. Notwithstanding our efforts to
foresee and mitigate the effects of changes in fiscal circumstances,
fluctuations in currency exchange rates in the future could affect our
operations and/or cash flows. In addition, high inflation rates in foreign
countries could affect our future results.

IF WE DO NOT SUCCESSFULLY COMPLETE MODIFICATIONS TO OUR SYSTEMS AND COMMERCIAL
ARRANGEMENTS IN A TIMELY MANNER TO ACCOMMODATE THE NEW EUROPEAN CURRENCY,
MATERIAL DISRUPTION OF OUR BUSINESS COULD OCCUR.

A new European currency was implemented in January 1999 to replace the
separate currencies of eleven western European countries. In response, we are
changing our operations as we modify systems and commercial arrangements to deal
with the new currency. Modifications are necessary in operations such as
payroll, benefits and pension systems, contracts with suppliers and customers,
and internal financial reporting systems. We expect a three-year transition
period during which transactions may also be made in the old currencies. This
requires dual currency processes for our operations. We have identified issues
involved and are developing and implementing solutions. The cost of this effort
is not expected to have a material effect on our business or results of
operations. We cannot assure you, however, that all problems will be foreseen
and corrected or that no material disruption of our business will occur.

CHANGES IN INTERNATIONAL TRADE AND ECONOMIC CONDITIONS COULD ADVERSELY IMPACT
OUR ABILITY TO MANUFACTURE OR SELL IN FOREIGN MARKETS AND COULD RESULT IN A
DECLINE IN CUSTOMER ORDERS.

We have substantial business activities in Europe and the Pan-Asia region.
Both manufacturing and sales of our products may be adversely impacted by
changes in political and economic conditions abroad. A change in the current
tariff structures, export compliance laws or other trade policies, in either the
United States or foreign countries could adversely impact our ability to
manufacture or sell in foreign markets.

The recent economic crisis in Asia has affected business conditions and
pricing in the region. We subcontract test and assembly functions to
subcontractors in Asia. A significant 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 customer orders or increased costs. Such
conditions could have an adverse impact on our operating results. Additionally,
our customers sell products, especially consumer products, into the Pan-Asia
region. A significant decrease in sales to end-users and consumers in the area
could result in a decline in orders and have an impact on our operating results
and financial condition.

13
<PAGE> 15

OUR MARKETING STRATEGY CREATES RISKS ASSOCIATED WITH CUSTOMER CONCENTRATION.

We expect that we will become increasingly dependent on a limited number of
customers for a substantial portion of our net revenues. This is as a result of
our strategy to direct our marketing and selling efforts toward selected
customers. During 1998, Sony Corporation accounted for 12% of net revenues. We
fill Sony's orders as they are placed and accepted. We do not have a supply
contract with Sony and Sony is not obligated to purchase our products.

Our operating results and financial condition could be affected if:

- We do not win new product designs from major customers,

- Major customers cancel their business with us,

- Major customers make significant changes in scheduled deliveries, or

- Prices of products that we sell to these customers are decreased.

OUR BUSINESS AS A HIGH TECHNOLOGY COMPANY PRESENTS RISKS OF INTELLECTUAL
PROPERTY OBSOLESCENCE, INFRINGEMENT AND LITIGATION.

Our success is dependent in part on our technology and other proprietary
rights. We believe that there is value in the protection afforded by our
patents, patent applications and trademarks. However, the semiconductor industry
is characterized by rapidly changing technology. 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 semiconductor industry, from time to time we have
received communications from other parties asserting that they possess patent
rights, mask work rights, copyrights, trademark rights or other intellectual
property rights which cover certain of our products, processes, technologies or
information. We are evaluating several such assertions. We are considering
whether to seek licenses with respect to certain of these claims. Based on
industry practice, we believe that licenses or other rights, if necessary, could
be obtained on commercially reasonable terms for existing or future claims.
Nevertheless, we cannot assure you that licenses can be obtained, or if obtained
will be on acceptable terms or that litigation or other administrative
proceedings will not occur. Litigation of such claims or the inability to obtain
certain licenses or other rights or to obtain such licenses or rights on
favorable terms could have an impact on our operating results and financial
condition.

CYCLICAL FLUCTUATIONS IN OUR MARKETS COULD CAUSE A DOWNTURN IN DEMAND FOR OUR
PRODUCTS AND RESULT IN LOWER REVENUES.

We may experience period-to-period fluctuations or a decline as a result of
the following:

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

- Fluctuations in supply and demand in the semiconductor or storage markets
for our products,

- Maturing product cycles in our products or products produced by our
customers, and

- Fluctuations or declines in general economic conditions, which often
produce abrupt fluctuations or declines in our products or the products
or services offered by our suppliers and customers.

Significant industry-wide fluctuations or a downturn as a result of these
factors could affect our operating results and financial condition.

The semiconductor industry also has experienced periods of rapid expansion
of production capacity. Even if our customers' demand were not to decline, the
availability of additional excess production capacity in our industry creates
competitive pressure that can degrade pricing levels, which can also depress our
revenues. Also, during such periods, customers who benefit from shorter lead
times may delay some purchases into future periods, which could affect our
demand and revenues for the short term. We

14
<PAGE> 16

cannot assure you that we will not experience such downturns or fluctuations in
the future, which could affect our operating results and financial condition.

WE DEPEND ON KEY EMPLOYEES AND FACE COMPETITION IN HIRING AND RETAINING
QUALIFIED EMPLOYEES.

Our employees are vital to our success. Moreover, our key management,
engineering and other employees are difficult to replace. We generally do not
have employment contracts with our key employees. Further, we do not maintain
key person life insurance on any of our employees. The expansion of high
technology companies in Silicon Valley and Colorado has increased demand and
competition for qualified personnel. We may not be able to attract, assimilate
or retain additional highly qualified employees in the future. These factors
could affect our business, financial condition and results of operations.

IF WE, OUR SUPPLIERS OR OUR CUSTOMERS DO NOT SUCCESSFULLY, TIMELY OR ADEQUATELY
ADDRESS THE YEAR 2000 ISSUE, WE COULD EXPERIENCE A SIGNIFICANT DISRUPTION OF OUR
FINANCIAL MANAGEMENT AND CONTROL SYSTEMS OR A LENGTHY INTERRUPTION IN OUR
MANUFACTURING OPERATIONS.

The inability of computer software programs to accurately recognize,
interpret and process date codes designating the year 2000 and beyond could
cause systems to yield inaccurate results or encounter operating problems
resulting in the interruption of the business operations which they control.
This could adversely affect our ability to process orders, forecast production
requirements or issue invoices. A significant failure of the computer integrated
manufacturing systems, which monitor and control factory equipment, would
disrupt manufacturing operations and cause a delay in completion and shipping of
products. Moreover, if our critical suppliers' or customers' systems or products
fail because of a Year 2000 malfunction, it could impact our operating results.
Finally, our own products could malfunction as a result of a failure in date
recognition, giving rise to the possibility of warranty claims and litigation.

Based on currently available information, our management does not believe
that the Year 2000 issues discussed above, related to internal systems or
products sold to customers, will have a material impact on our financial
condition or overall trends in results of operations. However, we are uncertain
to what extent we may be affected by such matters. A significant disruption of
our financial management and control systems or a lengthy interruption in our
manufacturing operations caused by a Year 2000 related issue could result in a
material adverse impact on our operating results and financial condition. In
addition, it is possible that a supplier's failure to ensure Year 2000
capability or our customer's concerns about Year 2000 readiness of our products
would have a material adverse effect on our results of operations.

THE NOTES ARE SUBORDINATED AND OUR ABILITY TO REPAY THE NOTES IS DEPENDENT IN
PART ON THE EARNINGS OF OUR SUBSIDIARIES.

The notes are unsecured and subordinated to our senior indebtedness and
rank equally with our outstanding 4 1/4% convertible subordinated notes due
2004.

Upon the occurrence of:

- bankruptcy,

- liquidation,

- reorganization, or

- acceleration of the notes

15
<PAGE> 17

our assets will be available to pay the notes only after we have paid all of our
senior indebtedness. After we repay our senior indebtedness, we may not have
enough assets to repay the notes. The notes are effectively subordinated to the
liabilities, including trade payables, of our subsidiaries.

The notes are exclusively obligations of LSI Logic Corporation. A
substantial portion of our operations are conducted through our subsidiaries. As
a result, our cash flow and our ability to service our debt, including the
notes, is dependent upon the earnings of our subsidiaries. In addition, we are
dependent on the distribution of earnings, loans or other payments by our
subsidiaries to us.

Our subsidiaries are separate and distinct legal entities. Our subsidiaries
have no obligation to pay any amounts due on the notes. Our subsidiaries are not
required to provide us with funds for our payment obligations, whether by
dividends, distributions, loans or other payments. In addition, any payment of
dividends, distributions, loans or advances by our subsidiaries to us could be
subject to statutory or contractual restrictions. Payments to us by our
subsidiaries will also be contingent upon our subsidiaries' earnings and
business considerations.

Our right to receive any assets of any of our subsidiaries upon their
liquidation or reorganization, and therefore the right of the holders to
participate in those assets, will be effectively subordinated to the claims of
that subsidiary's creditors, including trade creditors. In addition, even if we
were a creditor to any of our subsidiaries, our rights as a creditor would be
subordinate to any security interest in the assets of our subsidiaries and any
indebtedness of our subsidiaries senior to that held by us.

Neither we nor our subsidiaries are prohibited or limited from incurring
additional debt under the indenture. As of June 30, 1999, we had approximately
$133 million of senior indebtedness. As of June 30, 1999, our subsidiaries had
approximately $144 million of indebtedness and other liabilities to which the
notes were effectively subordinated. This amount included trade and other
payables, but excluded:

- approximately $71 million of indebtedness guaranteed by us,

- intercompany liabilities, and

- liabilities not required to be on a balance sheet in accordance with
generally accepted accounting principles.

We and our subsidiaries will also incur other debt in the future. See
"Description of Notes -- Subordination of Notes."

WE MAY NOT BE ABLE TO REDEEM THE NOTES UPON A FUNDAMENTAL CHANGE.

If a fundamental change occurs, a holder may require us to redeem their
notes. If a fundamental change occurs, we may not have enough funds to pay the
redemption price for all tendered notes. In addition, our existing credit
facility prohibits redemptions of the notes. Our existing credit facility also
provides that both the triggering of redemption rights as a result of a
fundamental change and the occurrence of a change of control would be an event
of default under the credit facility. We may also enter into future debt
agreements that may contain similar provisions.

If a fundamental change occurs when we are prohibited from redeeming notes,
we could either:

- seek the consent of our lenders to redeem the notes, or

- refinance the debt containing this prohibition.

If we do not obtain a consent from our lenders or repay these borrowings,
we would be prohibited from redeeming the notes. If we failed to redeem notes,
it would be an event of default under the indenture. If we had an event of
default under the indenture, or the fundamental change resulted in an event of
default under our senior indebtedness, the indenture would restrict our ability
to pay the noteholders.

A "fundamental change" is limited to certain types of transactions. A
fundamental change may not include other events that might adversely affect our
financial condition. This provision may not protect you

16
<PAGE> 18

if we engage in a highly leveraged transaction, reorganization or merger. See
"Description of Notes -- You may require as to redeem the notes upon a
fundamental change."

A PUBLIC MARKET MAY NOT DEVELOP FOR THE NOTES.

Prior to this offering, there has been no trading market for the notes.
Although the underwriters have advised us that they currently intend to make a
market in the notes, they are not obligated to make a market. Their market
making activity will also be subject to the limits imposed by the securities
laws. As a result, we cannot guarantee that there will be a market for the
notes. Even if a market does develop, we cannot guarantee that a market will be
maintained. If an active market for the notes does not develop, the trading
price of the notes could decrease.

OUR NOTES MAY NOT BE RATED OR MAY RECEIVE A LOWER RATING THAN ANTICIPATED.

We believe it is likely that one or more rating agencies may rate the
notes. If one or more rating agencies assign the notes a rating lower than
expected by investors, the market price of the notes and our common stock would
be materially adversely affected.

POSSIBLE VOLATILITY OF PRICE OF COMMON STOCK AND NOTES.

The market price of our common stock has been volatile in the past. The
market price of the notes and the common stock may be volatile in the future.
The trading price of the notes and the common stock may be significantly
affected by the following factors:

- The cyclical nature of both the semiconductor industry and the markets
addressed by our products,

- The availability and extent of utilization of manufacturing capacity,

- Erosion in the price of our products,

- The timing of new product introductions, the ability to develop and
implement new technologies and other competitive factors,

- Our announcement of new products or product enhancements or similar
announcements by our competitors, and

- General market conditions or market conditions specific to particular
industries.

In addition, the stock prices of many companies in the technology and
emerging growth sectors have fluctuated widely due to events unrelated to their
operating performance. These fluctuations may adversely affect the market price
of the notes and the common stock.

17
<PAGE> 19

USE OF PROCEEDS

The net proceeds to us from the sale of the notes offered by this
prospectus are estimated to be approximately $242 million (approximately $279
million if the underwriters' over-allotment option is exercised in full) after
deducting the estimated discount and other expenses of this offering payable by
us. We intend to use the proceeds of this offering and the concurrent offering
of our common stock to repay indebtedness under our existing credit facility and
for general corporate purposes. From time to time we consider investments in
companies, products and technologies, either through acquisition or investment
alliances, for which the proceeds may be used. We are currently evaluating
potential acquisitions and investment alliances and will continue to do so on an
ongoing basis. We do not currently have any commitments for such use of the
proceeds. To the extent that we do not consummate the concurrent offering of our
common stock, we intend to use the proceeds of this offering to repay
indebtedness under our existing credit facility. The banks' lending commitments
under the credit facility will be permanently reduced by the amount of the loan
repayment. The revolver reduces by $34.4 million per quarter beginning December
31, 1999 until the total commitment reaches $300 million and bear interest at
variable rates calculated as either the prime rate or LIBOR plus the applicable
margin. As of June 30, 1999, the interest rate for the revolver and the yen
sub-facility were 5.96% and 1.14%, respectively. All of the proceeds of these
loans were used to finance the costs and related expenses of our acquisition of
Symbios, Inc. in August 1998. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

COMMON STOCK PRICE RANGE

Our common stock is listed on the New York Stock Exchange Composite Tape
under the symbol "LSI." The following table lists the high and low per share
sale prices for our common stock as reported by the New York Stock Exchange
Composite Tape for the periods indicated:

<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
Year ended December 31, 1997:
First quarter............................................. $ 38 1/4 $ 25 7/8
Second quarter............................................ 46 7/8 32
Third quarter............................................. 36 3/4 28 3/8
Fourth quarter............................................ 32 11/ 18 5/8
Year ended December 31, 1998:
First quarter............................................. $ 27 1/2 $ 19 5/16
Second quarter............................................ 29 3/8 20 3/4
Third quarter............................................. 25 1/8 11 1/2
Fourth quarter............................................ 20 1/2 10 1/2
Year ended December 31, 1999:
First quarter............................................. $ 32 $ 16 1/8
Second quarter............................................ 46 3/16 27 1/2
Third quarter (through July 27, 1999)..................... 53 5/8 45 1/8
</TABLE>

On July 27, 1999, the reported last sale price of our common stock as
reported on the New York Stock Exchange Composite Tape was $51 1/2 per share.

DIVIDEND POLICY

We have never declared or paid cash dividends and currently do not
anticipate paying cash dividends in the foreseeable future. In addition, our
credit facility limits our ability to declare and pay dividends.

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<PAGE> 20

CAPITALIZATION

The following table sets forth our cash, cash equivalents, short-term
investments, current portion of long-term obligations and capitalization at June
30, 1999 on an actual basis and as adjusted to give effect to the sale of the
notes offered by us (assuming the underwriters' over-allotment option is not
exercised) and the application of the net proceeds of the offering, after
deducting estimated expenses of this offering and as further adjusted to give
effect to the concurrent offering of our common stock offered by us (assuming
the underwriters' over-allotment option is not exercised) and the application of
the net proceeds of that offering and this offering, after deducting estimated
expenses of both offerings. This offering is not conditioned on the completion
of our offering of common stock. See "Use of Proceeds." This table should be
read in conjunction with our consolidated financial statements and the other
information included or incorporated by reference in this prospectus.

<TABLE>
<CAPTION>
JUNE 30, 1999
---------------------------------------
AS FURTHER
ACTUAL AS ADJUSTED ADJUSTED
---------- ------------ -----------
UNAUDITED
(IN THOUSANDS)
<S> <C> <C> <C>
Cash, cash equivalents and short-term investments......... $ 345,143 345,143
========== ========== ==========
Current portion of long-term obligations.................. $ 72,051 2,014
========== ========== ==========
Long-term obligations:
Long-term obligations................................ $ 302,936 130,848
4 1/4% Convertible Subordinated Notes due 2004....... 345,000 345,000
% Convertible Subordinated Notes due 2006.......... -- 250,000
---------- ---------- ----------
Total long-term obligations..................... 647,936 725,848
Stockholders' equity:
Preferred Stock, $.01 par value; 2,000 shares
authorized; none issued or outstanding, actual and as
adjusted............................................. --
Common Stock, $.01 par value; 450,000 shares authorized;
145,967 issued and outstanding, actual and as
adjusted............................................. 1,460 1,460
Additional paid-in capital.............................. 1,159,402 1,159,402
Retained earnings....................................... 290,445 290,445
Accumulated other comprehensive income.................. 34,776 34,776
---------- ---------- ----------
Total stockholders' equity...................... 1,486,083 1,486,083
---------- ---------- ----------
Total capitalization....................... $2,134,019 2,211,931
========== ========== ==========
</TABLE>

This capitalization table excludes (i) 21.2 million shares issuable upon
exercise of outstanding stock options with a weighted average exercise price of
$23.49 per share and 8.4 million shares available for grant under our 1982
Incentive Stock Option Plan, 1991 Equity Incentive Plan and 1995 Director Option
Plan, (ii) 1.7 million shares issuable under our Employee Stock Purchase Plan,
(iii) 11 million shares issuable upon conversion of the 4 1/4% convertible
subordinated notes due 2004 and (iv) shares issuable upon conversion of
the notes offered by this prospectus.

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<PAGE> 21

SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements and the related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus. The consolidated statement of
operations data for the three years in the period ended December 31, 1998, and
the balance sheet data at December 31, 1997 and 1998, are derived from the
audited consolidated financial statements included elsewhere in this prospectus.
The consolidated statement of operations data for the years ended December 31,
1994 and 1995, and the balance sheet data at December 31, 1994, 1995 and 1996
are derived from audited consolidated financial statements not included in this
prospectus. The consolidated statement of operations data for the six months
ended June 30, 1998 and 1999 and the balance sheet data at June 30, 1998 and
1999 are derived from the unaudited consolidated financial statements included
elsewhere in this prospectus.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31,(1) JUNE 30,
------------------------------------------------------------ -----------------------
1994 1995 1996 1997 1998 1998 1999
-------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AND RATIO DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues...................... $923,663 $1,288,790 $1,271,855 $1,322,626 $1,516,891 $ 669,002 $ 964,629
-------- ---------- ---------- ---------- ---------- ---------- ----------
Costs and expenses:
Costs of revenues........... 535,383 679,588 716,755 694,274 884,598 367,392 616,289
Research and development.... 102,351 126,911 187,749 229,735 291,125 130,857 151,569
Selling, general and
administrative............ 130,671 163,286 171,733 196,359 226,258 97,601 124,272
Acquired in-process research
and development........... -- -- -- 2,850 145,500 -- 4,600(2)
Restructuring of operations
and other non-recurring
charges................... 4,647 (114) -- -- 75,400 -- 5,871(2)
Amortization of
intangibles............... 1,022 2,296 3,869 4,472 22,369 2,772 23,022
-------- ---------- ---------- ---------- ---------- ---------- ----------
Total costs and
expenses............ 774,074 971,967 1,080,106 1,127,690 1,645,250 598,622 925,623
-------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from
operations.................. 149,589 316,823 191,749 194,936 (128,359) 70,380 39,006
Interest expense.............. (18,867) (16,776) (13,850) (1,860) (8,865) (175) (20,200)
Interest income and other..... 19,855 35,448 30,483 34,891 7,719 13,637 4,273
-------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before income
taxes, minority interest and
cumulative effect of change
in accounting principle..... 150,577 335,495 208,382 227,967 (129,505) 83,842 23,079
Provision for income taxes.... 43,684 93,790 57,521 60,819 9,905 20,890 9,160
-------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before minority
interest and cumulative
effect of change in
accounting principle........ 106,893 241,705 150,861 167,148 (139,410) 62,952 13,919
Minority interest in net
income of subsidiaries...... 3,747 3,042 499 727 68 157 78
-------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before
cumulative effect of change
in accounting principle..... 103,146 238,663 150,362 166,421 (139,478) 62,795 13,841
Cumulative effect of change in
accounting principle........ -- -- -- (1,440) -- -- (91,774)
-------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)............. $103,146 $ 238,663 $ 150,362 $ 164,981 $ (139,478) $ 62,795 $ (77,933)
======== ========== ========== ========== ========== ========== ==========
</TABLE>

20
<PAGE> 22

OTHER DATA:
Ratio of earnings to fixed
charges(4).................. 5.7x 11.4x 7.2x 10.6x -- 9.5x 1.7x
</TABLE>

<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
-------------------------------------------------------------- -----------------------
1994 1995 1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents
and short-term
investments.......... 430,224 688,657 721,924 500,456 291,526 $ 419,128 $ 345,143
Working capital........ 423,745 747,152 714,961 448,677 238,724 441,698 518,402
Total assets........... 1,289,126 1,865,708 1,974,628 2,155,365 2,823,805 2,163,950 2,755,715
Total debt............. 289,045 257,945 331,977 116,008 747,523 109,244 719,987
Total stockholders'
equity............... 549,474 1,227,029 1,330,528 1,586,382 1,524,473 1,637,572 1,486,083
</TABLE>

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

(1) Our fiscal years ended on December 31, 1997 and 1998, and the Sunday closest
to December 31 in 1994, 1995 and 1996. For presentation purposes, this
prospectus and the Audited Consolidated Financial Statements refer to
December 31 as year end.

(2) In 1998, we recorded a $145.5 million charge for acquired in-process
research and development associated with the acquisition of Symbios and a
$75.4 million charge for restructuring. See Notes 2 and 3 of Notes to the
Consolidated Financial Statements. For the six months ended June 30, 1999,
the company recorded a $4.6 million charge for in-process technology
associated with the acquisition of ZSP Corporation on April 14, 1999,
restructuring and merger costs primarily in connection with the merger with
SEEQ and a $92 million charge for a cumulative effect of a change in
accounting principles, net of tax, associated with the unamortized
preproduction balance associated with the Gresham manufacturing facility.
See Notes 2, 3 and 9 to the Notes to the Unaudited Consolidated Condensed
Financial Statements for the six months ended June 30, 1999.

21
<PAGE> 23

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Statements in this discussion and analysis include forward-looking
information statements within the meaning of Section 27A of the Securities Act
and Section 21E of the Exchange Act. 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
prospectus. Risks and uncertainties that may affect our results may include,
among others:

- Fluctuations in the timing and volumes of customer demand,

- Currency exchange rates,

- Availability and utilization of our manufacturing capacity,

- Timing and success of new product introductions, and

- Unexpected obsolescence of existing products.

OVERVIEW

We believe that our future operating results will continue to be subject to
quarterly variations based upon a wide variety of factors. These factors
include, among others:

- Cyclical nature of both the semiconductor industry 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, 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 position 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.

22
<PAGE> 24

We have international subsidiaries which 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, we are exposed to international factors such as changes in foreign
currency exchange rates or weak economic conditions of the respective countries
in which we operate. We utilize forward exchange, currency swap, interest swap
and option contracts to manage our exposure associated with currency
fluctuations on intercompany transactions and certain foreign currency
denominated commitments. With the exception of purchased option contracts and
forward contracts, there were no currency swap or interest rate swap contracts
outstanding as of June 30, 1999 and December 31, 1998. (See Note 8 to the
Unaudited Consolidated Condensed Financial Statements.) 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 which could significantly and adversely affect our operating
results and financial condition.

RESULTS OF OPERATIONS

On June 22, 1999, we completed a merger of our wholly-owned subsidiary with
SEEQ in a transaction accounted for as a pooling of interests and SEEQ became a
wholly-owned subsidiary. All financial information has been restated
retroactively to reflect SEEQ and our combined operations as if the merger had
occurred at the beginning of the earliest period presented (see Note 2 to the
Unaudited Consolidated Condensed Financial Statements). Prior to the merger,
SEEQ's fiscal year-end was the last Sunday in September of each year whereas we
operate on a fiscal year ending on December 31.

Where more than one material factor caused changes in results, we have
quantified each material factor throughout the MD&A where practicable.

SIX MONTHS ENDED JUNE 30, 1999 VERSUS SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)

Revenue

Revenues for the second quarter of 1999 increased $165 million or 49% to
$501 million compared to $336 million during the same period of 1998. The
material factors contributing to this increase included additional revenues from
the acquisition of Symbios in the third quarter of 1998 (see Note 6 to the
Unaudited Consolidated Condensed Financial Statements). The increase was also
attributable to increased demand for products used in communications and
networking applications. The increase was offset in part by decreased demand for
our component products used in computer product applications.

Revenues for the first half of 1999 increased $296 million or 44% to $965
million compared to $669 million for the same period of the prior year. The
material factors contributing to the increase included additional revenues from
the acquisition of Symbios in the third quarter of 1998. The increase was also
attributable to increased demand for products used in communications and
networking applications. The increase was offset in part by the decreased demand
and lower average selling prices for our component products used in computer and
consumer product applications.

One customer represented 11% of revenues for the three months ended June
30, 1999. There were no customers with revenues greater than or equal to 10% of
total consolidated revenues for the six months ended June 30, 1999.

23
<PAGE> 25

Operating costs and expenses

Key elements of the consolidated statements of operations, expressed as a
percentage of revenues, were as follows:

<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------ ------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Gross margin............................................. 37% 47% 36% 45%
Research and development expenses........................ 15% 20% 16% 20%
Selling, general and administrative expenses............. 13% 16% 13% 15%
Amortization of intangibles.............................. 2% -- 2% --
Income from operations................................... 5% 11% 4% 11%
</TABLE>

Gross margin

The gross margin percentage decreased to 37% during the second quarter of
1999 from 47% in the same period in 1998 and decreased to 36% during the first
half of 1999 from 45% in the same period in 1998. The decrease reflected a
combination of the following elements:

- Changes in product mix primarily related to Symbios product additions
from August 6, 1998,

- Lower average selling prices, including the impact from currency
fluctuations, and

- Increased cost of revenues from commencing operations at our new
fabrication facility in Gresham, Oregon in December of 1998.

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 margin
in future periods.

Changes in the relative strength of the yen may have a greater impact on
gross margin than other foreign exchange fluctuations due to our large wafer
fabrication operations in Japan. Although the yen strengthened (the average yen
exchange rate for the second quarter and first half of 1999 increased 12% and
10%, respectively, from the same periods in 1998), the effect on gross 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 8 to the Unaudited
Consolidated Condensed Financial Statements.) Future changes in the relative
strength of the yen or mix of foreign denominated revenues and costs could have
a significant effect on gross margins or operating results.

Research and development

Research and development expenses increased $9 million or 14% to $75
million and $21 million or 16% to $152 million during the three and six month
periods ended June 30, 1999, respectively, compared

24
<PAGE> 26

to $66 million and $131 million in the same periods of 1998, respectively. The
material factors resulting in this increase were the following:

- Expenditures for research and development activities which were a
continuation of research and development activities of the Symbios
business included in our unaudited consolidated financial statements in
the second quarter and the first half of 1999,

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

- Salary increases during the second quarter of 1999.

For the three and six months ended June 30, 1999, the above noted increases
were offset in part by $3 million which is directly attributable to a technology
transfer agreement entered into with a non-public technology company located in
Malaysia during the second quarter of 1999. (See Note 4 of the Notes to the
Unaudited Consolidated Condensed Financial Statements).

As a percentage of revenues, R&D expenses decreased to 15% and 16% for the
second quarter and the first half of 1999, respectively, compared to
approximately 20% for the comparable periods in 1998. The effects of our
restructuring programs in the third quarter of 1998 primarily accounted for the
decrease (see Note 5 of Notes to the Unaudited Consolidated Condensed Financial
Statements). As we continue our commitment to technological leadership in our
markets and realize the further benefit of cost savings from our restructuring
efforts, we are targeting our R&D investment in the second half of 1999 to be
approximately 13% of revenues.

Selling, general and administrative

Selling, general and administrative expenses increased $11 million or 20%
to $63 million and $26 million or 27% to $124 million for the three and six
months ended June 30, 1999, respectively, compared to $52 million and $98
million during the same periods in 1998, respectively. The increase was
primarily attributable to the inclusion of current expenses relating to the
former Symbios business acquired on August 6, 1998 and salary increases in the
second quarter of 1999. As a percentage of revenues, SG&A expenses decreased to
approximately 13% for the three and six month periods ended June 30, 1999 from
16% and 15% during the same periods in 1998, respectively. We expect that SG&A
expenses as a percentage of revenues will decline to approximately 12% of
revenues during the second half of 1999 as we continue to realize the benefits
of cost savings from the restructuring programs established in the third quarter
of 1998.

Restructuring and merger related expenses

Restructuring and merger related expenses were $8 million and $6 million
for the three and six month periods ended June 30, 1999, respectively. There
were no restructuring or merger related expenses recorded in the same periods of
1998. In connection with the merger with SEEQ on June 22, 1999 (see Note 2 of
the Notes to the Unaudited Consolidated Condensed Financial Statements), we
recorded $3 million in restructuring charges and $5 million in merger related
expenses. The merger expenses related primarily to investment banking and other
professional fees directly attributable to the merger with SEEQ. The
restructuring charge is comprised of $2 million in write-downs of fixed assets
which were duplicative to the combined company, $0.5 million of exit costs
relating to non-cancelable building lease contracts and $0.5 million provision
for severance costs related to the involuntary termination of certain employees.
The exit costs and employee severance costs were recorded in accordance with
EITF No. 94-3 "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity." The fixed and other assets write-downs
were recorded in accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." The
restructuring actions as outlined by the restructuring plan are intended to be
executed to completion by June 30, 2000, one year from the date the reserve was
taken.

25
<PAGE> 27

the first quarter of 1999, we determined that $2.5 million of the restructuring
reserve originally established in the third quarter of 1998 would not be
utilized as a result of the completion of activities in the U.S., Europe and
Japan, including the trade-in of certain software at a gain which was previously
written down. For a description of the restructuring costs recorded in the third
quarter of 1998 and changes to the restructuring reserves in the second quarter
of 1999, refer to Note 5 of the Notes to the Unaudited Consolidated Condensed
Financial Statements.

The savings from the restructuring plan associated with the acquisition of
SEEQ are not considered to be significant.

As a result of the execution of restructuring plan announced in the third
quarter of 1998, we expect to realize savings in 1999 of approximately $37
million in reduced employee expenses, $10 million in depreciation savings and $3
million related to reduced lease and maintenance contract expenses primarily
associated with the reduction in the number of engineering design centers and
sales facilities and administrative offices worldwide. As of June 30, 1999, the
remaining cash requirements will be related primarily to severance payouts. The
resources for such payments will come from cash on hand at the time the
severance payouts are distributed.

In-process research and development

On April 14, 1999, we acquired all of outstanding capital stock of ZSP
Corporation for a total purchase price of $11.3 million which consisted of $7
million in cash (which included approximately $0.6 million in direct acquisition
costs), and assumed liabilities up to $4.3 million in accordance with the
purchase agreement with ZSP. The merger was accounted for as a purchase (See
Note 3 to the Notes to the Consolidated Condensed Financial Statements). ZSP, a
development stage semiconductor company, was involved in the design and
marketing of programmable Digital Signal Processors for use in wired and
wireless communications. The results of operations of ZSP and estimated fair
value of assets acquired and liabilities assumed were included in our
consolidated condensed financial statements as of April 14, 1999, the effective
date of the purchase, through the end of the period.

In connection with the purchase of ZSP, we recorded a $4.6 million charge
to in-process research and development during the second quarter of 1999. The
amount was determined by identifying research projects for which technological
feasibility had not been established and no alternative future uses existed. We
acquired ZSP's in-process DSP research and development project that was targeted
at the telecommunications market. This product is being developed specifically
for voice over net or voice over internet protocol applications and is intended
to have substantial incremental functionality, greatly improved speed and a
wider range of interfaces than ZSP's current technology.

The value of the one project identified to be in progress was determined by
estimating the future cash flows from the project once commercially feasible,
discounting the net cash flows back to their present value and then applying a
percentage of completion to the calculated value as defined below. The net cash
flows from the identified project are based on our estimates of revenues, cost
of sales, research and development costs, selling, general and administrative
costs and applicable income taxes for the project. These estimates were compared
and found to be in line with industry analysts forecasts of growth in the
telecommunications market. Estimated total revenues are expected to peak in the
years 2002 and 2003 and then decline in 2004 as other new products are expected
to become available. These projections are based on our estimates of market size
and growth, expected trends in technology, and the expected timing of new
product introductions by us and our competitors.

We applied a royalty percentage of 25% of operating income for the project
in-process to attribute value for dependency on predecessor core technologies.
The discount rate used was 25% for the project, a rate 1,000 basis points higher
than the industry weighted average cost of capital estimated at approximately
15% 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.

26
<PAGE> 28

The percentage of completion for the project was determined using
milestones representing management's estimate of effort, value added and degree
of difficulty of the portion of the project completed as of April 14, 1999, as
compared to the remaining research and development to be completed to bring the
project to technical 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).

Development of ZSP's digital signal processor project started in May 1998.
As of April 14, 1999, we estimated the project was 65% complete. As of the
acquisition date, the cost to complete the project was estimated at $1 million
for the remainder of 1999.

However, development of the technology remains a substantial risk to us due
to the remaining effort to achieve technical feasibility, rapidly changing
customer markets and competitive threats from other companies. Additionally, the
value of other intangible assets acquired may become impaired. Our management
believes that the in-process research and development charge of $4.6 million is
valued consistently with the SEC staff's view regarding valuation methodologies.
There can be no assurances, however, that the SEC staff will not take issue with
any assumptions used in the valuation model and require us to revise the amount
allocated to in-process research and development.

Amortization of goodwill and other intangibles

Amortization of goodwill and other intangibles increased $11 million to $12
million and $20 million to $23 million in the three and six months ended June
30, 1999, respectively, compared to $1 million and $3 million during the same
periods in 1998, respectively. The increase was primarily related to
amortization of goodwill and other intangibles associated with the acquisition
of Symbios in the third quarter of 1998 and the acquisition of ZSP in the second
quarter of 1999.

Interest expense

Interest expense increased $10 million and $20 million for the three and
six month periods ended June 30, 1999 as compared to the same periods in the
prior year. The increase was attributable to interest expense on the bank debt
facility, which we entered into during the third quarter of 1998 to fund the
purchase of Symbios, and the 4 1/4% convertible subordinated notes issued in
March 1999. (See Note 10 of Notes to the Unaudited Consolidated Condensed
Financial Statements.) Additionally, in 1999, we did not capitalize any interest
associated with the construction of the new fabrication facility in Gresham,
Oregon, as operations of the facility commenced in December 1998.

Interest income and other

Interest income and other decreased $3 million to $2 million and $9 million
to $4 million in the second quarter and the first half of 1999, respectively, as
compared to $5 million and $13 million during the same periods in 1998,
respectively. The decrease was primarily attributable to the following:

- A reduction in interest income attributable to lower average balances of
cash, cash equivalents and short-term investments during the first half
of 1999 as compared to the same period in the prior year. The lower
average balances of cash, cash equivalents and short term investments
resulted primarily from cash outlays associated with the purchase of
Symbios in the third quarter of 1998 and debt repayments, net of
borrowings, primarily during the first quarter of 1999; and

- The combination of slightly higher losses on both foreign exchange and
fixed asset disposals during the three and six months ended June 30, 1999
compared to the same periods of 1998.

27
<PAGE> 29

Provision for income taxes.

The tax provision for the three and six months ended June 30, 1999 was at
an effective rate of 43% and 40%, respectively, compared to 25% for the three
and six months ended June 30, 1998, respectively. The rate in the first half of
1999 was impacted by the write-offs relating to IPR&D, SEEQ merger costs and
restructuring charges during the second quarter of 1999. Our effective tax rate
can be above or below the U.S. statutory rate primarily due to non-deductible
IPR&D and merger and restructuring charges offset in part by earnings of our
foreign subsidiaries taxed at lower rates and the utilization of prior loss
carryovers and other tax credits.

FISCAL YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998

Revenue In 1998, we adopted Statement of Accounting Standards ("SFAS") No. 131,
"Disclosures about Segments of an Enterprise and Related Information." We
concluded that we operate in two reportable segments: the Semiconductor segment
and the Storage Systems segment. In the Semiconductor segment, we design,
develop, manufacture and market integrated circuits, including
application-specific integrated circuits, application-specific standard products
and related products and services. Semiconductor design and service revenues
include engineering design services, licensing of our advanced design tools
software, and technology transfer and support services. Our customers use these
services in the design of increasingly advanced integrated circuits
characterized by higher levels of functionality and performance. The proportion
of revenues from ASIC design and related services compared to semiconductor
product sales varies among customers depending upon their specific requirements.
In the Storage Systems segment, we design, manufacture, market and support high
performance data storage management and storage systems solutions, including a
complete line of Redundant Array of Independent Disks ("RAID") storage systems,
subsystems and related software. The following table describes revenues from the
Semiconductor and Storage Systems segments as a percentage of total consolidated
revenues:

<TABLE>
<CAPTION>
REPORTABLE SEGMENTS: 1996 1997 1998
-------------------- ---- ---- ----
<S> <C> <C> <C>
Semiconductor............................................... 100% 100% 94%
Storage Systems............................................. -- -- 6%
---- ---- ----
100% 100% 100%
==== ==== ====
</TABLE>

The Storage Systems segment was added in 1998 with the purchase of Symbios
(see Note 2 of the Notes to the Audited Consolidated Financial Statements), and
therefore financial data are not available for comparative purposes in prior
years. In addition, the segment does not meet the quantitative thresholds of a
reportable segment as defined in SFAS No. 131, and accordingly, separate
financial information related to the segment has been excluded for the fiscal
year 1998.

Total revenues increased 15.2% to $1.52 billion in 1998 from $1.32 billion
in 1997. Material factors resulting in this increase were additional revenues
from Symbios after August 6, 1998, and increased demand for our component
products used in communications and networking applications. The increase was
offset in part by decreased demand for our component products used in computer
product applications and lower average selling prices when expressed in dollars
for component products used in computer and consumer product applications.
Design and service revenues remained relatively consistent as compared to 1997
at 5% of total Semiconductor segment revenues. In 1997, all revenues were from
the Semiconductor segment. During 1998, one customer represented 12% of our
consolidated revenues.

Total revenues increased to $1.32 billion in 1997 from $1.27 billion in
1996. Material factors resulting in the increase in revenues during 1997 were an
increase in demand for our component products used in consumer and communication
applications. The increase was offset in part by declines in demand for our
component products used in computer applications and by lower average selling
prices during 1997 as compared to 1996 when expressed in dollars. Design and
service revenues remained relatively consistent as compared to 1996 at 6% of
total revenues. One customer represented 22% in 1997 and 14% in 1996 of our
consolidated revenues.

28
<PAGE> 30

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

<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Gross profit margin......................................... 44% 48% 42%
Research and development expense............................ 15% 17% 19%
Selling, general and administrative expense................. 14% 15% 15%
(Loss)/income from operations............................... 15% 15% (8)%
</TABLE>

Gross margin Gross margin percentage for 1998 decreased to 42% from 48% in 1997.
The decrease reflects a combination of the following elements:

- Non-recurring inventory charges of $7.7 million,

- Changes in product mix related to Symbios product additions from August
6, 1998,

- Lower average selling prices, including the impact from currency
fluctuations, and

- Increased cost of sales from commencing operations at our new fabrication
facility in Gresham, Oregon in December of 1998, including $11.8 million
in lower of cost or market charges.

The gross margin percentage for 1997 increased to 48% of revenues, compared
with 44% in 1996. The increase was primarily related to increased manufacturing
yields largely attributable to the installation of chemical mechanical polishing
equipment during the fourth quarter of 1996 and to an improvement in capacity
utilization during 1997 as compared to 1996. The increase was partially offset
by lower average selling prices.

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 margin
in future periods.

Changes in the relative strength of the yen may have a greater impact on
gross margin than other foreign exchange fluctuations due to our large wafer
fabrication operations in Japan. Although the yen weakened (the average yen
exchange rate for 1998 decreased 9.9% from 1997), the effect on gross margin and
net income was not significant because yen denominated sales offset a
substantial portion of yen denominated costs during those periods. Moreover, we
hedged a portion of our remaining yen exposure. (See Note 6 of the Audited Notes
to the Consolidated Financial Statements.) Future changes in the relative
strength of the yen or mix of foreign denominated revenues and costs could have
a significant effect on gross margins or operating results.

Research and development Total research and development increased 26.7% or $61.4
million to $291.1 million during 1998 as compared to 1997. The increase was
attributable to the following:

- Research and development expenditures for Symbios included in our
consolidated financial statements since August 6, 1998,

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

- Upgrade from 6 inch to 8 inch wafer fabrication capability at our Santa
Clara, California research and development facility.

29
<PAGE> 31

As a percentage of revenues, R&D expenses were 19% in 1998, 17% in 1997,
and 15% in 1996. Total R&D expenses increased from previous years' R&D spending
by $42 million to $229.7 million in 1997 and by $61 million to $187.7 million in
1996. The increase in 1997 as compared to 1996 was primarily attributed to
increased compensation and staffing levels and expansions of our product
development centers as we continued to develop higher technology sub-micron
products and the related manufacturing, packaging and design processes. As we
continue our commitment to technological leadership in our markets and realize
the benefit of cost savings from our restructuring programs in the third quarter
of 1998, we are targeting our research and development investment in the second
half of 1999 to be approximately 13% to 15% of revenues.

Selling, general and administrative Selling, general and administrative expenses
increased $30.0 million during 1998 as compared to 1997. The increase was
primarily attributable to SG&A expenses from Symbios since August 6, 1998. SG&A
expenses as a percentage of revenue were 15% in 1998 and 1997 and 14% in 1996.

SG&A expenses increased $25 million in 1997 and $8 million in 1996 from
previous years' SG&A spending. The increases during 1997 and 1996 were primarily
attributable to increased information technology costs related to upgrading our
business systems and infrastructure. We are targeting SG&A expenses to decline
in 1999 to 13% of revenues as the benefit of cost savings are realized during
1999 from the restructuring programs established in the third quarter of 1998.

In-process research and development We reduced our estimate of the amount
allocated to in-process research and development by $79.3 million from the
$224.8 million amount previously reported in the third quarter of 1998 to $145.5
million for the year ended December 31, 1998. Amortization of intangibles
increased by $4.3 million from $18.1 million to $22.4 million for the year ended
December 31, 1998. The basic loss per share and loss per share assuming dilution
decreased from $1.51 to $0.97 for the year ending December 31, 1998.

We allocated amounts to IPR&D and intangible assets in the third quarter of
1998 in a manner consistent with widely recognized appraisal practices at the
date of acquisition of Symbios. Subsequent to the acquisition, the Commission
staff expressed views that took issue with certain appraisal practices generally
employed in determining the fair value of the IPR&D that was the basis for our
measurement of our IPR&D charge. The charge of $224.8 million, as first we
reported, was based upon assumptions and appraisal methodologies the SEC has
since announced it does not consider appropriate.

As a result of computing IPR&D using the Commission's preferred
methodology, we decided to revise the amount originally allocated to IPR&D. We
have revised earnings for 1998 and have amended our report on Form 10-Q and
report on Form 8-K/A previously filed with the Commission. The revised quarterly
results for the third and fourth quarters of 1998 are included in this report
under Part II, Item 8 "Financial Statements and Supplementary Data."

The $145.5 million allocation of the purchase price to IPR&D was determined
by identifying research projects in areas for which technological feasibility
had not been established and no alternative future uses existed. We acquired
technology consisting of storage and semiconductor research and development
projects in process. The storage projects consist of designing controller
modules, a new disk drive and a new version of storage management software with
new architecture to improve performance and portability. The semiconductor
projects consist of client/server products being designed with new architectures
and protocols and a number of ASIC and peripheral products that are being custom
designed to meet the specific needs of specific customers. The amounts of
in-process research and development allocated to each category of projects was
$50.7 million for storage projects, $69.1 million for client/server projects and
$25.7 million for ASIC and peripheral projects.

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<PAGE> 32

then applying a percentage of completion to the calculated values as defined
below. The net cash flows from the identified projects are based on our
estimates of revenues, cost of sales, research and development costs, selling,
general and administrative costs, and income taxes from those projects. These
estimates are based on the assumptions mentioned below. The research and
development costs included in the model reflect costs to sustain projects, but
exclude costs to bring in-process projects to technological feasibility.

The estimated revenues are based on management projections of each
in-process project for semiconductor and storage systems products, and the
aggregated business projections were compared and found to be in line with
industry analysts' forecasts of growth in substantially all of the relevant
markets. Estimated total revenues from the IPR&D product areas are expected to
peak in the year 2001 and decline from 2002 to 2005 as other new products are
expected to become available. These projections are based on our estimates of
market size and growth, expected trends in technology, and the nature and
expected timing of new product introductions by us and our competitors.

Projected gross margins approximate Symbios' recent historical performance
and are in line with industry margins in the semiconductor and storage systems
industry sectors. The estimated selling, general and administrative costs are
consistent with Symbios' historical cost structure which is in line with
industry averages at approximately 15% of revenues. Research and development
costs are consistent with Symbios' historical cost structure.

Royalty rate We applied a royalty charge of 25% of operating income for each
in-process project to attribute value for dependency on predecessor core
technologies.

Discount rate Discounting the net cash flows back to their present value is
based on the industry weighted average cost of capital ("WACC"). The industry
WACC is approximately 15% for semiconductors and 16% for storage systems. The
discount rate used in discounting the net cash flows from IPR&D is 20% for
semiconductor and 21% for storage systems, a 500 basis point increase from the
respective industry WACCs. This discount rate is higher than the industry WACC
due to inherent uncertainties surrounding the successful development of the
IPR&D, market acceptance of the technology, the useful life of such technology,
the profitability levels of such technology and the uncertainty of technological
advances which could potentially impact the estimates described above.

Percentage of completion The percentage of completion for each project was
determined using milestones representing management's estimate of effort, value
added, and degree of difficulty of the portion of each project completed as of
August 6, 1998, as compared to the remaining research and development to be
completed to bring each project to technical 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).

Each of these phases has been subdivided into milestones, and then the
status of each of the projects was evaluated as of August 6, 1998. We estimate
as of the acquisition date, the storage projects in aggregate are approximately
74% complete and the aggregate costs to complete are $25.2 million ($5.7 million
in 1998, $14.5 million in 1999 and $5.0 million in 2000). We estimate the
semiconductor projects are approximately 60% complete for client/server projects
and 55% complete for ASIC and peripheral projects. As of the acquisition date,
we expect the cost to complete all semiconductor projects to be approximately
$24.1 million ($8.7 million in 1998, $14.8 million in 1999 and $0.6 million in
2000).

Substantially all of the IPR&D projects are expected to be completed and
generating revenues within the 24 months following the acquisition date.

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<PAGE> 33

affect sales and profitability of the combined company in the future.
Additionally, the value of other intangible assets acquired may become impaired.
Our management and advisers believe that the restated IPR&D charge of $145.5
million is valued consistently with the Commission staff's views regarding
valuation methodologies. There can be no assurances, however, that the
Commission staff will not take issue with any assumptions used in our valuation
model and require us to further revise the amount allocated to IPR&D.

In July 1997, we acquired all issued and outstanding shares of the common
stock of Mint Technology, Inc. ("Mint") for $9.5 million in cash and options to
purchase approximately 681,726 shares of common stock with an intrinsic value of
$11.3 million. The acquisition was accounted for as a purchase. (See Note 8 of
the Notes to the Audited Consolidated Financial Statements.) Approximately $2.9
million of the purchase price was allocated to IPR&D and was expensed in the
third quarter of 1997. The nature of the projects in process at the date of
acquisition related to computer aided design tools, in particular, those that
would be used for functional verification of the chip design. The additional
costs to complete the tools were approximately $850,000 and were completed in
the fourth quarter of 1997. The actual development timeline and costs were in
line with estimates.

INTEREST EXPENSE. Interest expense increased to $8.9 million in 1998 from $1.9
million in 1997. The increase was primarily attributable to interest expense on
the new debt facility with a bank which we entered into to fund the purchase of
Symbios. (See Notes 2 and 4 of the Notes to the Audited Consolidated Financial
Statements.) It was offset in part by the capitalization of interest as part of
the construction at our new manufacturing facility in Gresham, Oregon. Interest
expense was $1.9 million in 1997 compared to $13.9 million in 1996. The decrease
resulted from the conversion of all of our $144 million, 5 1/2% Convertible
Subordinated Notes to common stock on March 24, 1997 (See Note 4 of the Notes to
the Audited Consolidated Financial Statements) and the capitalization of
interest as part of the construction of the Gresham facility.

INTEREST INCOME AND OTHER. Interest income and other decreased $27.2 million to
$7.7 million in 1998 from $34.9 million in 1997. The decrease was primarily
attributable to the combination of a reduction of $18 million in interest income
generated from our lower average balances of cash, cash equivalents and
short-term investments during 1998 and lower interest rates in 1998 as compared
to 1997. The lower average balances of cash, cash equivalents and short term
investments resulted primarily from cash outlays associated with the purchase of
Symbios and purchases of property and equipment for the new fabrication facility
in Gresham, Oregon. Additionally, we charged to other expense the following:

- $8.1 million of surplus fixed assets, and

- $14.3 million of our equity investment in two non-public technology
companies with impairment indicators considered to be other than
temporary. (See Note 1 of the Notes to the Audited Consolidated Financial
Statements.)

The decrease in interest income and other was offset in part by a $16.7
million gain on sale of a long-term investment in a non-public technology
company and a $3.1 million gain on the sale of a building owned by a European
affiliate.

Interest and other income increased $4.7 million in 1997 compared to 1996.
The increase was primarily attributable to a decrease in foreign exchange losses
from $6.9 million in 1996 to $1.6 million in 1997, which related primarily to a
reduced foreign exchange exposure at our European sales affiliate. In addition,
we received other income from insurance settlement proceeds, the disposal of
land owned by a European affiliate and other miscellaneous gains. These gains
were offset in part by losses on the final sale of equipment from our Milpitas
wafer manufacturing facility. (See Note 7 of the Notes to the Audited
Consolidated Financial Statements.)

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<PAGE> 34

tax rate in the years presented was lower than the U.S. statutory rate primarily
due to earnings of our foreign subsidiaries taxed at lower rates and the
utilization of prior loss carryovers and other tax credits.

MINORITY INTEREST. There was a 91% decrease in minority interest in net income
of subsidiaries in 1998 attributable to the purchase of minority interest shares
of our Japanese affiliate LSI Logic K.K. The changes in minority interest in
1998 and 1997 were attributable to the composition of earnings and losses among
certain of our international affiliates for each of the respective years. The
changes in minority interest in 1996 was primarily attributable to the purchase
in that year of minority held shares of LSI Logic Japan Semiconductor, Inc.
("JSI"), formerly known as Nihon Semiconductor, Inc., and LSI Logic Europe, Ltd.
(formerly known as LSI Logic Europe, plc). (See Note 8 of the Notes to the
Audited Consolidated Financial Statements.)

CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. On November 21, 1997, the
Emerging Issues Task Force ("EITF") issued EITF 97-13, "Accounting for Costs
Incurred in Connection with a Consulting Contract or an Internal Project that
Combines Business Process Re-engineering and Information Technology
Transformation." EITF 97-13 required that we expense, in the fourth quarter of
1997, all costs previously capitalized in connection with business process
re-engineering activities as defined by the statement. Accordingly, we recorded
a charge of $1.4 million, net of related tax of $0.6 million, during the fourth
quarter of 1997. (See Note 1 of the Notes to the Audited Consolidated Financial
Statements.)

Restructuring

We remain committed to improving profitability and strengthening
competitiveness. As a result of identifying opportunities to streamline
operations and maximize the integration of Symbios into our operations, our
management, with the approval of the Board of Directors, committed itself to a
plan of action and recorded a $75.4 million restructuring charge in the third
quarter of 1998. The action undertaken included the following elements:

- Worldwide realignment of manufacturing capacity,

- Consolidation of certain design centers, sales facilities and
administrative offices, and

- Streamlining of our overhead structure to reduce operating expenses.

The restructuring charge excludes any integration costs relating to
Symbios. As discussed in Note 2 of the Notes to the Audited Consolidated
Financial Statements, such costs relating to Symbios were accrued as a liability
assumed in the purchase in accordance with EITF 95-3.

Restructuring costs include the following elements:

- $37.2 million related primarily to fixed assets impaired as a result of
the decision to close, by the third quarter of 1999, a manufacturing
facility in Tsukuba, Japan,

- $4.7 million for termination of leases and maintenance contracts
primarily in the U.S. and Europe,

- $1.7 million for non-cancelable purchase commitments primarily in Europe,

- $13.1 million in fixed asset and other asset write-downs, primarily in
the U.S., Japan and Europe,

- Approximately $2.4 million in other exit costs, which result principally
from the consolidation and closure of certain design centers, sales
facilities and administrative offices primarily in the U.S. and Europe,
and

- $16.3 million in work force reduction costs.

Other exit costs include $0.9 million related to payments made for early
lease contract terminations and the write-down of surplus assets to their
estimated realizable value: $0.7 million for the write-off of excess licenses
for closed locations in Europe and $0.8 million of other exit costs associated
with the consolidation of design centers worldwide.

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<PAGE> 35

The workforce reduction costs primarily include severance costs related to
involuntary reduction of approximately 900 jobs from manufacturing in Japan, and
engineering, sales, marketing and finance personnel located primarily in the
U.S., Japan and Europe. The fair value of assets determined to be impaired in
accordance with the guidance on assets to be held and used in SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," were the result of independent appraisals and management
estimates. Severance costs and other exit costs noted above were determined in
accordance with EITF No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity." The restructuring
actions, as outlined by the plan, are intended to be completed by September 30,
1999, one year from the date the reserve was taken.

As of December 31, 1998, the remaining cash requirements were related
primarily to severance payouts. Cash requirements for severance payments were
approximately $5 million in the first quarter of 1999 with the remaining $7
million spread evenly over the second and third quarter of 1999. We used our
cash balances on hand at the time the severance distributions are made.

As a result of the execution of the restructuring plan announced in the
third quarter of 1998, we recognized reduced employee expenses in the fourth
quarter of 1998 of approximately $4.0 million and expect to realize further
savings of approximately $37.3 million in 1999. Depreciation expense savings of
approximately $1.7 million were realized in the fourth quarter of 1998 and we
realized further savings of approximately $9.5 million in 1999. We also realized
additional savings of $2.6 million in 1999 related to the reduction in the
number of engineering design centers and sales and administrative offices
worldwide. These savings included reduced lease and maintenance contract
expenses.

The following table sets forth our 1998 restructuring reserves as of
September 30, 1998, and activity against the reserve for the three month period
ending December 31, 1998:

<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31,
RESTRUCTURING TRANSLATION 1998
EXPENSE UTILIZED ADJUSTMENT BALANCE
------------------ -------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Write-down of manufacturing facility(a)...... $37,200 $(35,700) $ -- $ 1,500
Other fixed asset related charges(a)......... 13,100 (13,100) -- --
Payments to employees for severance(b)....... 16,300 (4,700) -- 11,600
Lease terminations and maintenance
contracts(c)............................... 4,700 (100) -- 4,600
Noncancelable purchase commitments (c)....... 1,700 (100) -- 1,600
Other exit costs(c).......................... 2,400 (1,200) -- 1,200
Cumulative currency translation adjustment... 1,512 1,512
------- -------- ------ -------
Total.............................. $75,400 $(54,900) $1,512 $22,012
======= ======== ====== =======
</TABLE>

- ---------------
(a) Amounts utilized represent a write-down of fixed assets due to impairment.
The amounts were accounted for as a reduction of the assets and did not
result in a liability. The $1.5 million balance for the write-down of the
facility relates to machinery and equipment decommissioning costs.

(b) Amounts utilized represent cash payments related to the severance of
approximately 290 employees.

YEAR 2000 DISCLOSURE

The following statement is a Year 2000 Readiness Disclosure under the Year
2000 Information and Readiness Disclosure Act of 1998.

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<PAGE> 36

beyond the turn of the century, there could be an adverse impact on our
operations. Moreover, if critical suppliers' or customers' systems or products
fail because of a Year 2000 malfunction, there could be an adverse impact on our
operating results. Finally, our products could malfunction as a result of a
failure in date recognition. A Year 2000 problem could arise if our systems were
to fail to properly recognize and process date information for several reasons:
they could fail to properly recognize years that begin with the digits "20"
instead of "19"; they could attribute specially assigned meanings to certain
date code digits, such as "99"; or they could fail to recognize the year 2000 as
a leap year. The inability of computer software programs to accurately
recognize, interpret and process date codes designating the year 2000 and beyond
could cause systems to yield inaccurate results or encounter operating problems,
including interruption of the business operations such systems control.

We are engaged in a comprehensive program to assess our Year 2000 risk
exposure and to plan and implement remedial and corrective action where
necessary. We have reviewed all of our major internal systems, including human
resources, financial, engineering and manufacturing systems, to assess Year 2000
readiness and to identify critical systems that require correction or
remediation. Assessment of our design engineering systems and products was
completed in the first quarter of 1999. Based on the results of this assessment,
it is anticipated that remediation of critical systems will be completed and
tested by the end of the third quarter 1999. We believe that our existing human
resources, financial and business software systems are Year 2000 ready. We
cannot assure you, however, that integration and testing of new, corrected or
updated programs or systems with which they interface will not result in
necessary corrective action to one or more critical systems. A significant
disruption of our financial or business systems would adversely impact our
ability to process orders, manage production and issue and pay invoices. Our
inability to perform these functions for a long period of time could result in a
material impact on our results of operations and financial condition.

Our manufacturing facilities incorporate sophisticated computer integrated
manufacturing systems which depend on a mix of the Company's 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. Our assessment of the Year
2000 readiness of our manufacturing systems is complete. Based on information
currently available, we believe that our systems will not be materially impacted
by Year 2000 issues. However, we cannot assure you that a significant disruption
in systems resulting from a Year 2000 problem will not occur. If the computer
integration system fails for this or any other reason, there could be a material
adverse impact on our operating results and financial condition.

We are working with critical suppliers of products and services to assess
their Year 2000 readiness with respect both to their operations and the products
and services they supply to us. Comprehensive inquiries have been sent and
responses are being monitored, with appropriate follow-up where required. This
analysis will continue well into 1999, with corrective action taken commensurate
with the criticality of affected products and services.

Our assessment program also has encompassed our own product offerings. Our
ASICs are custom-designed chips which implement the customer's functional or
engineering specifications. As designer and manufacturer of the physical
implementation of a customer's design in silicon, we generally do not have
specific knowledge of the role of the customer's ASIC within the complete system
for which it is intended. Whether the chip will operate correctly depends on the
system function and the software design and integration, which will be
determined independently by the customer or other third party suppliers. Our
ASSP and storage systems products, on the other hand, do implement chip and
system functionality designed by us. They include graphics processing,
audio/video signal decoding, data transmission, I/O control and data storage
whose functionality generally is not date dependent. We have completed our
assessment of the Year 2000 readiness of these products, and there is no
information to indicate that Year 2000 issues will have a material impact on
sales or functionality of our standard product offerings. Customers are seeking
assurances of our Year 2000 readiness with increasing frequency, and we are
endeavoring promptly and completely to address their concerns. However, we have
no control over a customer's Year 2000 readiness. Customers who believe that the
products they purchase from us may not

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<PAGE> 37

be Year 2000 compliant may seek alternative sources of supply. A significant
decline in new orders or increase in cancellations of existing backlog could
have a material adverse impact on our results of operations or financial
condition.

We are at work on the development of various types of contingency plans to
address potential problems with critical internal systems and third party
interactions. Our contingency plans include procedures for dealing with a major
disruption of internal business systems, plans for long term factory shutdown
and identification of alternative vendors of critical materials in the event of
Year 2000 related disruption in supply. Contingency planning will continue
through at least 1999, and will depend heavily on the results of the remediation
and testing of critical systems. The potential ramifications of a Year 2000 type
failure are potentially far-reaching and largely unknown. We cannot assure you
that a contingency plan in effect at the time of a system failure will
adequately address the immediate or long term effects of a failure, or that such
a failure would not have a material adverse impact on our operations or
financial results in spite of prudent planning.

Our costs to date related to the Year 2000 issue consist primarily of
reallocation of internal resources to evaluate and assess systems and products
as described above and to plan our remediation and testing efforts. We have not
maintained detailed accounting records, but based on our review of department
budgets and staff allocations, we believe these costs to be immaterial. We
currently estimate that the total cost of ongoing assessment, remediation,
testing and planning directly related to Year 2000 issues will amount to
approximately $15 million. Of this, approximately $8 million is expected to
consist of expenses attributed to redeployment of labor resources and overhead,
$3 million for the cost of software and external consulting fees and $4 million
for additional capital expenditures. The capital expenditures represent the
early replacement of information technology equipment and software to obtain the
full benefits of Year 2000 protections versus the normal technical obsolescence
replacement cycle. The estimate is based on the current assessment of the
projects and is subject to change as the projects progress. We cannot assure you
that remediation and testing will not identify issues which require additional
expenditure of material amounts which could result in an adverse impact on
financial results in future reporting periods.

Based on currently available information, management does not believe that
the Year 2000 issues discussed above related to internal systems or products
sold to customers will have a material adverse impact on our financial condition
or overall trends in results of operations. However, we are uncertain to what
extent we may be affected by such matters. In addition, we cannot assure you
that the failure to ensure Year 2000 capability by a supplier not considered
critical or another third party would not have a material adverse effect on us.

ADOPTION OF THE EURO

In 1998, we established a task force to address the issues raised by the
implementation of the European single currency. Our primary focus has been the
changes needed to address a mix of Euro and local denomination transactions
during the transition period from January 1, 1999 through January 1, 2002.

As of January 1, 1999, we began transacting business in Euros. We
implemented a new bank account structure throughout Europe to accommodate
customers and vendors and to improve liquidity management in Europe.

We do not presently expect that the introduction and use of the Euro will
materially affect our foreign exchange and hedging activities or our use of
derivative instruments. We do not believe that the introduction of the Euro will
result in any significant increase in costs to the Company, and all costs
associated with the introduction of the Euro will be expensed in accordance with
our policy. We do not expect that the transition to the Euro will result in any
competitive pricing or will adversely impact any of our internal computer
systems. While we will continue to evaluate the impact of the Euro introduction
over time, based on currently available information, we do not believe that the
introduction of the Euro currency will have a significant adverse impact on our
financial condition or overall trends in results of operations.

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<PAGE> 38

FINANCIAL CONDITION AND LIQUIDITY

Cash, cash equivalents and short-term investments increased by $53 million
during the first six months of 1999 to $345 million from $292 million at the end
of 1998. The increase was primarily generated from operations partially offset
by purchases of property and equipment, repayment of debt obligations, net of
borrowings, and purchases net of sales of equity securities.

Working capital increased by $279 million to $518 million at June 30, 1999
from $239 million at December 31, 1998. The increase in working capital was
primarily a result of the following elements:

- Lower current liabilities as a result of repayment of the short-term
portion of the debt facility in the first quarter of 1999, lower accounts
payable due to the timing of invoice receipt and payment, and lower
income taxes payable primarily resulting from the timing of payments, and

- Higher short-term investments, accounts receivable and inventories. The
increase in accounts receivable was attributable to higher sales in the
second quarter of 1999 as compared to the fourth quarter of 1998. The
increase in inventories reflected the expectation of continued sales
growth in 1999 that would be higher than the rate in 1998.

The increase in working capital was offset in part by lower prepaids and
other current assets and higher accrued salaries, wages and benefits as compared
to December 31, 1998. The increase in accrued salaries and wages related to the
timing of payments and accruals as of June 30, 1999 compared to December 31,
1998.

During the first six months of 1999, we generated $100 million of cash and
cash equivalents from operating activities compared to $68 million during the
same period in 1998. The increase in cash and cash equivalents provided from
operations was primarily attributable to:

- Higher net income (before depreciation and amortization, write-off of
unamortized preproduction costs, non-cash restructuring charges and the
gain on stock investments); and

- A decrease in prepaids and other assets and an increase in accrued and
other liabilities.

The decrease in prepaids and other assets was primarily attributable to a
$23 million increase in the accumulated amortization of goodwill and other
intangibles during the first half of 1999 offset in part by timing differences
of payments on prepaids and other current assets. The increase in accrued and
other liabilities was primarily due to an increase in accrued salaries and wages
and benefits offset in part by a decrease in income taxes payable.

The increased cash from operations was offset in part by an increase in
accounts receivable, inventories, and a decrease in accounts payable. The
increase in accounts receivable was primarily a result of higher revenues in the
first half of 1999 as compared to the first half of 1998. Inventories were
primarily higher as revenues are expected to continue to be higher for the
second half of 1999 as compared to 1998. The decrease in accounts payable was
primarily as a result of timing of invoice receipt and the higher volumes of
business in June 1999 compared to June 1998.

Cash and cash equivalents used in investing activities during the first six
months of 1999 were $109 million compared to $47 million during the same period
in 1998. The primary investing activities during the first six months of 1999
included the following:

- Purchases and sales of debt and equity securities available-for-sale;

- The acquisition of a non-public technology company; and

- Purchases of property and equipment.

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technological leadership in the highly competitive worldwide semiconductor
industry requires substantial ongoing investment in advanced manufacturing
capacity. Net capital additions were $29 million and $148 million during the
first six months of 1999 and 1998, respectively. The decrease in additions from
1998 was primarily attributable to reduced purchases of property and equipment
related to construction of the new wafer fabrication facility in Gresham,
Oregon. We expect to incur capital expenditures of no more than $250 million in
1999.

Cash and cash equivalents used for financing activities during the first
six months of 1999 totaled $9 million, compared to $12 million provided by
financing activities in the same period of 1998. The increase in cash used
during the first six months of 1999 was primarily attributable to repayment of
the credit facility, net of proceeds, from the issuance of the 4 1/4%
convertible subordinated notes (see Note 4 to the Unaudited Consolidated
Condensed Financial Statements.) The increase in cash used is offset in part by
proceeds from sale of common stock issued pursuant to our employee stock option
and purchase plans.

During March of 1999, we issued $345 million of 4 1/4% convertible
subordinated notes due in 2004. The Convertible Notes are subordinated to all
existing and future senior debt, are convertible 60 days following issuance into
shares of our common stock at a conversion price of $31.353 per share and are
redeemable at our option, in whole or in part, 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 certain events and in
certain circumstances. Interest is payable semiannually. We paid approximately
$9.5 million for debt issuance costs related to the Convertible Notes. The debt
issuance costs are being amortized using the interest method. We used the net
proceeds from the Convertible Notes to repay debt obligations as outlined below.

On August 5, 1998, we entered into a credit agreement with JSI and ABN
AMRO. The credit agreement was restated and superseded by the Amended and
Restated Credit Agreement dated as of September 22, 1998 and thereafter
syndicated to a group of lenders determined by ABN AMRO and us. The credit
agreement consists of two credit facilities: a $575 million senior unsecured
reducing revolving credit facility, and a $150 million senior unsecured
revolving credit facility.

On August 5, 1998, we borrowed $150 million under the 364 day Facility and
$485 million under the Revolver. On December 22, 1998, we borrowed an additional
$30 million under the Revolver. The credit facilities allow for borrowings at
adjustable rates of LIBOR/TIBOR with a 1.25% spread. As of March 31, 1999 the
spread was 1%. Interest payments are due quarterly. The 364 day Facility expires
on August 3, 1999 at which time borrowings outstanding are payable in full. The
Revolver is for a term of four years with the principal reduced quarterly
beginning on December 31, 1999. The Revolver includes a term loan sub-facility
in the amount of 8.6 billion yen made available to JSI over the same term. The
yen term loan sub-facility is for a period of four years with no required
payments until it expires on August 5, 2002. Pursuant to the restated credit
agreement, on August 30, 1998, JSI repaid it's existing 11.4 billion yen ($79.2
million) credit facility and borrowed 8.6 billion yen ($70.5 million at June 30,
1999) bearing interest at adjustable rates. In March of 1999, we repaid the $150
million outstanding under the 364 day Facility and $185.5 million outstanding
under the Revolver primarily using proceeds from the Convertible Notes.
Borrowings outstanding under the Revolver including the yen sub-facility were
$370 million as of June 30, 1999. As of June 30, 1999, the interest rate for the
Revolver and the yen sub-facility were 5.96% and 1.14%, respectively. Debt
issuance costs were not significant.

In accordance with the existing credit agreement, we must comply with
certain financial covenants related to profitability, tangible net worth,
liquidity, senior debt leverage, debt service coverage and subordinated
indebtedness. As of June 30, 1999, we were in compliance with these covenants.

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financing will be available when needed or, if available, will be on favorable
terms. Any future equity financing will decrease existing stockholders' equity
percentage ownership and may, depending on the price at which the equity is
sold, result in dilution.

RECENT ACCOUNTING PRONOUNCEMENTS

In April 1998, the Accounting Standards Executive Committee released
Statement of Position No. 98-5, "Reporting on the Costs of Start-up Activities."
SOP No. 98-5 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. We will expense the unamortized preproduction balance
of $91.8 million, net of tax as of January 1, 1999 and present it as a
cumulative effect of a change in accounting principle in accordance with SOP No.
98-5.

In 1998, we adopted SFAS No. 130, "Reporting Comprehensive Income."
Comprehensive income is defined as the 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 our net income and our comprehensive income is
due to foreign currency translation adjustments. We are showing comprehensive
income in the Statement of Stockholders' Equity.

In 1998, we adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise," and replaces the
"industry segment" approach with the "management" approach. The management
approach designates the internal organization that is used by management for
making operating decisions and assessing performance as the source of a
company's reportable segments. SFAS No. 131 also requires disclosures about
products and services, geographic areas, and major customers. The adoption of
SFAS No. 131 did not affect results of our operations or financial position or
the segments we reported in 1998. (See Note 11 of Notes to Audited Consolidated
Financial Statements.)

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." 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. The statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Upon adoption of SFAS No. 133, we will be
required to adjust hedging instruments to fair value in the balance sheet, and
recognize the offsetting gain or loss as transition adjustments to be reported
in net income or other comprehensive income, as appropriate, and presented in a
manner similar to the cumulative effect of a change in accounting principle.
While we believe the adoption of this statement will not have a significant
effect on our results of operations as most derivative instruments are closed on
the last day of each fiscal quarter, the impact of the adoption of SFAS No. 133
as of the effective date cannot be reasonably estimated at this time.

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BUSINESS

LSI Logic Corporation is a worldwide leader in the design, development,
manufacture and marketing of high performance application specific integrated
circuits ("ASICs") and application specific standard products ("ASSPs"). We use
advanced process technologies and design methodologies to design, develop and
manufacture highly complex circuits. Our submicron process technologies,
combined with our CoreWare(R) design methodology, provide us with the ability to
integrate system level solutions on a single chip. Our products are tailored to
the specific application requirements of OEMs and other customers in the
networking, telecom/wireless, consumer, computer, storage components and storage
systems markets. Our methodology has been used to create custom and standard
semiconductors for a variety of applications in each of these markets. In August
1998, we acquired Symbios, Inc., a leading supplier of client/server storage
solutions, enabling us to extend our market focus to storage components and
storage systems. Our customers, which include Cisco Systems, Inc., Compaq
Computer Corporation, Hewlett Packard Company, IBM Corporation, NCR, Sony
Corporation and Sun Microsystems, Inc., are worldwide leaders in their end
markets.

Since our inception, our technology and our business strategy have been
based on integrating increasingly complex electronic building blocks onto a few
chips or a single chip. High-level, industry-standard building blocks of the
type that were previously independent chips, such as microprocessors, networking
controllers, digital signal processors and video compression engines, are used
as "cores" that are connected electronically, along with a customer's
proprietary logic and memory, to form an entire system on a single chip. The
results for our customers are higher system performance, lower system cost and
faster time-to-market with a differentiated product. We have been a leader in
developing and promoting important industry standard architectures, functions,
protocols and interfaces. This focus enables us to launch standards-based
products quickly, allowing our customers and ourselves to achieve time-to-
market and other competitive advantages.

We use proprietary and leading third-party electronic design automation
("EDA") software design tools in the design phase of our work. Our design tool
environment is highly integrated with our manufacturing process requirements so
that it will accurately simulate product performance, reducing design time and
project cost. We offer a broad range of design and manufacturing options to our
customers in implementing their product specifications. A customer may use its
own engineers to implement a design, use our engineers on a "turn-key" basis to
completely design their ASICs, or collaborate with us in a combined engineering
effort. We have an extensive network of design centers located around the world
and staffed with highly experienced engineers. These centers enable us to have
close interaction with our customers' engineering, management and system
architects, facilitating design development for new products and ongoing
after-sales customer support.

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. In December 1998, we began
production in a new, state-of-the-art facility in Gresham, Oregon that is
equipped for advanced manufacturing operations and is designed to accommodate
our expansion requirements well into the foreseeable future. Our production
operations in the United States and Japan, as well as those of our assembly and
test subcontractors in Asia, are ISO certified, an important international
measure for quality.

We have developed and use complementary metal oxide semiconductor ("CMOS")
process technologies to manufacture integrated circuits implementing submicron
geometries. Our advanced processes are capable of producing products with an
effective electrical channel length within transistors as small as 0.18 micron.
During the first quarter of 1998, we announced our next generation process
technology that has an effective electrical channel length within transistors of
0.13 micron, which is planned to be ready for production in the fourth quarter
of 1999.

We market our products and services worldwide through direct sales,
marketing and field technical staff and through independent sales
representatives and distributors. We market our storage system products to OEMs
and end users through value added resellers.

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PRODUCTS AND SERVICES

We design, manufacture, market and sell semiconductor products and storage
systems solutions.

In our semiconductor business, we primarily manufacture, market and sell
ASICs. ASICs are semiconductors that are designed for a unique,
customer-specified application. We also market and sell a variety of integrated
standard components called ASSPs that are designed by us for specific electronic
systems applications. Our ASSPs are sold to multiple customers, such as OEMs,
who offer system-level products using applications for which our ASSPs are
designed. Both our ASICs and ASSPs are manufactured using our proprietary
process technologies.

Our semiconductor products are increasingly based upon our cell-based
technology. This technology allows us to design products using predefined
circuit elements, called cells, that are standard building blocks of electronic
functions. These cells can be integrated into a product to implement a
customer's design specifications. Our emphasis on our newer cell-based product
lines reflects the market preference for developing advanced integrated circuit
products. Customers obtain greater flexibility in the design of system level
products using cell-based technology than is available using an array-based
methodology which limits the placement of circuits to a fixed grid. We also
continue to manufacture and sell gate-array products which were designed using
prior technologies.

Our CoreWare design methodology offers a comprehensive design approach for
creating a system on a chip efficiently, predictably and rapidly. Our CoreWare
libraries include pre-designed implementations of industry standard electronic
functions, interfaces and protocols. Some of these are targeted for specific
types of products, and others can be used in a variety of product applications.
Examples of the cores which are targeted for specific applications are:

- Switched Ethernet/Fast Ethernet/Gigabit Ethernet for networking and
communications,

- Fibre Channel for storage applications,

- IEEE 1394 for storage and consumer product applications, and

- Audio/video encoders and decoders for consumer products.

Cores that can be used in product applications across a broad range of
product markets include:

- The MiniRISC(R) family of MIPS-based RISC (reduced instruction set
computing) processor cores,

- The GigaBlaze(R) SeriaLink(R)transceiver core,

- The ARM(R) CPU core,

- The OakDSPCore(R) digital signal processor core, and

- The HyperPHY high speed I/O (input/output) transceiver core.

Our acquisition of Symbios, Inc. resulted in a significant expansion of our
product lines designed for applications involving data storage and transmission
between a host computer and peripheral devices such as disk drives, scanners and
printers. We offer many industry standard I/O technologies, such as SCSI (small
computer system interface, pronounced "skuzzy"), Fibre Channel, PCI (peripheral
component interface), IEEE 1394, USB (universal serial bus) and I2O (intelligent
I/O) compliant software.

In addition to our integrated circuit products, we develop and market
high-performance data storage management and storage system solutions. These
products are targeted at key data storage applications, including:

- On-line transaction processing,

- Data warehousing,

- Internet servers,

- Electronic commerce,

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- Video delivery, editing and production, and

- Migration of mission critical applications off mainframe computers.

We offer a comprehensive array of storage products that can be integrated
on a component basis or aggregated into a complete storage solution. This broad
array of products includes the following:

- Host adapter boards ("HAB"),

- Drive enclosures,

- Disk array controllers, and

- Complete Redundant Array of Independent Disks ("RAID") storage systems.

We also develop and market storage management software called
SYMplicity(TM) Storage Manager. To meet open computing standards, our storage
solutions products are designed to operate within the Windows NT, UNIX and
Novell operating systems environments.

In addition to the product offerings mentioned above, we continue to expand
our design services. The semiconductor design flow is an interactive process
involving participation by both us and our customers. We seek to engage
customers early in their new system product development process. We provide
advice on product design strategies to optimize product performance and
suitability for the targeted application. We also offer design engineering and
consulting services in the areas of system architecture and system level design
simulation, verification and synthesis used in the development of complex
integrated circuits. In offering a wide variety of design services, we allow the
customer to determine our level of participation in the design process.

We make various circuit elements from our library available to our
customers. These elements range from simple cells to larger and more complex
elements and silicon structures called macrocells, megacells and megafunctions.
The most complex of these cells are the cores that make up our CoreWare library.

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 which 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 such as Cadence Design Systems, Inc., Mentor Graphics
Corporation, Synopsys, Inc. and Avant! Corporation, 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.

MARKETING AND CUSTOMERS

We primarily market our products and services to leading OEMs that develop
and manufacture products for the following applications:

- Networking. Our products are used in local area network ("LAN") and wide
area network ("WAN") equipment such as hubs, routers and switches.
Drawing from our CoreWare library, customers can use RISC processors,
digital signal processors ("DSPs"), HyperPHY high speed transceiver
cores, and Ethernet cores, including our GigaBlaze core capable of
transmission at more than one gigabit per second. We also offer
mixed-signal (digital and analog) integration and ASSPs such as the
ATMizer(R) family of products that supports segmentation and reassembly,
or SAR, functions on a single chip.

- Telecommunications and Wireless. We provide our telecommunications
customers with a blend of high performance, high integration and low
power solutions for Internet access, switching, digital

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WAN and residential broadband applications. Wireless customers benefit
from strong microprocessor and DSP core offerings, mixed-signal
functions, industry standard buffers and interfaces, and a range of ASSPs
including our Cablestream(TM) QAM receiver.

- Consumer. We target high-volume consumer product applications with
advanced digital technology and complete system solutions. Our products
have been designed into video games and digital set-top box systems for
satellite, cable and terrestrial TV reception. We also offer highly
integrated, cost-effective ASSP solutions for digital cameras and DVD
player and PC applications.

- Computer. We provide tools, libraries, semiconductor processes and
packaging products which enable our OEM customers to reliably develop
high performance, high complexity designs for leading edge computer
systems. For the office automation market, we provide a suite of MIPS(R)
and ARM embedded processors and industry standard bus interface cores
such as USB, IEEE 1394 and PCI.

- Storage Components. We design and manufacture semiconductor components
that facilitate data storage and transmission between a host computer and
peripheral devices such as disk drives, scanners and printers. We offer
many industry standard I/O technologies, such as SCSI, Fibre Channel,
PCI, IEEE 1394, USB and I2O compliant software.

- Storage Systems. We develop and market scaleable and integrated hardware
and software solutions for the enterprise market. To provide our OEM
customers with the flexibility to create differentiated products, we
offer a broad array of storage products that can be integrated on a
component basis or aggregated into a complete storage solution. This
broad array of products includes HABs, drive enclosures, disk array
controllers and complete RAID storage systems.

In each of the foregoing applications we seek to leverage our systems-level
ASIC strength to the benefit of acknowledged market leaders. 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 or
applications we have selected. This could result in lower revenues and higher
unit costs due to an underutilization of resources.

We market our semiconductor products and services primarily through our
network of direct sales and marketing and field engineering offices located in
North America, Europe, Japan and elsewhere in Pan-Asia. In 1998, we opened a
representative office in Beijing, China. We also use independent distributors
and sales representatives. Distributors typically offer customers engineering
support and purchase product from us for resale to their customers. Sales
representatives facilitate sales by us directly to customers and typically do
not carry inventory. International sales are subject to risks common to export
activities, including governmental regulations, tariff increases and other trade
barriers and currency fluctuations.

We sell our storage hardware and software solutions primarily to OEMs.
However, we also sell our RAID storage systems to resellers, system integrators
and distributors under the brand name MetaStor(R).

In 1998, Sony Corporation accounted for approximately 12% of our revenues.
No other customer accounted for greater than 10% of total revenue. Although we
do not currently foresee any reduction in volume of products ordered by Sony, a
significant decline in product orders could have a material adverse impact on
our operating results and financial condition.

MANUFACTURING

Our semiconductor manufacturing operations convert a design into packaged
silicon chips and support customer volume production requirements. 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, cut into die and sorted. The die that pass
initial tests are then sent to the assembly process where the fabricated
circuits are encapsulated into ceramic or plastic packages. The finished devices
undergo additional testing and quality assurance before shipment. Dedicated
computer

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systems are used in this comprehensive testing sequence. The test programs use
the basic functional test criteria from the design simulation. For ASICs, the
functional test criteria are specified by the customer.

We own and operate manufacturing facilities in the United States, Japan and
Hong Kong. We utilize various high performance CMOS process technologies in the
volume manufacture of our products. Our advanced manufacturing facilities
feature highly specialized chemical mechanical polishing equipment which
increase yields and allow for higher levels of chip customization. The
production operations are fully computer integrated to increase efficiency and
reduce costs.

Semiconductor process technologies are identified in terms of the size of
the 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
channel length is smaller than the drawn gate length. In this prospectus, we use
the 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 0.18 micron (G11 process technology) allowing for up to 24,000,000
usable gates on a single chip. Our G10 process technology is capable of
producing 0.25 micron products. During the first quarter of 1998, we announced
our next generation 0.13 micron G12 process technology, which is planned to be
ready for production in the fourth quarter of 1999. These advanced process
technologies allow for greater circuit density and increased functionality on a
single chip.

Substantially all of our wafers are fabricated in facilities in Tsukuba,
Japan, Colorado Springs, Colorado and our new factory in Gresham, Oregon. In the
Fall of 1998, we announced that the older of the two Tsukuba factories, which
produces the 0.38 micron products, will be closed in 1999 after eleven years of
service. This action was taken as part of a comprehensive restructuring and cost
reduction plan.

The new manufacturing facility in Gresham, Oregon, began volume production
in December 1998. Located on 325 acres outside of Portland, the facility is
equipped for advanced manufacturing operations and is designed to accommodate
our expansion requirements well into the foreseeable future. The Gresham plant
is equipped to produce eight-inch wafers hosting products manufactured to the
G10 and G11 processes.

The manufacturing of our HABs and other storage system products involves
the assembly and testing of components, including our semiconductors, which are
then integrated into final products. We utilize subcontractors for the assembly
and test of our HABs. Our storage system products are assembled and tested
internally.

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.

We have developed a 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. And we also
offer a wide array of ceramic and plastic wirebond packaging options.

Final assembly (i.e., encapsulation in a plastic or ceramic package) and
test operations are conducted by our Hong Kong affiliate through independent
subcontractors in the Philippines, Malaysia, Korea and Hong Kong. We perform
ceramic package assembly for our products at our Fremont, California facility.

Both manufacturing and sales of our 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

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ability to manufacture or sell products in or into foreign markets. The recent
economic crisis in Asia could affect the viability of our assembly and test
subcontractors in that area. 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.

Although there has been no evidence of problems, it is still impossible to
predict the effects on Hong Kong business operations of the 1997 reversion of
Hong Kong to the Peoples' Republic of China ("PRC"). Our Hong Kong subsidiary
exercises primary control over our manufacturing and assembly and test
operations. If the PRC were to attempt to control or otherwise impose increased
governmental influence over business activities in Hong Kong, our operations
could be adversely affected.

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 may involve significant expense
and delay in our technology advancements and manufacturing capabilities.

The semiconductor equipment and materials industries also include numerous
vendors that are relatively small and have limited resources. Several of these
vendors provide equipment and or services to us. 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 assure you
that alternative suppliers would be available to meet our needs, or that if
available, such suppliers would provide components in a timely manner or on
favorable terms. Should we experience such disruptions, our operations could be
materially affected, which could have a material adverse impact on our operating
results and financial condition. Our operations also depend upon a continuing
adequate supply of electricity, natural gas and water.

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. Based on our assessment of the
Year 2000 issues, we believe that the operation of the computer integrated
manufacturing systems will not be adversely impacted by the Year 2000. However,
we cannot assure you that a significant disruption in the system resulting from
a Year 2000 related issue will not occur. If the computer integration system
fails for this or any other reason, there could be a material adverse impact on
our operating results and financial condition.

Additional risk factors are set forth in the Risk Factors section above.

BACKLOG

Generally, we 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 performance of design services and the
placement of orders included in our backlog at any particular time are generally
within the control of the customer. For example, there could be a significant
time lag between engagement for design services and the delivery of a purchase
order for the product. Or a customer may from time to time revise delivery
quantities or delivery schedules to reflect changes in the customer's needs. For
these reasons, our backlog as of any particular date is not a meaningful
indicator of future sales.

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COMPETITION

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 which we offer.

Our major competitors include large domestic companies such as IBM
Corporation, Lucent Technologies, Inc., Motorola, Inc. and Texas Instruments,
Inc. We also face competition from large foreign corporations, including Toshiba
Corporation, NEC Corporation and SGS Thomson Microelectronics, S.A.

The principal competitive factors in the industry include:

- Design capabilities (including EDA programs, cell libraries and
engineering skills),

- Quality of the products and services delivered,

- Product functionality,

- Delivery time, and

- Price.

In addition, standard products and system level offerings compete on the
following factors:

- Quality of system integration,

- Existence and accessibility of differentiating features, and

- Quality and availability of supporting software.

We believe that we presently compete favorably with respect to these
factors. It is possible, however, that other custom design approaches or
competing system level products will be developed by others which could have a
material adverse impact on our competitive position.

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 we cannot assure
you that our CoreWare methodology approach and product offerings will continue
to receive market acceptance.

We also compete in the storage systems market, which 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,

- Features and functionality, and

- Reliability, technical service and support.

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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 storage system products compete primarily with products
from independent storage providers such as Adaptec, the CLARiiON business unit
of Data General Corporation, EMC Corporation, MTI Technologies, Inc., Mylex
Corporation and Network Appliance, Inc. In addition, many of our current
customers in this market, as well as certain potential customers, also have
internal storage divisions which produce products that compete directly or
indirectly with our storage system products. We cannot assure you that these
customers, which include Compaq Computer Corporation, Dell Computer Corporation,
Hewlett Packard Company, IBM Corporation, Sun Microsystems, Inc., and Unisys
Corporation, will continue to purchase storage products from us.

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 tool environments 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 and
Kansas. The following table shows our expenditures on research and development
activities for each of the last three fiscal years.

<TABLE>
<CAPTION>
YEAR AMOUNT PERCENT OF REVENUE
---- -------------- ------------------
(IN THOUSANDS)
<S> <C> <C>
1996............................ $187,749 15%
1997............................ $229,735 17%
1998............................ $291,125 19%
</TABLE>

Research and development expenses primarily consist of salaries and related
costs of employees engaged in ongoing research, design and development
activities and subcontracting costs. As we continue our commitment to
technological leadership in our markets and realize the benefit of cost savings
from our restructuring programs in the third quarter of 1998, we are targeting
our research and development investment in the second half of 1999 to be
approximately 13% to 15% of revenues.

PATENTS, TRADEMARKS AND LICENSES

We own various United States and international patents and have additional
patent applications pending relating to certain of our products and
technologies. We also maintain trademarks on certain of our products and
services and claim copyright protection for certain proprietary software and
documentation. While patent and trademark protection for our intellectual
property is important, we believe our future success is primarily dependent upon
the technical competence and creative skills of our personnel.

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 also entered into certain cross-license
agreements that generally provide for the non-exclusive licensing of design and
product manufacturing rights and 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. We cannot assure
you that the rights granted under any patents will provide competitive
advantages to us

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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 laws of the United States.

Please see additional risk factors set forth in the Risk Factors section
above and Note 12 of Notes to Consolidated Financial Statements.

ENVIRONMENTAL REGULATION

Federal, state and local regulations, as well as 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 present 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 materially 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 unpermitted 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

- 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

At June 30, 1999, we and our subsidiaries had approximately 6,150
employees.

In connection with our restructuring and cost reduction plan announced in
October 1998 following the Symbios acquisition, we announced a workforce
reduction of 1,200 jobs or approximately 17% of the workforce to be achieved by
October 1999. The reduction was primarily a result of the following actions:

- Closure of the manufacturing facility in Japan and the former Symbios
test and assembly facilities in Colorado,

- Consolidation of duplicative design centers and sales offices in the U.S.
and Europe, and

- Closure of redundant administrative functions.

Our future success depends in large part on 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. Although we consider our employee
relations to be good, 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.

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<PAGE> 50

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The directors and executive officers of the Company, and certain
information about them as of June 30, 1999, are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Wilfred J. Corrigan........................ 61 Chairman, Chief Executive Officer and
Director
Elias J. Antoun............................ 42 Executive Vice President, Consumer Products
John P. Daane.............................. 35 Executive Vice President, Communications,
Computer and ASIC Products
John D'Errico.............................. 56 Executive Vice President, LSI Storage
Products and Colorado Operations
Thomas Georgens............................ 39 Senior Vice President, Storage Systems
W. Richard Marz............................ 55 Executive Vice President, Geographic
Markets
R. Douglas Norby........................... 64 Executive Vice President, Chief Financial
Officer and Director
David E. Sanders........................... 51 Vice President, General Counsel and
Secretary
Lewis C. Wallbridge........................ 55 Vice President, Human Resources
Joseph M. Zelayeta......................... 52 Executive Vice President, Worldwide
Operations
T.Z. Chu................................... 65 Director(1)(2)
Malcolm R. Currie.......................... 72 Director(1)(2)
James H. Keyes............................. 58 Director(1)(2)
Matthew J. O'Rourke........................ 61 Director
</TABLE>

- ---------------
(1) Member of the Compensation Committee

(2) Member of the Audit Committee

Wilfred J. Corrigan, a founder of the Company, has served as Chief
Executive Officer and a director of the Company since our organization in
January 1981. Mr. Corrigan also serves on the boards of directors of several
privately held corporations.

Elias J. Antoun was named Executive Vice President, Consumer Products in
March 1998. Mr. Antoun joined the Company in 1991 and has served in senior
management and executive positions including General Manager of Finance and,
more recently, President of LSI Logic K.K.

John P. Daane was named Executive Vice President, Communications, Computer
and ASIC Products, in October 1997. Mr. Daane joined us in 1985, and has served
in senior management and executive positions since 1992, including, most
recently, Vice President and General Manager of the Communication Products
Division.

John D'Errico was named Executive Vice President, Storage Components and
Colorado Operations in August 1998. 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. Most recently, Mr. D'Errico served as Vice
President and General Manager, Pan-Asia.

Thomas Georgens was named Senior Vice President and General Manager,
Storage Systems, Inc. in August 1998, upon the acquisition of Symbios, Inc. Mr.
Georgens joined Symbios in 1996, where he served as Vice President and General
Manager of Storage Systems. Before joining Symbios, Mr. Georgens was employed by
EMC Corporation, where he served as Director of Engineering Operations for the
Systems Group and later as Director of Internet Marketing.

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. Before

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<PAGE> 51

joining us, Mr. Marz was a long-time senior sales and marketing executive at
Advanced Micro Devices, Inc., a semiconductor manufacturer.

R. Douglas Norby has been a director of the Company since 1993. He has
served as Executive Vice President and Chief Financial Officer of the Company
since November 1996. From September 1993 until November 1996, he served as
Senior Vice President and Chief Financial Officer of Mentor Graphics
Corporation, an EDA company. From July 1992 until September 1993, he served as
President and Chief Executive Officer of Pharmetrix Corporation, a health care
company located in Menlo Park, California. Mr. Norby also serves on the board of
directors of Corvas International, Inc., a biopharmaceutical company.

David E. Sanders has served as Vice President, General Counsel and
Secretary of the Company since 1991. He joined the Company in 1986. Prior to
joining the Company, he served as Associate General Counsel of Advanced Micro
Devices, Inc.

Lewis C. Wallbridge has served as Vice President, Human Resources of the
Company since joining the Company in 1984. Prior to joining the Company, he
served as director of Human Resources of Amdahl Corporation.

Joseph M. Zelayeta was named Executive Vice President, Worldwide Operations
in September 1997. Employed with the Company since 1981, Mr. Zelayeta has held
management and executive positions in research and development and manufacturing
operations since 1986.

T.Z. Chu has been a director of the Company since 1992. He served as
President of Hoefer Pharmacia Biotech, Inc., a biotechnology company, from March
1995 until his retirement in February 1997. From August 1993 until March 1995,
he served as President and Chief Executive Officer of Hoefer Scientific
Instruments, a manufacturer of scientific instruments. From January 1992 until
August 1993, he acted as a consultant to Hambrecht & Quist, an investment
banking firm and to Thermo Instrument Systems, Inc., a manufacturer of
analytical instruments.

Malcolm R. Currie has been a director of the Company since 1992. He serves
as Chief Executive Officer of Currie Technologies, Inc., a manufacturer of
electric propulsion systems for bicycles. He served as Chairman and Chief
Executive Officer of Hughes Aircraft Company from March 1988 until his
retirement in July 1992. He presently serves on the boards of directors of
Unocal Corporation, Investment Company of America, SM&A Corp., and Regal One
Corp., and as Chairman of the Board of Trustees of the University of Southern
California.

James H. Keyes has been a director of the Company since 1983. He has served
as Chairman and Chief Executive Officer of Johnson Controls, Inc. since January
1993. Johnson Controls, Inc. is a global leader in automotive systems and
facility management and control. He also serves on the boards of directors of
Pitney Bowes, Inc. and the Chicago Federal Reserve Board.

Matthew J. O'Rourke has been a director of the Company since 1999. He was a
partner with the accounting firm Price Waterhouse LLP from 1972 until his
retirement in June 1996. Prior to his retirement, he served as the managing
partner at Price Waterhouse's New York National Office from 1994 to 1996 and as
managing partner for Northern California from 1988 to 1994. Since his
retirement, Mr. O'Rourke has provided services as an independent business
consultant. He is a member of the board of directors of Read-Rite Corporation, a
manufacturer of recording heads and related assemblies for computer disk and
tape drives and other data storage products.

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<PAGE> 52

DESCRIPTION OF NOTES

We will issue the notes under an indenture dated as of , 1999,
between us and State Street Bank and Trust Company of California, N.A., as
trustee. The following description is a summary of the material provisions of
the notes and the indenture and does not purport to be complete. You should look
at the indenture and the form of note that will be filed as an exhibit to this
registration statement.

GENERAL

The notes represent unsecured general obligations to us subordinate in
right of payment to certain of our other obligations and will rank equally with
our outstanding 4 1/4% convertible subordinated notes due 2004. The notes will
be limited to $250,000,000 aggregate principal amount ($287,500,000 aggregate
principal amount if the underwriters' over-allotment option is exercised in
full). The notes will be issued in denominations of $1,000 and multiples of
$1,000. The notes will mature on , 2006 unless earlier converted or
redeemed.

The notes will bear interest at the rate of % per year, beginning on
, 1999. We will pay interest on and of
each year, beginning on , 2000. Interest is based on a 360-day
year composed of twelve 30-day months. Interest will be paid to holders of
record:

- as of in the case of the interest payment
date, and

- as of in the case of the interest payment
date,

subject to certain exceptions if notes are converted or redeemed prior to the
interest payment date.

The indenture does not contain any financial covenants or restrictions on
our paying dividends, any restrictions on our incurring additional indebtedness,
including senior indebtedness, nor any restrictions on our ability to issue
additional securities or repurchase our outstanding securities. The indenture
contains no covenants or other provision that will protect you in the event of a
highly leveraged transaction or a change in control, except to the extent that
you may be able to redeem your notes as discussed below.

Payments on the notes will be made at the office of the paying agent. The
paying agent office will initially be an office or agency of the trustee in the
Borough of Manhattan, the City of New York.

CONVERSION OF NOTES

You may convert your note, in whole or in part, into common stock at any
time prior to maturity. However, if we call a note for redemption, you may
convert a note only until the close of business on the business day prior to the
redemption date unless we fail to pay the redemption price. If you have
submitted your notes for redemption upon a fundamental change, you may convert
your note only if you withdraw your conversion election.

The initial conversion price is $ per share of common stock, subject
to adjustment as described below. We will not issue fractional shares of common
stock upon conversion of notes. Instead, we will pay cash equal to the market
price of the common stock on the business day prior to the conversion date.
Except as described below, you will not receive any accrued interest or
dividends upon conversion. If you convert your notes during the period from the
record date to the next interest payment date, you will be required to pay us
the interest on conversion unless we have called the notes for redemption on a
redemption date during this time period.

We will adjust the conversion price if the following events occur:

(1) the issuance of common stock as a dividend or distribution on common
stock,

(2) the issuance of rights or warrants to purchase common stock to all
holders of common stock,

(3) certain subdivisions and combinations of common stock,

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<PAGE> 53

(4) distributions of capital stock, other than common stock, or debt
instruments or assets to all holders of common stock, including
securities but excluding the following:

- rights or warrants listed in (2) above,

- dividends or distributions listed in (1) above, and

- cash distributions listed in (5) below,

(5) distributions of cash, excluding any quarterly cash dividends on the
common stock if the quarterly dividend distribution does not exceed the
greater of:

- the cash dividend per share from the previous quarter not requiring an
adjustment under this provision, or

- 3.75% of the sale price of common stock during the ten trading days
prior to the dividend declaration date, excluding any dividend or
distribution in connection with our liquidation or dissolution or
winding up,

(6) payment on a tender offer or exchange offer by us or our subsidiary for
the common stock if the payment exceeds the current market price of the
common stock on the trading day next succeeding the last date for
tenders or exchanges, and

(7) payment on certain tender offers or exchange offers by a third party
if, as of the closing date of the offer, our board of directors does
not recommend rejection of the offer. We will make this adjustment only
if:

- the tender offer or exchange offer increases the share ownership of
the person making the offer to more than 25% of our common stock and

- the cash and other consideration paid exceeds the current market price
of the common stock.

We will not make this adjustment if as of closing we will engage in a
merger, consolidation or sale of all or substantially all of our assets.

Under our preferred shares rights plan, upon conversion holders will
receive, in addition to the common stock, the rights described in the preferred
shares rights plan, subject to customary exceptions.

In the event of:

- any reclassification of our common stock, or

- a consolidation, merger or combination involving LSI Logic, or

- a sale or conveyance to another person of our property and assets as an
entirety or substantially as an entirety

in which common stock holders would be entitled to receive stock, other
securities or property or assets or cash with respect to their common stock, you
will generally be allowed to convert your notes into the same type of
consideration received by common stock holders immediately prior to one of these
types of events.

You may as a result of certain types of conversion price adjustments be
subject to U.S. income tax. See "Certain Federal Income Tax Considerations."

We may at any time reduce the conversion price by any amount for a period
of at least 20 days, if our board of directors determines that such reduction
would be in our best interests. If we reduce the conversion price, we must give
you at least 15 days' prior notice. We may, at our option, also reduce the
conversion price to reduce any income tax to holders of common stock resulting
from any dividend or distribution of stock. See "Certain Federal Income Tax
Considerations."

We will not make any adjustment in the conversion price unless the
adjustment would require a change of at least 1% in the conversion price. We
will carry forward any adjustments less than 1% of the conversion price.

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<PAGE> 54

OPTIONAL REDEMPTION BY LSI LOGIC CORPORATION

No sinking fund exists for the notes. On or after , 2002, we may
redeem the notes, in whole or in part, on at least 30 days' notice at the
following redemption prices:

- if redeemed from , 2002 through , 2003, at % of
the principal amount,

- if redeemed from , 2003 through , 2004, at % of
the principal amount,

- if redeemed from , 2004 through , 2005, at % of
the principal amount,

- if redeemed on or after , 2005, at 100% of the principal amount.

Holders in each case will receive accrued interest to, but excluding, the
redemption date. If the redemption date is an interest payment date, then
interest shall be paid to the record holder.

If we redeem less than all of the notes, the trustee will select the notes
to be redeemed in multiples of $1,000:

- by lot,

- pro rata, or

- by another method the trustee considers fair and appropriate.

If a portion of your notes is selected for partial redemption and you
convert a portion of your notes, the converted portion shall be attributed first
to the portion selected for redemption.

We may not give notice of any redemption of notes if we have defaulted in
payment of interest on the notes and there is an event of default.

YOU MAY REQUIRE US TO REDEEM THE NOTES IN THE EVENT OF A FUNDAMENTAL CHANGE

If a fundamental change occurs prior to , you may require us to
redeem, in whole or in part, your notes 30 days after our notice of the
fundamental change. We will redeem the notes at 100% of the principal amount
plus accrued interest to, but excluding, the repurchase date. If the repurchase
date is an interest payment date, then interest shall be paid to the record
holder.

We will mail to all record holders a notice within 10 days after the
occurrence of a fundamental change. We will also deliver a notice to the
trustee. You must deliver to us, on or before the 30th day after the date of our
fundamental change notice, your redemption notice together with the notes duly
endorsed for transfer.

We will comply with any applicable provisions of Rule l3e-4 and any other
tender offer rules under the Exchange Act in the event of a fundamental change.

A "fundamental change" is any transaction or event in which substantially
all of our common stock is exchanged for, converted into, acquired for or
constitutes solely the right to receive consideration that is not substantially
all common stock listed, or that will be listed, on:

- a U.S. national securities exchange,

- approved for quotation on the Nasdaq National Market, or

- any similar U.S. system of automated dissemination of quotations of
securities prices.

These redemption rights could discourage a potential acquiror from
acquiring us. However, we are not aware of any specific effort to acquire us by
means of a merger, tender offer, solicitation or otherwise. The redemption upon
a fundamental change feature is not part of any specific plan to adopt a series
of antitakeover provisions and we have no such plans.

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<PAGE> 55

SUBORDINATION OF NOTES

The notes are subordinated to the prior payment in full of all of our
senior indebtedness and will rank equally with our outstanding 4 1/4%
convertible subordinated notes.

If we dissolve, wind up, liquidate or reorganize our business, we will
repay the senior indebtedness before we make any payments on the notes. If the
notes are accelerated because of an event of default, we will first pay the
holders of any senior indebtedness in full before we are permitted to pay you.
The indenture requires us to promptly notify the holders of senior indebtedness
if payment of the notes accelerates because of an event of default.

We may not make any payment on the notes if there is:

- a default in the payment of senior indebtedness,

- any other default of designated senior indebtedness that permits the
holders of designated senior indebtedness to accelerate its maturity and
the trustee receives a payment blockage notice, or

- any judicial proceeding pending with respect to any payment default or
non-payment default.

We may resume payments on the notes:

- in case of a payment default, upon the date on which such default is
cured or waived or ceases to exist, and

- in the case of a non-payment default, the earlier of:

- the date on which the non-payment default is cured or waived or ceases
to exist, or

- 179 days after the date on which the payment blockage notice is
received.

No new period of payment blockage may be commenced unless 365 days have
passed since the initial effectiveness of the immediately prior payment blockage
notice. No non-payment default that existed on the date of delivery of any
payment blockage notice to the trustee shall be the basis for any later payment
blockage notice.

If the trustee or you receive any payment or distribution on the notes not
permitted by the subordination provisions of the indenture, then the trustee or
you must hold the payment or distribution in trust for the benefit of holders of
senior indebtedness to pay all senior indebtedness.

In the event of our bankruptcy, dissolution or reorganization, holders of
senior indebtedness may receive more, ratably, and you may receive less,
ratably, than our other creditors.

We will pay the trustee reasonable compensation and will indemnify the
trustee against certain losses, liabilities or expenses it may incur in
connection with its duties. The trustee's claims for such payments will
generally be senior to any claims asserted by you.

EVENTS OF DEFAULT; NOTICE AND WAIVER

An event of default on the notes includes any of the following:

- default in payment of the principal or premium,

- default for 30 days in payment of interest,

- default for 60 days after notice in the observance or performance of any
other covenants in the indenture, or

- certain events involving bankruptcy, insolvency or reorganization of us
or any of our significant subsidiaries.

The trustee may withhold notice to you of any default, except defaults in
payment of principal, premium or interest on the notes. However, the trustee
must consider it to be in your interest to withhold this notice.

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<PAGE> 56

If an event of default occurs and continues, the trustee or the holders of
at least 25% in principal amount of the notes offered by this prospectus may
declare the principal, premium, and accrued interest on the notes to be
immediately due and payable. If we file for protection under the bankruptcy code
or similar insolvency laws, the principal, premium and accrued interest on the
notes automatically become due and payable.

The holders of a majority of the principal amount of the notes offered by
this prospectus may cancel any acceleration with respect to the notes for a
non-payment default and waive certain non-payment defaults.

Payments of principal, premium, or interest on the notes that are not made
when due will accrue interest at the annual rate of % from the required
payment date.

The holders of a majority of the notes offered by this prospectus will have
the right to direct the time, method and place of any proceedings for any remedy
available to the trustee, subject to limitations specified in the indenture.

You may not pursue any remedy under the indenture, except in the case of a
default in the payment of principal, premium or interest on the notes, unless:

- you have given the trustee written notice of an event of default,

- the holders of at least 25% in principal amount of the notes offered by
this prospectus make a written request, and offer reasonable indemnity,
to the trustee to pursue the remedy,

- the trustee does not receive an inconsistent direction from the holders
of a majority in principal amount of the notes, and

- the trustee fails to comply with the request within 60 days after
receipt.

MODIFICATION OF THE INDENTURE

With the consent of the holders of a majority in principal amount of the
notes, we may modify the indenture or enter into any supplemental indenture that
shall:

- extend the fixed maturity of any note,

- reduce the rate or extend the time for payment of interest of any note,

- reduce the principal amount or premium of any note,

- reduce any amount payable upon redemption of any note,

- adversely change our obligation to redeem any note upon a fundamental
change,

- impair the right of a holder to institute suit for payment on the note,

- change the currency in which any note is payable,

- impair the right to convert the notes,

- adversely modify the subordination provisions of the indenture, or

- reduce the percentage of notes required for consent to any modification
of the indenture.

The indenture also permits certain types of modifications of its terms without
the consent of the holders of a majority in principal amount the notes.

FORM, DENOMINATION AND REGISTRATION

The notes will be issued in fully registered form, without coupons, in
denominations of $1,000 principal amount and multiples thereof.

Global note, book-entry form

The notes will be evidenced by one or more global notes, which will be
deposited with, or on behalf of, DTC and registered in the name of Cede & Co. as
DTC's nominee. Except as set forth below, a global

55
<PAGE> 57

note may be transferred, in whole or in part, only to another nominee of DTC or
to a successor of DTC or its nominee.

Holders of the notes may hold their interests in the global notes directly
through DTC or indirectly through organizations which are participants in DTC,
whom we also refer to as participants. Transfers between participants will be
effected in the ordinary way in accordance with DTC's rules and will be settled
in clearing house funds. The laws of some states require that certain persons
take physical delivery of securities in definitive form. Consequently, the
ability to transfer beneficial interest in the global notes to such persons may
be limited.

Holders of the notes may beneficially own interests in the global notes
held by DTC only through participants or certain banks, brokers, dealers, trust
companies and other parties that clear through or maintain a custodial
relationship with a participant, either directly or indirectly, whom we also
refer to as indirect participants. So long as Cede & Co., as the nominee of DTC,
is the registered owner of a global note, Cede & Co. for all purposes will be
considered the sole holder of the global note. Except as provided below, owners
of beneficial interests in the global notes will not be entitled to have
certificates registered in their names, will not receive or be entitled to
receive physical delivery of certificates in definitive form, and will not be
considered the holders thereof.

Payment of interest on, and the redemption price of, the global notes will
be made to Cede & Co., as the registered owner of the global notes by wire
transfer of immediately available funds on each interest payment date or the
redemption date, as the case may be. Neither we, the trustee nor any paying
agent will have any responsibility or liability for any aspect of the records
relating to or payments made on account of beneficial ownership interests in the
global notes or for maintaining, supervising or reviewing any records relating
to such beneficial ownership interests.

We have been informed by DTC that, with respect to any payment of interest
on, or the redemption price of, the global notes, DTC's practice is to credit
participants' accounts on the payment date therefor with payments in amounts
proportionate to their respective beneficial interests in the principal amount
represented by the global notes as shown on the records of DTC, unless DTC has
reason to believe that it will not receive payment on the payment date. Payments
by participants to owners of beneficial interests in the principal amount
represented by the global notes held through the participants will be the
responsibility of the participants, as is now the case with securities held for
the accounts of customers registered in "street name."

Because DTC can only act on behalf of participants, who in turn act on
behalf of indirect participants, the ability of a person having a beneficial
interest in the principal amount represented by a global note to pledge that
interest to persons or entities that do not participate in the DTC system, or
otherwise take actions in respect of that interest, may be affected by the lack
of a physical certificate evidencing that interest.

Neither we nor the trustee (or any registrar, paying agent or conversion
agent under the indenture) will have any responsibility for the performance by
DTC or its participants or indirect participants of their respective obligations
under the rules and procedures governing their operations. DTC has advised us
that it will take any action permitted to be taken by a holder of notes
(including, without limitation, the presentation of notes for exchange as
described below), only at the direction of one or more participants to whose
account with DTC interests in the global notes are credited, and only in respect
of the principal amount of the notes represented by the global notes as to which
the participant or participants has or have given such direction.

DTC has advised us as follows: DTC is a limited purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the Uniform
Commercial Code and a "clearing agency" registered pursuant to the provisions of
Section 17A of the Exchange Act. DTC was created to hold securities for its
participants and to facilitate the clearance and settlement of securities
transactions between participants through electronic book-entry changes to the
accounts of its participants, thereby eliminating the need for physical movement

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<PAGE> 58

of certificates. Participants include securities brokers and dealers, banks,
trust companies and clearing corporations and may include certain other
organizations such as the initial purchasers. Some of the participants (or their
representatives), together with other entities, own DTC. Indirect access to the
DTC system is available to others such as banks, brokers, dealers and trust
companies that clear through, or maintain a custodial relationship with, a
participant, either directly or indirectly.

Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the global notes among participants, it is under no
obligations to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. If DTC is a any time unwilling or
unable to continue as depositary and a successor depositary is not appointed by
us within 90 days, we will cause notes to be issued in definitive form in
exchange for the global notes.

DEFINITIONS USED IN THE DESCRIPTION OF NOTES

"Senior indebtedness" means the principal, premium and interest on, rent
payable under, and any other amounts due on all of our current and future
indebtedness. However, senior indebtedness does not include:

- indebtedness evidenced by the notes,

- our indebtedness to any of our majority-owned subsidiaries except to the
extent that the indebtedness is pledged by the subsidiary as security for
any senior indebtedness,

- our accounts payable to trade creditor in the ordinary course of
business, and

- any particular indebtedness in which the instrument evidencing the
indebtedness provides that the indebtedness shall not be senior in right
of payment to, or is subordinated to, the notes.

- our outstanding 4 1/4% convertible subordinated notes due 2004.

"Indebtedness" means:

- all obligations of any person:

- for borrowed money,

- evidenced by a note, debenture, bond or written instrument,

- for leases of the person required to be accounted for as capitalized
lease obligations on the balance sheet of the person and all
obligations and other liabilities under any lease or related document
in connection with the lease of real property that provides that the
person is contractually obligated to purchase or cause a third party
to purchase the leased property, or

- letters of credit, local guarantees or bankers' acceptances,

- all obligations of others of the type described in the above clause or
the clauses below assumed by or guaranteed in any manner by the person,

- all obligations secured by a lien affecting title or resulting in a lien
to which the property of such person is subject,

- all obligations of any person under interest rate and currency swap
agreements, cap, floor and collar agreements, spot and forward contracts
and similar agreements and arrangements, and

- all obligations, contingent or otherwise, of any person under any and all
deferrals, renewals, extensions and refundings of, or amendments,
modifications or supplements to, any liability described above.

"Designated senior indebtedness" means senior indebtedness under our
existing credit facility and any other particular senior indebtedness in which
the instrument creating or evidencing the debt or the assumption or guarantee of
the debt (or related agreements or documents to which we are a party) expressly
provides that such senior indebtedness shall be designated senior indebtedness
for purposes of the indenture (provided that such instrument, agreement or other
document may place limitations and conditions on the right of such senior
indebtedness to exercise the rights of designated senior indebtedness).

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INFORMATION CONCERNING THE TRUSTEE

We have appointed State Street Bank and Trust Company of California, N.A.,
as trustee under the indenture, paying agent, conversion agent, note registrar
and custodian for the notes. The trustee or its affiliates may provide banking
and other services to us in the ordinary course of their business.

Boston EquiServe, LP, an affiliate of the trustee, is the transfer agent
for the common stock. BancBoston, N.A., an affiliate of the trustee, is a lender
under our existing credit facility. The indenture contains certain limitations
on the rights of the trustee, as long as it or any of its affiliates remains our
creditor, to obtain payment of claims in certain cases or to realize on certain
property received on any claim as security or otherwise. The trustee and its
affiliates will be permitted to engage in other transactions with us. However,
if the trustee or any affiliate continues to have any conflicting interest and a
default occurs with respect to the notes, the trustee must eliminate such
conflict or resign.

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<PAGE> 60

DESCRIPTION OF CAPITAL STOCK

Our authorized capital stock consists of 450,000,000 shares of common
stock, par value $0.01 per share, and 2,000,000 shares of preferred stock, par
value $0.01 per share.

COMMON STOCK. As of July 26, 1999, there were 147,391,417 shares of common
stock outstanding held by approximately 4,084 holders of record. Each holder of
common stock is entitled to one vote per share on all matters to be voted upon
by the stockholders. Our certificate of incorporation provides that at all
elections of directors, each holder of stock shall be entitled to cumulative
voting. The holder may cast all of these votes for a single candidate or may
distribute them among the number of directors to be elected. Holders of common
stock are entitled to receive dividends declared by the board of directors, out
of funds legally available for the payment of dividends subject to preferences
that may be applicable to the holders of preferred stock. Upon liquidation,
dissolution or winding up of our business, the holders of common stock are
entitled to share equally in all assets available for distribution after payment
of liabilities, subject to prior distribution rights of preferred stock. The
holders of common stock have no preemptive or conversion rights or other
subscription rights. No redemption or sinking fund provisions apply to the
common stock.

All outstanding shares of common stock are fully paid and nonassessable.

PREFERRED STOCK. As of July 26, 1999, no shares of preferred stock were
issued and outstanding. The board of directors has the authority to issue the
preferred stock in one or more series and to fix the following rights,
preferences, privileges and restrictions of the preferred stock without further
vote or action by our stockholders:

- dividend rights and rates,

- terms of conversion, voting rights, terms of redemption, liquidation
preferences,

- the number of shares constituting any series or the designation of such
series.

Preferred stock could be issued quickly with terms calculated to delay or
prevent a change in control and may adversely affect the voting and other rights
of the holders of common stock. Except in accordance with the rights plan
described below, we have no present plans to issue any shares of preferred
stock.

PREFERRED SHARES RIGHTS PLAN. On November 16, 1988, our board of directors
authorized a dividend distribution of one share purchase right for each share of
common stock outstanding as of the close of business on December 15, 1988 and
each future share of common stock. The Amended and Restated Preferred Shares
Rights Agreement dated November 20, 1998 between us and BankBoston, N.A., as
rights agent, provides, among other things, that after a distribution date, each
right entitles the registered holder to purchase from us 1/1000 of a share of
our Series A participating preferred stock, $0.01 par value, initially at a
price of $100.00.

The rights will expire ten years after the date of issuance, or December
15, 2008, unless earlier redeemed, and will become exercisable and transferable
separately from the common stock following the tenth day after a person or
group:

- acquires beneficial ownership of 20% or more of our common stock,

- announces a tender or exchange offer, the consummation of which would
result in ownership by a person or group of 30% or more of our common
stock, or

- a later date after the occurrence of an event described in clause (i) or
(ii) above as may be determined by a majority of directors not affiliated
with the acquiring group or person.

If (a) an acquiror obtains 30% or more of our common stock, (b) an
acquiring entity combines with us in a transaction in which we are the surviving
company and our common stock remains outstanding and unchanged or (c) we effect
or permit certain "self-dealing" transactions with an owner of 20% or more of
our common stock or its affiliates or associates, then each right will entitle
the holder to purchase, at the

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then-current purchase price, a number of shares of common stock having a
then-current market value of twice the purchase price.

If (x) we merge into another entity, (y) an acquiring entity merges into us
and our common stock is changed into or exchanged for other securities or assets
or (z) we sell more than 50% of our assets or earning power, then each right
will entitle the holder to purchase, at the then-current purchase price, a
number of shares of common stock of the person engaging in the transaction
having a then-current market value of twice the purchase price.

We may redeem the rights at our option for $0.01 per right at any time on
or prior to the tenth day after public announcement that a person or group has
acquired beneficial ownership of 20% or more of our common stock or such later
date as may be determined by a majority of the directors not affiliated with the
acquiring group or person. The rights are also redeemable at our option
following the shares acquisition date if:

- such redemption is in connection with a consolidation or merger in which
we are not the surviving corporation,

- no acquiror has held more than 20% of our common stock for less than the
last three years, and

- the redemption is approved by a majority of the directors not affiliated
with the acquiring group or person.

Our right of redemption may be reinstated if the acquiring person or group
reduces its beneficial ownership to 10% or less of our common stock.

The Series A participating preferred purchasable upon exercise of the
rights will be nonredeemable and junior to any other series of our preferred
stock. Each share of Series A participating preferred will have a preferential
cumulative quarterly dividend in an amount equal to 1,000 times the dividend
declared on each share of common stock. In the event of liquidation, the holders
of Series A participating preferred will receive a preferred liquidation payment
equal to 1,000 times the aggregate amount to be distributed per share to the
holders of shares of common stock plus accrued dividends. Following payment of
the Series A liquidation preference, and after the holders of shares of common
stock shall have received an amount per share equal to the quotient obtained by
dividing the Series A liquidation preference by 1,000, the holders of Series A
participating preferred and holders of common stock will share ratably and
proportionately the remaining assets to be distributed in liquidation. Each
share of Series A participating preferred Stock will have 1,000 votes and will
vote together with the shares of common stock. In the event of any merger,
consolidation or other transaction in which shares of common stock are exchanged
for or changed into other securities, cash and/or other property, each share of
Series A participating preferred will be entitled to receive 1,000 times the
amount and type of consideration received per share of common stock.

Although the rights should not interfere with a business combination
approved by the board of directors in the manner set forth in the rights plan,
they may cause substantial dilution to a person or group that attempts to
acquire control without approval by the board.

DELAWARE GENERAL CORPORATION LAW SECTION 203

We are a Delaware corporation subject to Section 203 of the Delaware
General Corporation Law, an anti-takeover law. In general, Section 203 prohibits
a publicly held Delaware corporation from engaging in a "business combination"
transaction with an "interested stockholder" for a period of three years after
the person became an interested stockholder, unless the business combination or
the transaction in which the person became an interested stockholder is approved
in the manner described below.

The Section 203 restrictions do not apply if:

(1) the business combination or transaction is approved by our board of
directors before the date the interested stockholder obtained the
status,

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(2) upon consummation of the transaction which resulted in the stockholder
obtaining the status, the stockholder owned at least 85% of the shares
of stock entitled to vote in the election of directors, the "voting
stock". The 85% calculation does not include those shares:

- owned by directors who are also officers of the target corporation,
and

- held by employee stock plans which do not permit employees to decide
confidentially whether to accept a tender or exchange offer, or

(3) on or after the date the interested stockholder obtained its status,
the business combination is approved by our board of directors and at a
stockholder meeting by the affirmative vote of at least 66 2/3% of the
outstanding voting stock which is not owned by the interested
stockholder.

Generally, a "business combination" includes a merger, asset sale, or other
transaction resulting in a financial benefit to the interested stockholder.
Generally, an "interested stockholder" is a person who, together with affiliates
and associates, owns, or within three years prior to the determination of
interested stockholder status, did own, 15% or more of a corporation's voting
stock. Section 203 may prohibit or delay mergers or other takeover or change in
control attempts with respect to LSI Logic Corporation. As a result, Section 203
may discourage attempts to acquire us even though such transaction may offer our
stockholders the opportunity to sell their stock at a price above the prevailing
market price.

CHARTER AND BYLAW PROVISIONS

Our charter and bylaws include provisions that may have the effect of
discouraging, delaying or preventing a change in control or an unsolicited
acquisition proposal that a stockholder might consider favorable, including a
proposal that might result in the payment of a premium over the market price for
the shares held by stockholders as follows:

- our charter provides for cumulative voting at all elections of directors,

- our board has the power to establish the rights, preferences and
privileges of authorized and unissued shares,

- our charter limits the liability of our directors, in their capacity as
directors but not in their capacity as officers, to LSI Logic Corporation
or its stockholders to the fullest extent permitted by Delaware law.

INDEMNIFICATION ARRANGEMENTS

Our bylaws provide that our directors, officers and agents shall be
indemnified against expenses, judgments, fines, settlements actually and
reasonably incurred in connection with any proceeding arising out of their
status. However, the director, officer or agent acted in good faith and in a
manner he or she reasonably believed to be in the best interests of LSI Logic
Corporation, and, with the respect to any criminal action or proceeding, had no
reasonable cause to believe such conduct was unlawful.

CHANGE OF CONTROL AGREEMENTS

We have entered into certain severance agreements with each of our
executive officers providing for the acceleration of unvested options held by
such executive officers and the payment of certain lump sum amounts and benefits
upon an involuntary termination at any time within twelve (12) months after a
change of control.

A "change of control" is defined as

- the consummation of a merger or consolidation with any other corporation,
other than a merger or consolidation in which we are the surviving
entity,

- the approval by our stockholders of a plan of liquidation or an agreement
for the sale or disposition by us of all or substantially all of our
assets, and

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- any person becoming the beneficial owner, as defined in Rule 13d-3 under
the Securities and Exchange Act of 1934, as amended, of 50% or more of
our total outstanding voting securities. Our successors shall be bound
under the change of control severance agreements. The change of control
severance agreements terminate on November 20, 2003. Although these
should not interfere with a business combination, they may cause a
substantial dilution to a person or group that attempts to acquire us
without approval of our board of directors.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the common stock is Boston EquiServe,
L.P.

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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS

This section summarizes certain U.S. federal income tax considerations
relating to the purchase, ownership and disposition of the notes and of common
stock into which you may convert the notes. This is not a complete analysis of
all the potential tax consequences that you may need to consider before
investing. This summary is based on current laws, regulations, rulings and
decisions. All of these may change, possibly with retroactive effect. This
summary applies only to beneficial owners who hold notes and common stock as
"capital assets". This discussion does not address tax considerations applicable
to an investor's particular circumstances or to investors that may be subject to
special tax rules, such as banks, holders subject to the alternative minimum
tax, tax-exempt organizations, insurance companies, non-U.S. persons or entities
except to the extent specifically set forth below, dealers in securities or
currencies, persons that will hold notes as a position in a hedging transaction,
"straddle" or "conversion transaction" for tax purposes or persons deemed to
sell notes or common stock under the constructive sale provisions of the
Internal Revenue Code of 1986, as amended (the "Code"). This summary also does
not discuss the tax considerations applicable to subsequent purchasers of the
notes. We have not sought any ruling from the Internal Revenue Service (the
"IRS") or an opinion of counsel with respect to the statements made and the
conclusions reached in the following summary. We cannot guarantee that the IRS
will agree with these statements and conclusions. This summary does not consider
the effect of the federal estate or gift tax laws or the tax laws, except as set
forth below with respect to non-U.S. holders, of any applicable foreign, state,
local or other jurisdiction.

BEFORE YOU INVEST IN THESE SECURITIES, YOU SHOULD CONSULT YOUR OWN TAX
ADVISORS TO DETERMINE THE APPLICATION OF THE UNITED STATES FEDERAL INCOME TAX
LAWS TO YOUR PARTICULAR SITUATION AND FOR INFORMATION ABOUT ANY TAX CONSEQUENCES
ARISING UNDER THE FEDERAL ESTATE OR GIFT TAX RULES OR UNDER THE LAWS OF ANY
STATE, LOCAL, OR FOREIGN TAXING JURISDICTION OR UNDER ANY APPLICABLE TAX TREATY.

For purposes of this discussion, a "U.S. holder" refers to any holder that
is a U.S. person, and a "non-U.S. holder" refers to any holder that is not a
U.S. person. The term "U.S. person" means:

- a citizen or resident of the United States,

- a corporation, partnership (or other entity treated as a corporation or a
partnership for U.S. federal income tax purposes) created or organized in
the United States or any state of the United States or the District of
Columbia,

- an estate the income of which is subject to U.S. federal income taxation
regardless of its source, or

- a trust subject to the primary supervision of a court in the United
States and controlled by one or more U.S. persons.

U.S. HOLDERS

Taxation of Interest

You generally must include interest on the notes in your income as ordinary
income at the time you receive or accrue interest, depending on your method of
accounting for U.S. federal income tax purposes. A holder may require us to
redeem any of his notes in the event of a fundamental change. We intend to take
the position that a "fundamental change" is remote under the Treasury
Regulations, and do not intend to treat the possibility of a "fundamental
change" as affecting the yield to maturity of any note. In the event a
redemption upon a fundamental change occurs, it would affect the amount and
timing of the income that must be recognized by a U.S. holder of notes. There
can be no assurance that the IRS will agree with our position.

Sale, Exchange or Redemption of the Notes

Except as described below under "Conversion of the Notes", upon the sale,
exchange or redemption of a note, you generally will recognize capital gain or
loss equal to the difference between (i) the amount of cash proceeds and the
fair market value of any property you receive on the sale, exchange or

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redemption, except any portion that is accrued interest income, which is taxable
as ordinary income, and (ii) your adjusted tax basis in the note. Your adjusted
tax basis generally will equal the cost of the note to you. This capital gain or
loss will be long-term if you have held the note for more than one year. Long-
term capital gains recognized by certain non-corporate U.S. holders, including
individuals, will generally taxed at your maximum rate of tax of 20%. The
deductibility of capital losses is subject to limitations.

Conversion of the Notes

You generally will not recognize any income, gain or loss upon conversion
of a note into common stock except to the extent the common stock is considered
attributable to accrued interest not previously included in income or with
respect to cash you receive instead of a fractional share of common stock. Your
tax basis in the common stock received on conversion of a note will be the same
as your adjusted tax basis in the note at the time of conversion, reduced by any
basis allocable to a fractional share interest for which you receive cash. Your
holding period for the common stock received on conversion will generally
include the holding period of the note converted. However, your tax basis in
shares of common stock considered attributable to accrued interest generally
will equal the amount of such accrued interest included in income. The holding
period for such shares shall begin on the date of conversion.

You should treat cash you receive instead of a fractional share of common
stock upon conversion as a payment in exchange for the fractional share of
common stock. This generally will result in capital gain or loss, measured by
the difference between the cash received for the fractional share and your
adjusted tax basis in the fractional share.

Dividends

Distributions made on the common stock after a conversion generally will be
included in your income as ordinary dividend income to the extent of our current
or accumulated earnings and profits. Distributions in excess of our current and
accumulated earnings and profits will be treated as a return of capital to the
extent of your basis in the common stock and thereafter as capital gain.

Constructive Dividends

The conversion price of our notes may change under certain circumstances.
In such a case, you may be treated as having received constructive
distributions. Adjustments to the conversion price made pursuant to a reasonable
adjustment formula which has the effect of preventing the dilution of the
interest of the holders of the debt instruments, however, will generally not
result in a constructive distribution of stock. Certain of the possible
adjustments provided in the notes will not qualify as being pursuant to a
reasonable adjustment formula. If such adjustments are made, you will be deemed
to have received constructive distributions taxable as dividends to the extent
of our current and accumulated earnings and profits even though you did not
receive any cash or property. In certain circumstances, the failure to provide
for such an adjustment may result in taxable dividend income to you.

Sale of Common Stock

On the sale or exchange of common stock, you generally will recognize
capital gain or loss equal to the difference between (i) the amount of cash and
the fair market value of any property received on the sale or exchange and (ii)
your adjusted tax basis in the common stock. This capital gain or loss will be
long-term if your holding period in common stock is more than one year.
Long-term capital gains for certain non-corporate taxpayers, including
individuals, are taxed at a maximum rate of 20%. A U.S. Holder's basis and
holding period in common stock received upon conversion of a note are determined
as discussed above under "Conversion of the Notes." The deductibility of capital
losses is subject to limitations.

SPECIAL TAX RULES APPLICABLE TO NON-U.S. HOLDERS

In general, subject to the discussion below concerning backup withholding:

(a) Payments of principal or interest on the notes by us to a
beneficial owner of a note that is a non-U.S. holder will not be subject to
U.S. income or withholding tax, provided that, in the case of

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interest, (i) the non-U.S. holder does not own, actually or constructively,
10% or more of the total combined voting power of all classes of our stock
entitled to vote, within the meaning of Section 871(h)(3) of the Code, (ii)
the non-U.S. holder is not a "controlled foreign corporation" with respect
to which we are a "related person" within the meaning of the Code, (iii)
the non-U.S. holder is not a bank receiving interest described in Section
881(c)(3)(A) of the Code, and (iv) the certification requirements under
Section 871(h) or Section 881(c) of the Code and Treasury Regulations are
satisfied;

(b) A non-U.S. holder of a note or common stock will not be subject to
U.S. federal income tax on gains realized on the sale, exchange or other
disposition of any note or common stock unless (i) the non-U.S. holder is
an individual who is present in the U.S. for 183 days or more in the
taxable year of sale, exchange or other disposition, and certain conditions
are met, (ii) the gain is effectively connected with the conduct by the
non-U.S. holder of a trade or business in the U.S. and, if certain U.S.
income tax treaties apply, is attributable to a U.S. permanent
establishment maintained by the non-U.S. holder, (iii) the non-U.S. holder
is subject to Code provisions applicable to certain U.S. expatriates or,
(iv) in the case of common stock held by a person who holds more than 5% of
the stock, we are or have been, at any time within the shorter of the
five-year period preceding the sale or other disposition or the period the
non-U.S. holder held the common stock, a U.S. real property holding
corporation for U.S. federal income tax purposes. We do not believe that we
are currently a U.S. real property holding corporation or that we will
become one in the future;

(c) Interest on notes not excluded from U.S. withholding tax as
described in (a) above and dividends on common stock after conversion
generally will be a subject to U.S. withholding tax at a 30% rate, except
where an applicable tax treaty provides for the reduction or elimination of
the withholding tax.

To satisfy the certification requirements referred to in (a)(iv) above,
Sections 871(h) and 881(c) of the Code and currently effective Treasury
Regulations require that either (i) the beneficial owner of a note must certify,
under penalties of perjury, to us that the owner is a non-U.S. holder and must
provide the owner's name and address, and U.S. taxpayer identification number,
if any, or (ii) a securities clearing organization, bank or other financial
institution that holds customer securities in the ordinary course of its trade
or business and holds the note on behalf of the beneficial owner thereof must
certify, under penalties of perjury, to us that the certificate has been
received from the beneficial owner and must furnish the payor with a copy
thereof. This requirement will be fulfilled if the beneficial owner of a note
certifies on IRS Form W-8, under penalties of perjury, that it is a non-U.S.
holder and provides its name and address or any financial institution holding
the note on behalf of the beneficial owner files a statement with the
withholding agent to the effect that it has received a statement from the
beneficial owner and furnishes the withholding agent with a copy thereof.

Treasury Regulations effective for payments made after December 31, 2000,
will provide alternative methods for satisfying the certification requirements
described above and below, subject to certain grandfathering provisions. These
new regulations also require, in the case of notes held by a foreign
partnership, that (i) the certification be provided by the partners rather than
by the foreign partnership and (ii) the partnership provide certain information,
including a U.S. taxpayer identification number. A look-through rule will apply
in the case of tiered partnerships.

Provided that the certification requirements discussed below are met, if a
non-U.S. holder of a note or common stock is engaged in a trade or business in
the U.S. and if interest on the note, dividends on the common stock, or gain
realized on the sale, exchange or other disposition of the note or common stock
is effectively connected with the conduct of the trade or business, the non-U.S.
holder, although exempt from U.S. withholding tax, will generally be subject to
U.S. federal income tax on the interest, dividends or gain on a net income basis
in the same manner as if it were a U.S. holder. Instead of the certificate
described above, the non-U.S. holder will be required, under currently effective
Treasury Regulations, to provide us with a properly executed IRS Form 4224 in
order to claim an exemption from withholding tax. In addition, if the non-U.S.
holder is a foreign corporation, it may be subject to a branch profits tax equal
to

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30%, or a lower rate if provided by an applicable treaty, of its effectively
connected earnings and profits for the taxable year, subject to certain
adjustments.

U.S. Federal Estate Tax

A note held by an individual who at the time of death is not a citizen or
resident of the U.S. will not be subject to U.S. federal estate tax if the
individual did not actually or constructively own 10% or more of the total
combined voting power of all our classes of stock and, at the time of the
individual's death, payments with respect to the note would not have been
effectively connected with the conduct by the individual of a trade or business
in the U.S.

Common stock held by an individual who at the time of death is not a
citizen or resident of the U.S. will be included in the individual's estate for
U.S. federal estate tax purposes, unless an applicable estate tax treaty
otherwise applies.

Non-U.S. holders should consult with their tax advisors regarding U.S. and
foreign tax consequences with respect to the notes and common stock.

BACKUP WITHHOLDING AND INFORMATION REPORTING

Backup withholding of U.S. federal income tax at a rate of 31% may apply to
payments made in to a U.S. holder of a note or common stock if the payee is not
an "exempt recipient" and fails to provide certain identifying information in
the manner required. Generally, individuals are not exempt recipients, whereas
corporations and certain other entities are exempt recipients. Payments made in
respect of a note or common stock must be reported to the IRS, unless the U.S.
holder is an exempt recipient or otherwise establishes an exemption.

In the case of payments of interest on a note to a non-U.S. holder,
Treasury Regulations provide that backup withholding and information reporting
will not apply to payments with respect to which either requisite certification
has been received or an exemption has otherwise been established.

Dividends on the common stock paid to non-U.S. holders that are subject to
U.S. withholding tax, as described above, generally will be exempt from U.S.
backup withholding tax but will be subject to certain information reporting.

Payments of the proceeds of the sale of a note or common stock to or
through a foreign office of a broker that is a "controlled foreign corporation"
as defined in the Code, or a foreign person, 50% or more of whose gross income
from all sources for the three-year period ending with the close of its taxable
year preceding the payment was effectively connected with the conduct of a trade
or business within the U.S. are currently subject to certain information
reporting requirements. If the payee is an exempt recipient or the broker has
evidence in its records that the payee is a non-U.S. holder and no actual
knowledge that the evidence is false and certain other conditions are met, the
reporting requirements do not apply. Temporary Treasury Regulations indicate
that the payments are not currently subject to backup withholding. Under current
Treasury Regulations, payments of the proceeds of a sale of a note or common
stock to or through the U.S. office of a broker will be subject to information
reporting and backup withholding unless the payee certifies under penalties of
perjury as to his or her status as a non-U.S. holder and satisfies certain other
qualifications and provides his or her name and address or the payee otherwise
establishes an exemption.

You may credit any amounts withheld under the backup withholding rules
against your U.S. federal income tax, if the required information is furnished
to the IRS in a timely manner.

New regulations will generally be applicable to payments made after
December 31, 2000. In general, these new regulations attempt to unify current
certification procedures and forms and clarify reliance standards. Under these
new regulations, special rules apply which permit the shifting of primary
responsibility for withholding to certain financial intermediaries acting on
behalf of beneficial owners. You should consult with your tax advisor regarding
the application of the backup withholding rules to your

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particular situation, the availability of an exemption, the procedure for
obtaining an exemption and the impact of these new regulations on payments made
with respect to notes or common stock after December 31, 2000.

THE PRECEDING DISCUSSION OF CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
IS FOR YOUR GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. ACCORDINGLY, YOU
SHOULD CONSULT YOUR OWN TAX ADVISOR AS TO THE PARTICULAR U.S. FEDERAL, STATE,
AND LOCAL TAX CONSEQUENCES OF PURCHASING, HOLDING AND DISPOSING OF THE NOTES AND
COMMON STOCK. TAX ADVISORS SHOULD ALSO BE CONSULTED AS TO THE U.S. ESTATE AND
GIFT TAX CONSEQUENCES AND THE FOREIGN TAX CONSEQUENCES OF PURCHASING, HOLDING
AND DISPOSING OF THE NOTES AND COMMON STOCK, AS WELL AS THE CONSEQUENCES OF ANY
PROPOSED CHANGE IN APPLICABLE LAWS.

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UNDERWRITERS

Under the terms and subject to the conditions set forth in an underwriting
agreement between us and Morgan Stanley & Co. Incorporated, BancBoston Robertson
Stephens Inc., J.P. Morgan & Co., Inc. and Merrill Lynch, Pierce, Fenner & Smith
Incorporated dated , 1999, the underwriters have severally agreed to
purchase, and we have agreed to sell to them, $250,000,000 aggregate principal
amount of notes at the price indicated on the cover of this prospectus plus
accrued interest, if any, from , 1999 to the date of payment and
delivery. After the initial offering of the notes, the offering price and other
selling terms may from time to time be varied by the underwriters.

The underwriting agreement provides that the obligation of the underwriters
to pay for and accept delivery of the notes is subject to approval of certain
legal matters by their counsel and to certain other conditions. The underwriters
are obligated to take and pay for all of the notes offered hereby if any are
taken (other than the notes covered by the over-allotment option described
below).

We have granted to the underwriters an option, exercisable within 30 days
of the date of the underwriting agreement, to purchase up to an additional
$37,500,000 aggregate principal amount of the notes solely for the purpose of
covering over-allotments, if any.

The underwriting agreement provides that we will indemnify the underwriters
against certain liabilities, including liabilities under the Securities Act.

The underwriters have advised us that they presently intend to make a
market in the notes as permitted by applicable laws and regulations. The
underwriters are not obligated, however, to make a market in the notes and any
such market making may be discontinued at any time at the sole discretion of the
underwriters. Accordingly, no assurance can be given as to the liquidity of, or
trading markets for, the notes.

Concurrent with this offering of the notes, we are conducting a separate
offering of 5,000,000 shares of our common stock. This notes offering is not
conditioned on the completion of the offering of our common stock. We will grant
to the underwriters for the common stock offering an option, exercisable within
30 days of the date of the underwriting agreement, to purchase up to an
additional 750,000 shares of our common stock, solely for the purpose of
covering over-allotments of common stock of that offering, if any.

We and our executive officers and directors have agreed that we and they
will not (a) offer, pledge, sell, contract to sell, sell any option or contract
to purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase, lend, or otherwise transfer or dispose of, directly or
indirectly, any shares of common stock or any securities convertible into or
exercisable or exchangeable for common stock, or (b) enter into any swap or
other arrangement that transfers to another, in whole or in part, any of the
economic consequences of ownership of the common stock, whether any such
transaction described in clause (a) or (b) above is to be settled by delivery of
common stock or such other securities, in cash or otherwise for a 90-day period
after the date of this prospectus, without the prior written consent of Morgan
Stanley & Co. Incorporated, except that we may, without such consent, (i) issue
and sell the notes offered hereby, (ii) issue the common stock issuable upon
conversion of the notes offered by this prospectus and our outstanding 4 1/4%
convertible subordinated notes due 2004, (iii) issue and sell the shares of
common stock we are offering in our concurrent offering, (iv) grant options or
issue and sell stock upon the exercise of outstanding stock options or otherwise
pursuant to our stock option or employee stock purchase plans, and (v) take any
of the proscribed actions in connection with acquisitions of technologies,
businesses or portions thereof, provided that the aggregate value of our equity
securities issued or issuable in connection with such other acquisitions, as
valued when issued or agreed to be issued, whichever is earlier, does not exceed
$20 million in the aggregate (excluding any of our equity securities issued or
issuable pursuant to such other acquisitions to persons who, prior to or
simultaneous with our agreeing to make any such other acquisition, agree to be
bound by the foregoing restrictions for the remainder of the period for which we
are bound).

68
<PAGE> 70

In order to facilitate the offering of the notes and the common stock, the
underwriters may engage in transactions that stabilize, maintain or otherwise
affect the price of the notes or the common stock. Specifically, the
underwriters may over-allot in connection with the offering, creating a short
position in the notes for their own account. To cover over-allotments or
stabilize the price of the notes, the underwriters may bid for, and purchase,
the notes or shares of the common stock in the open market. Finally, the
underwriters may reclaim selling concessions allowed to an underwriter or a
dealer for distributing the notes in the offering if the underwriters repurchase
previously distributed notes in transactions to cover the underwriters's short
positions, in stabilization transactions or otherwise. In addition, the
underwriters may bid for, and purchase shares of our common stock in the open
market to cover over-allotments under the concurrent offering of our common
stock and to stabilize the price of our common stock. Any of these activities
may stabilize or maintain the market price of the notes or the common stock
above independent market levels. The underwriters are not required to engage in
these activities and may discontinue any of these activities at any time.

Certain of the underwriters have engaged in transactions with and performed
various investment banking and other services for us in the past and may do so
from time to time in the future.

BancBoston Robertson Stephens is an affiliate of BancBoston, N.A., a lender
to us under our existing credit facility, and Boston EquiServe, L.P., is the
transfer agent for our common stock.

LEGAL MATTERS

The validity of the notes offered hereby will be passed upon for us by
Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Certain legal matters will be passed upon for the underwriters by
Shearman & Sterling, Menlo Park, California.

INDEPENDENT ACCOUNTANTS

The consolidated financial statements as of December 31, 1998 and 1997, and
for each of the three years in the period ended December 31, 1998, included in
this prospectus have been audited by PricewaterhouseCoopers LLP, independent
accountants, as stated in their report appearing herein.

AVAILABLE INFORMATION

We are subject to the informational requirements of the Exchange Act and
file reports, proxy statements and other information with the Commission. Such
reports, proxy statements and other information filed by us may be inspected and
copied at the Public Reference Section of the Commission at 450 Fifth Street,
N.W., Judiciary Plaza, Washington, D.C. 20549-1004. Information on the operation
of the Public Reference Room may be obtained by calling the Commission at
1-800-SEC-0330. Reports, proxy and information statements and other information
filed electronically by us with the Commission are available at the Commission's
website at http://www.sec.gov.

TRADEMARK ACKNOWLEDGEMENTS

LSI Logic logo design, G10, The System on a Chip Company, ATMizer,
CoreWare, SeriaLink, MiniRISC, GigaBlaze and MetaStor are registered trademarks
of LSI Logic Corporation; G11, G12, Cablestream and SYMplicity 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 prospectus are the
trademarks of their respective companies.

69
<PAGE> 71

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets as of December 31, 1998 and
1997...................................................... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997 and 1996.......................... F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1998, 1997 and 1996.............. F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
Consolidated Condensed Balance Sheets as of June 30, 1999
and December 31, 1998 (unaudited)......................... F-29
Consolidated Condensed Statements of Operations for the
three and six months ended June 30, 1999 (unaudited)...... F-30
Consolidated Condensed Statements of Cash Flows for the six
months ended June 30, 1999 and 1998 (unaudited)........... F-31
Notes to Condensed Consolidated Financial Statements
(unaudited)............................................... F-32
</TABLE>

F-1
<PAGE> 72

REPORT OF INDEPENDENT ACCOUNTANTS

To the Stockholders and Board of Directors of LSI Logic Corporation

In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of stockholders' equity, and of
cash flows present fairly, in all material respects, the financial position of
LSI Logic Corporation and its subsidiaries (the "Company") at December 31, 1998
and 1997, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards 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 the opinion expressed above.

As described in Note 1, on June 22, 1999, SEEQ Technology, Inc. ("SEEQ")
merged with a wholly-owned subsidiary of LSI Logic Corporation and became a
wholly-owned subsidiary of the Company in a transaction accounted for as a
pooling of interests. The accompanying supplementary consolidated financial
statements give retroactive effect to the merger. Generally accepted accounting
principles prescribe giving effect to a consummated business combination
accounted for by the pooling of interests method in financial statements that do
not include the date of consummation. These financial statements do not extend
through the date of consummation; however, they will become the historical
consolidated financial statements of LSI Logic Corporation and its subsidiaries
after financial statements covering the date of consummation of the business
combination are issued.

In our opinion, based upon our audits, the accompanying supplementary
consolidated balance sheets and the related supplementary consolidated
statements of operations, of stockholders' equity, and of cash flows present
fairly, in all material respects, the financial position of LSI Logic
Corporation and its subsidiaries at December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audits of these statements in
accordance with generally accepted auditing standards 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 the opinion expressed
above.

/s/ PRICEWATERHOUSECOOPERS LLP

San Jose, California
February 22, 1999,
except as to the pooling of interests
with SEEQ Technology Inc.
which is as of June 22, 1999

F-2
<PAGE> 73

CONSOLIDATED BALANCE SHEETS

A S S E T S

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1998 1997
-------------- --------------
(IN THOUSANDS, EXCEPT PER-SHARE
AMOUNTS)
<S> <C> <C>
Cash and cash equivalents................................... $ 210,306 $ 114,087
Short-term investments...................................... 81,220 386,369
Accounts receivable, less allowance for doubtful accounts
of $3,537 and $2,683...................................... 249,106 215,912
Inventories................................................. 181,440 106,072
Deferred tax assets......................................... 62,699 41,034
Prepaid expenses and other current assets................... 52,250 28,432
---------- ----------
Total current assets.............................. 837,021 891,906
---------- ----------
Property and equipment, net................................. 1,486,256 1,128,023
Goodwill and other intangibles.............................. 332,779 20,852
Other assets................................................ 167,749 114,584
---------- ----------
Total assets...................................... $2,823,805 $2,155,365
========== ==========

LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable............................................ $ 195,228 $ 213,491
Accrued salaries, wages and benefits........................ 47,988 39,005
Other accrued liabilities................................... 109,236 57,767
Income taxes payable........................................ 57,993 87,304
Current portion of long-term obligations.................... 187,852 45,662
---------- ----------
Total current liabilities......................... 598,297 443,229
---------- ----------
Long-term obligations and deferred income taxes............. 695,797 120,557
---------- ----------
Minority interest in subsidiaries........................... 5,238 5,197
---------- ----------
Commitments and contingencies (Note 12)

Stockholders' equity:
Preferred shares; $.01 par value; 2,000 shares authorized... -- --
Common stock; $.01 par value; 450,000 shares authorized;
143,867 and 142,480 shares outstanding.................... 1,439 1,424
Additional paid-in capital.................................. 1,135,219 1,089,574
Retained earnings........................................... 368,378 507,856
Accumulated other comprehensive income/(loss)............... 19,437 (12,472)
---------- ----------
Total stockholders' equity........................ 1,524,473 1,586,382
---------- ----------
Total liabilities and stockholders' equity........ $2,823,805 $2,155,365
========== ==========
</TABLE>

See Notes to Consolidated Financial Statements.
F-3
<PAGE> 74

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues............................................. $1,516,891 $1,322,626 $1,271,855
Costs and expenses:
Cost of revenues................................... 884,598 694,274 716,755
Research and development........................... 291,125 229,735 187,749
Selling, general and administrative................ 226,258 196,359 171,733
Acquired in-process research and development....... 145,500 2,850 --
Restructuring of operations and other non-recurring
charges......................................... 75,400 -- --
Amortization of intangibles........................ 22,369 4,472 3,869
---------- ---------- ----------
Total costs and expenses................... 1,645,250 1,127,690 1,080,106
---------- ---------- ----------
(Loss)/income from operations........................ (128,359) 194,936 191,749
Interest expense..................................... (8,865) (1,860) (13,850)
Interest income and other............................ 7,719 34,891 30,483
---------- ---------- ----------
(Loss)/income before income taxes, minority interest
and cumulative effect of change in accounting
principle.......................................... (129,505) 227,967 208,382
Provision for income taxes........................... 9,905 60,819 57,521
---------- ---------- ----------
(Loss)/income before minority interest and cumulative
effect of change in accounting principle........... (139,410) 167,148 150,861
Minority interest in net income of subsidiaries...... 68 727 499
---------- ---------- ----------
(Loss)/income before cumulative effect of change in
accounting principle............................... (139,478) 166,421 150,362
Cumulative effect of change in accounting
principle.......................................... -- (1,440) --
---------- ---------- ----------
Net (loss)/income.................................... $ (139,478) $ 164,981 $ 150,362
========== ========== ==========
Basic earnings per share:
(Loss)/income before cumulative effect of change in
accounting principle............................ $ (0.97) $ 1.18 $ 1.15
Cumulative effect of change in accounting
principle....................................... -- (0.01) --
---------- ---------- ----------
Net (loss)/ income................................. $ (0.97) $ 1.17 $ 1.15
========== ========== ==========
Diluted earnings per share:
(Loss)/income before cumulative effect of change in
accounting principle............................ $ (0.97) $ 1.15 $ 1.08
Cumulative effect of change in accounting
principle....................................... -- (0.01) --
---------- ---------- ----------
Net (loss)/income.................................. $ (0.97) $ 1.14 $ 1.08
========== ========== ==========
Shares used in computing per share amounts:
Basic.............................................. 143,153 140,880 131,181
========== ========== ==========
Dilutive........................................... 143,153 146,446 145,423
========== ========== ==========
</TABLE>

See Notes to Consolidated Financial Statements.
F-4
<PAGE> 75

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
---------------- PAID-IN RETAINED COMPREHENSIVE
SHARES AMOUNT CAPITAL EARNINGS INCOME/(LOSS) TOTAL
------- ------ ---------- --------- ------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1995......................... 131,579 $1,316 $ 976,975 $ 192,513 $ 56,225 $1,227,029
Net income..................... 150,362
Foreign currency translation
adjustments.................. (30,821)
Total comprehensive income..... 119,541
Purchases of common stock under
stock repurchase program..... (2,077) (21) (46,817) (46,838)
Issuance to employees under
stock option and purchase
plans........................ 1,803 18 20,028 20,046
Tax benefit of employee stock
transactions................. 10,750 10,750
------- ------ ---------- --------- -------- ----------
Balances at December 31,
1996......................... 131,305 1,313 960,936 342,875 25,404 1,330,528
Net income..................... 164,981
Foreign currency translation
adjustments.................. (37,876)
Total comprehensive income..... 127,105
Purchase of common stock under
stock repurchase program..... (2,400) (24) (59,857) (59,881)
Issuance to employees under
stock option and purchase
plans........................ 1,840 19 24,420 24,439
Tax benefit of employee stock
transactions................. 11,200 11,200
Issuance of stock from
conversion of Convertible
Subordinated Notes, net of
deferred offering costs...... 11,735 117 141,591 141,708
Intrinsic value of options
issued in conjunction with
the acquisition of Mint
Technology, Inc.............. 11,283 11,283
------- ------ ---------- --------- -------- ----------
Balances at December 31,
1997......................... 142,480 1,425 1,089,573 507,856 (12,472) 1,586,382
Net loss....................... (139,478)
Foreign currency translation
adjustments.................. 31,909
Total comprehensive loss....... (107,569)
Purchase of common stock under
stock repurchase program..... (445) (4) (5,657) (5,661)
Issuance to employees under
stock option and purchase
plans........................ 1,832 18 21,724 21,742
Common stock to be issued for
litigation settlement........ 1,406 1,406
Tax benefit of employee stock
transactions................. 3,026 3,026
Fair value of options issued in
conjunction with the
acquisition of Symbios,
Inc.......................... 25,147 25,147
------- ------ ---------- --------- -------- ----------
Balances at December 31,
1998......................... 143,867 $1,439 $1,135,219 $ 368,378 $ 19,437 $1,524,473
======= ====== ========== ========= ======== ==========
</TABLE>

See Notes to Consolidated Financial Statements.
F-5
<PAGE> 76

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
--------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating activities:
Net (loss)/income.................................. $(139,478) $ 164,981 $ 150,362
Adjustments:
Depreciation and amortization.................... 227,424 168,246 148,875
Common stock issued for litigation............... 1,406
Minority interest in net income of
subsidiaries.................................. 68 727 499
Write-off of acquired in-process research and
development................................... 145,500 2,850 --
Non-cash restructuring and other related
charges....................................... 75,400 -- --
Gain on sale of equipment........................ -- (62) (10)
Gain on sale of stock investments................ (16,671) -- --
Changes in:
Accounts receivable........................... 32,744 (34,157) 42,500
Inventories................................... 6,992 (15,374) 44,076
Current deferred tax assets................... (21,665) (22,160) 5,558
Prepaid expenses and other assets............. (42,662) (10,844) 2,128
Accounts payable.............................. (67,831) 111,499 (55,660)
Accrued and other liabilities................. 21,525 38,220 14,879
--------- ----------- -----------
Net cash provided by operating activities........ 222,752 403,926 353,207
--------- ----------- -----------
Investing activities:
Purchase of debt and equity securities
available-for-sale............................ (326,979) (1,134,838) (1,117,885)
Maturities and sales of debt and equity
securities available-for-sale................. 631,755 1,319,823 1,055,183
Purchase of non-marketable equity securities..... (9,216) (10,704) (6,252)
Purchases of property and equipment, net of
retirements................................... (329,892) (513,448) (362,024)
Acquisition of Symbios, net of cash acquired..... (763,683) -- --
Proceeds from sale of stock investments.......... 23,106 -- --
Acquisition of Mint Technology, Inc., net of cash
acquired...................................... -- (6,863) --
Release of funds in escrow....................... 2,676 1,200 1,000
Acquisition of stock from minority interest
holders....................................... (599) -- (2,757)
--------- ----------- -----------
Net cash used in investing activities............ (772,832) (344,830) (432,735)
--------- ----------- -----------
Financing activities:
Proceeds from borrowings......................... 724,682 34,193 145,832
Repayment of debt obligations.................... (101,781) (90,428) (58,033)
Purchase of common stock under repurchase
program....................................... (5,661) (59,881) (46,838)
Issuance of common stock, net.................... 21,742 24,444 20,046
--------- ----------- -----------
Net cash provided by/(used in) financing
activities.................................... 638,982 (91,672) 61,007
--------- ----------- -----------
Effect of exchange rate changes on cash and cash
equivalents...................................... 7,317 (5,038) (5,670)
--------- ----------- -----------
Increase/(decrease) in cash and cash equivalents... 96,219 (37,614) (24,191)
--------- ----------- -----------
Cash and cash equivalents at beginning of period... 114,087 151,701 175,892
--------- ----------- -----------
Cash and cash equivalents at end of period......... $ 210,306 $ 114,087 $ 151,701
========= =========== ===========
Supplemental non-cash disclosures:
Conversion of subordinated debentures to common
stock......................................... $ -- $ 141,708 $ --
========= =========== ===========
Tax benefit of employee stock transactions....... $ 3,026 $ 11,200 $ 10,750
========= =========== ===========
</TABLE>

See Notes to Consolidated Financial Statements.
F-6
<PAGE> 77

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES

NATURE OF BUSINESS. LSI Logic Corporation designs, develops and
manufactures high-performance integrated circuits, including ASICs, ASSPs and
related products and services, which it markets primarily to original equipment
manufacturers in the electronic data processing, consumer electronics,
telecommunications and certain office automation industries worldwide. The
Company also markets and supports ASICs for peripheral and storage systems
connectivity, peripheral controller electronics, host adapter integrated
circuits and boards and a complete line of RAID storage systems, subsystems and
related software.

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 August 6, 1998, the Company completed the acquisition of all of the
outstanding capital stock of Symbios from Hyundai Electronics America ("HEA").
HEA is a majority-owned subsidiary of Hyundai Electronics Industries Co., Ltd.
("HEI"), a Korean corporation. The transaction was accounted for as a purchase,
and accordingly, the results of operations of Symbios and estimated fair value
of assets acquired and liabilities assumed were included in the Company's
consolidated financial statements as of August 6, 1998, the effective date of
the purchase, through the end of the period. The acquisition of Symbios is
discussed further in Note 2 of Notes to the Consolidated Financial Statements.
There are no significant differences between the accounting policies of the
Company and Symbios.

On June 22, 1999, the Company completed a merger of Stealth Acquisition
Corporation, a wholly-owned subsidiary of the Company, with SEEQ Technology,
Inc. ("SEEQ") in a transaction accounted for as a pooling of interests, and SEEQ
became a wholly-owned subsidiary of the Company. All financial information has
been restated retroactively to reflect the combined operations of the Company
and SEEQ as if the merger had occurred at the beginning of the earliest period
presented (see Note 8). Prior to the merger, SEEQ's fiscal year-end was the last
Sunday in September of each year whereas the Company operates on a 52/53 week
fiscal year ending on December 31. SEEQ's financial information has been recast
to conform to the Company's year-end.

Minority interest in subsidiaries represents the minority stockholders'
proportionate share of the net assets and results of operations of the Company's
majority-owned subsidiaries. Sales of common stock of the Company's subsidiaries
and purchases of such shares may result in changes in the Company's
proportionate share of the subsidiaries' net assets. The Company reflects such
changes as an element of additional paid-in-capital.

During 1997, the Company changed its fiscal year from a 52-53 week year to
a year ending December 31. In 1996, the year ended on the Sunday closest to
December 31. For presentation purposes, the consolidated financial statements
and notes refer to December 31 as year end. Fiscal years 1998 and 1996 were
52-week years while fiscal year 1997 was a 53-week year.

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 financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

F-7
<PAGE> 78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Certain items previously reported in specific financial statement captions
have been reclassified to conform with the 1998 presentation.

CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS. All highly liquid investments
purchased with an original maturity of ninety days or less are considered to be
cash equivalents and are classified as held-to-maturity. Marketable short-term
investments are 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-to-maturity are reported at amortized
cost and securities available-for-sale are reported at fair value with
unrealized gains and losses, net of related tax, if any, reported as a separate
component of comprehensive income. Unrealized gains and losses at December 31,
1998 and 1997 were not significant. Realized gains and losses are based on the
book value of specific securities at the time of sale. Realized gains and losses
are included in interest income and other and were not significant during 1998,
1997 and 1996.

CONCENTRATION OF CREDIT RISK OF FINANCIAL INSTRUMENTS. Financial
instruments which 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 and consumer electronics manufacturers,
with the remainder distributed across other industries. Amounts due from one of
the Company's customers accounted for 17% and 26% of trade receivables at
December 31, 1998 and 1997, respectively. During 1998 and 1997, the Company sold
throughout the year approximately $77 million and $177 million (discounted at
short-term yen borrowing rates, averaging 0.4% in 1998 and in 1997),
respectively, of its Japanese sales affiliate's accounts receivable through
financing programs with certain Japanese banks. Related transaction costs were
not significant. 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. The Company performs ongoing credit evaluations of its
customers' financial condition and requires collateral as considered necessary.
Write-offs of uncollectible amounts have not been significant.

FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS. The estimated fair value
amounts have been 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. The book value of the new debt at December 31, 1998 approximates fair
value as the debt is at adjustable rates. (See Note 4 to the Notes.) The
estimated fair value of financial instruments at December 31, 1997 was not
significantly different from the values presented in the consolidated balance
sheets.

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.

PROPERTY AND EQUIPMENT. Property and equipment are recorded at cost and
includes interest on funds borrowed. Depreciation and amortization are
calculated based on the straight-line method. Depreciation of equipment and
buildings, in general, is computed using the assets' estimated useful lives as
presented below:

<TABLE>
<S> <C>
Buildings and improvements........................... 20 - 40 years
Equipment............................................ 2 - 6 years
Furniture and fixtures............................... 3 - 6 years
</TABLE>

F-8
<PAGE> 79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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. Incremental costs incurred in connection
with developing major production capabilities at new manufacturing plants,
including facility carrying costs and costs to qualify production processes, are
capitalized and amortized over the expected useful lives of the manufacturing
processes utilized in the plants, generally four years. Amortization commences
when the manufacturing plant is capable of volume production, which is generally
characterized by meeting certain reliability, defect density and service cycle
time criteria defined by management. In April of 1998, the Accounting Standards
Executive Committee of the AICPA released SOP No. 98-5, "Reporting on the Costs
of Start-up Activities." SOP No. 98-5 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. The Company will expense the
unamortized preproduction balance of $92 million, net of tax on January 1, 1999
and present it as a cumulative effect of a change in accounting principle in
accordance with SOP No. 98-5. The preproduction costs are included in property
and equipment at December 31, 1998 and 1997. The Company recorded approximately
$2 million in amortization of preproduction costs in 1998 related to the new
fabrication facility in Gresham, Oregon.

SOFTWARE. The Company capitalizes substantially all 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 life of the project,
typically a two to five year period. The Company had $62 million and $47 million
of capitalized software costs, net of amortization, included in other assets at
December 31, 1998 and 1997, respectively. Software amortization totaling $17
million, $15 million and $16 million was included in the Company's results of
operations during 1998, 1997 and 1996, respectively.

On November 21, 1997, the Emerging Issues Task Force issued EITF No. 97-13,
"Accounting for costs incurred in connection with a consulting contract or an
internal project that combines business process re-engineering and information
technology transformation." EITF No. 97-13 required that the Company change its
accounting policy to expense, in the fourth quarter of 1997, all costs
previously capitalized in connection with business process re-engineering
activities as defined by the statement. The Company recorded a charge of $1.4
million, net of related tax of $0.6 million, during the fourth quarter of 1997.
The charge reduced basic and diluted earnings per share by one cent for the
quarter and year ended December 31, 1997.

OTHER ASSETS. Goodwill and other intangibles acquired in connection with
the acquisition of Symbios on August 6, 1998 (See Note 2 of Notes to the
Consolidated Financial Statements), the purchase of Mint Technology, Inc. in
1997 and the purchase of common stock from minority stockholders (See Note 8 of
Notes to the Consolidated Financial Statements) of approximately $369 million
and $35 million, and related accumulated amortization of $36 million and $14
million, are included in other assets at December 31, 1998 and 1997,
respectively. 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, workforce in place, trademarks and goodwill, which are
being amortized over a weighted average life of eight years. Goodwill and other
intangibles are evaluated for impairment based on the related estimated
undiscounted cash flows.

At December 31, 1998 and 1997, the Company had $8 million and $20 million
invested in restricted shares of Chartered Semiconductor Manufacturing Pte. Ltd.
("CSM"), respectively. Transfer of the shares is restricted for five years or
until the listing of CSM stock upon a recognized stock exchange, whichever
occurs sooner. The Company also had $11 million in a number of other non-public
technology companies for both years ended December 31, 1998 and 1997. In the
third quarter of 1998, the Company wrote-down

F-9
<PAGE> 80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

to estimated fair values two long-term equity investments. This included a
write-down of $11.9 million in its investment in CSM and a $2.4 million
write-down of its investment in a technology company. The estimated fair values
for these investments were based on third party financings by CSM and management
analysis of the two companies financial statements. The decline in values was
considered by management to be other than temporary. In the fourth quarter of
1998, the Company recognized a gain of $16.7 million on proceeds of $23.1
million related to the sale of one of its investments in a technology Company.
The carrying value of the investment was approximately $6.4 million. All
investments are recorded as long-term assets at cost less adjustments made for
other than temporary declines in value and the Company believes that the fair
value of the investments is equal to or greater than their carrying values at
December 31, 1998 and 1997.

REVENUE RECOGNITION. 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.

One customer accounted for 12%, 22% and 14% of consolidated revenues in
1998, 1997 and 1996, respectively.

STOCK-BASED COMPENSATION. The Company accounts for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion ("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
Notes to the Consolidated Financial Statements.)

INCOME PER SHARE Basic 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
purchased from the exercise of stock

F-10
<PAGE> 81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

options. A reconciliation of the numerators and denominators of the basic and
diluted per share computations as follows (in thousands, except per share
amounts):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------- ------------------------------ ------------------------------
PER-SHARE PER-SHARE PER-SHARE
INCOME* SHARES+ AMOUNT INCOME* SHARES+ AMOUNT INCOME* SHARES+ AMOUNT
--------- ------- --------- -------- ------- --------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net (loss)/income before
cumulative effect of
change in accounting
principle................. $(139,478) 143,153 $(0.97) $166,421 140,880 $ 1.18 $150,362 131,181 $ 1.15
------ ------ ------
Cumulative effect of change
in accounting principle... -- -- (1,440) 140,880 (0.01) -- --
Net (loss)/ income available
to common stockholders.... (139,478) 143,153 (0.97) 164,981 140,880 1.17 150,362 131,181 1.15
------ ------ ------
Effect of dilutive
securities:
Stock options............. -- 2,816 2,507
5 1/2% Convertible
Subordinated Notes...... -- -- 1,279 2,750 6,166 11,735
Diluted EPS:
Net (loss)/income before
cumulative effect of
change in accounting
principle (adjusted for
assumed conversion of
debt)..................... (139,478) 143,153 (0.97) 167,700 146,446 1.15 156,528 145,423 1.08
------ ------ ------
Cumulative effect of change
in accounting principle... -- -- -- (1,440) 146,446 (0.01) -- --
------
Net (loss)/income available
to common stockholders.... $(139,478) 143,153 $(0.97) $166,260 146,446 $ 1.14 $156,528 145,423 $ 1.08
------ ------ ------
</TABLE>

- ---------------
* Numerator

+ Denominator

Options to purchase approximately 20,117,000, 4,065,000, and 3,194,000
shares were outstanding at December 31, 1998, 1997 and 1996, respectively, but
were not included in the computation because the exercise prices were greater
than the average market price of common shares in 1997 and 1996. In 1998, all
options were excluded from the calculation because of their antidilutive effect
on earnings per share. The exercise price ranges of these options were $1.98 to
$58.13, $32.00 to $103.75 and $30.50 to $103.75 at December 31, 1998, 1997 and
1996, respectively.

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.

COMPREHENSIVE INCOME. In 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." Comprehensive income is defined as the 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, is due to foreign currency translation
adjustments. Comprehensive income is being shown in the statement of
stockholders' equity.

SEGMENT REPORTING. In 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 131
supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise," replacing the "industry segment" approach with the "management"
approach. The management approach designates the internal organization that is
used by management for making operating decisions and assessing performance as
the source of the Company's reportable segments. SFAS No. 131 also requires
disclosures about products and services, geographic areas, and major customers.
The adoption of SFAS No. 131 did not affect results of the Company's

F-11
<PAGE> 82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

operations or financial position or the segments reported in 1998. (See Note 11
of Notes to the Consolidated Financial Statements.)

NOTE 2 -- ACQUISITION OF SYMBIOS

The Company completed the acquisition of all of the outstanding capital
stock of Symbios from HEA on August 6, 1998.

The Company paid approximately $767 million in cash for all of the
outstanding capital stock of Symbios. The Company additionally paid
approximately $6 million in direct acquisition costs and accrued an additional
$6 million as payable to HEA relating to the resolution of certain obligations
outlined in the Stock Purchase Agreement which were resolved in February of 1999
without a change to the accrual. The purchase was financed using a combination
of cash reserves and a new credit facility bearing interest at adjustable rates.
(See Note 4 of Notes to the Consolidated Financial Statements.) In addition, the
Company assumed all of the options outstanding under Symbios' 1995 Stock Plan
with a calculated Black-Scholes value of $25 million. The total purchase price
of Symbios was $804 million.

The total purchase price of $804 million was allocated to the estimated
fair value of assets acquired and liabilities assumed based on an independent
appraisal and management estimates.

The total purchase price was allocated as follows (in millions):

<TABLE>
<S> <C>
Fair value of property, plant and equipment................. $252
Fair value of other tangible net assets..................... 72
In-process research and development......................... 146
Current technology.......................................... 214
Assembled workforce and trademarks.......................... 37
Residual goodwill........................................... 83
----
$804
====
</TABLE>

SYMBIOS INTEGRATION. The Company has taken certain actions to combine the
Symbios operations with LSI Logic and, in certain instances, to consolidate
duplicative operations. Adjustments to accrued integration costs related to
Symbios were recorded as an adjustment to the fair value of net assets in the
purchase price allocation. The Company finalized the integration plan as of
December 31, 1998. Accrued integration charges include $4 million related to
involuntary separation and relocation benefits for approximately 300 Symbios
positions and $1.4 million in other exit costs primarily relating to the closing
of Symbios sales offices and the termination of certain contractual
relationships. The Symbios integration related accruals are based upon
management's current estimate of integration costs and are in accordance with
EITF No. 95-3, "Recognition of Liabilities in Connection with a Purchase
Business Combination."

The following table sets forth the Company's 1998 integration activity from
August 6, 1998 to December 31, 1998:

<TABLE>
<CAPTION>
AUGUST 6, 1998 DECEMBER 31,
INTEGRATION OF 1998
SYMBIOS UTILIZED BALANCE
-------------- -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Payments to employees for severance and relocation(a)... $4,000 $(1,640) $2,360
Other exit costs(a)..................................... 1,437 (435) 1,002
------ ------- ------
Total......................................... $5,437 $(2,075) $3,362
====== ======= ======
</TABLE>

- ---------------
(a) Amounts utilized represent cash charges.

The utilization of the Symbios integration reserve of $2.1 million during
the period August 6, 1998 to December 31, 1998 relates primarily to payments of
$1.6 million to 47 employees for severance and

F-12
<PAGE> 83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

relocation and $0.4 million for payments to third parties to terminate certain
contractual relationships. No significant adjustments were made to this reserve
during the year. The Company expects to complete the activities underlying the
integration plan by June 1999.

IN-PROCESS RESEARCH AND DEVELOPMENT. The Company reduced its estimate of
the amount allocated to in-process research and development ("IPR&D") by $79.3
million from the $224.8 million amount previously reported in the third quarter
of 1998 to $145.5 million for the year ended December 31, 1998. Amortization of
intangibles increased by $4.3 million from $18.1 million to $22.4 million for
the year ended December 31, 1998. The basic loss per share and loss per share
assuming dilution decreased from $1.51 to $0.97 for the year ending December 31,
1998.

The amount allocated to IPR&D and intangible assets in the third quarter of
1998 was made in a manner consistent with widely recognized appraisal practices
at the date of acquisition of Symbios. Subsequent to the acquisition, the SEC
staff expressed views that took issue with certain appraisal practices generally
employed in determining the fair value of the in-process research and
development that was the basis for the Company's measurement of its in-process
research and development charge. The charge of $224.8 million, as first reported
by the Company, was based upon assumptions and appraisal methodologies the SEC
has since announced it does not consider appropriate.

As a result of computing in-process research and development using the SEC
preferred methodology, the Company decided to revise the amount originally
allocated to in-process research and development. The Company has revised
earnings for the third quarter of 1998 and has amended its Report on Form 10-Q
and Report on Form 8-K/A previously filed with the Securities Exchange
Commission. The revised quarterly results for the third and fourth quarter of
1998 are included in this Annual Report on Form 10-K/A under Part II, Item 8
"Financial Statements and Supplementary Data."

The $145.5 million allocation of the purchase price to IPR&D was determined
by identifying research projects in areas for which technological feasibility
had not been established and no alternative future uses existed. We acquired
technology consisting of storage and semiconductor research and development
projects in process. The storage projects consist of designing controller
modules, a new disk drive and a new version of storage management software with
new architectures to improve performance and portability. The semiconductor
projects consist of client/server products being designed with new architectures
and protocols and a number of ASIC and peripheral products that are being custom
designed to meet the specific needs of specific customers. The amounts of
in-process research and development allocated to each category of projects was
$50.7 million for storage projects, $69.1 million for client/server projects and
$25.7 million for ASIC and peripheral projects.

The percentage of completion for each project was determined using
milestones representing management's estimate of effort, value added, and degree
of difficulty of the portion of each project completed as of August 6, 1998, as
compared to the remaining research and development to be completed to bring each
project to technical 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; the design and verification milestones; and the third
phase of prototyping and testing the product (both internal to the Company and
customer testing). Each of these phases has been subdivided into milestones and
then the status of each of the projects was evaluated as of August 6, 1998. We
estimate as of the acquisition date, the storage projects in aggregate are
approximately 74% complete, semiconductor projects are approximately 60%
complete for client/server projects and 55% complete for ASIC and peripheral
projects.

However, development of these technologies remains a significant risk to
the Company due to the remaining effort to achieve technical feasibility,
rapidly changing customer markets and significant competitive threats from
numerous companies. Failure to bring these products to market in a timely manner
could adversely affect sales and profitability of the combined company in the
future. Additionally, the value of other intangible assets acquired may become
impaired. Company management believes that
F-13
<PAGE> 84
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

the restated in-process research and development charge of $145.5 million is
valued consistently with the SEC staff's current views regarding valuation
methodologies. There can be no assurances, however, that the SEC staff will not
take issue with any assumptions used in the Company's valuation model and
require the Company to further revise the amount allocated to in-process
research and development.

USEFUL LIVES OF INTANGIBLE ASSETS. The estimated weighted average useful
life of the intangible assets for current technology, assembled workforce,
trademarks and residual goodwill, created as a result of the acquisition, is
approximately eight years.

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 Symbios been a consolidated entity during the
periods presented. The summary combines the results of operations as if Symbios
had been acquired as of the beginning of the periods presented.

The summary includes the impact of certain adjustments such as goodwill
amortization, changes in depreciation, estimated changes in interest income
because of cash outlays associated with the transaction and elimination of
certain notes receivable assumed to be repaid as of the beginning of the periods
presented, changes in interest expense because of the new debt entered into with
the purchase (see discussion in Note 4 of the Notes) and the repayment of
certain debt assumed to be repaid as of the beginning of the periods presented.
Additionally, in-process research and development of $145.5 million discussed
above has been excluded from the periods presented as it arose from the
acquisition of Symbios. The restructuring charge of $75.4 million did not relate
to the acquisition of Symbios (see Note 3 of the Notes) and accordingly was
included in the preparation of the pro forma results.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1998 1997
---------- ----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT
PER-SHARE AMOUNTS)
<S> <C> <C>
Revenue............................................. $1,875,247 $1,942,095
Net income.......................................... $ (4,843) $ 136,657
Basic EPS........................................... $ (0.03) $ 0.97
Diluted EPS......................................... $ (0.03) $ 0.94
</TABLE>

NOTE 3 -- RESTRUCTURING

The Company remains committed to improving profitability and strengthening
competitiveness. As a result of identifying opportunities to streamline
operations and maximize the integration of Symbios into the Company's
operations, the Company's management, with the approval of the Board of
Directors, committed itself to a restructuring plan and recorded a $75.4 million
restructuring charge in the third quarter of 1998. The action undertaken
included a worldwide realignment of manufacturing capacity, the consolidation of
certain design centers and administrative offices, and a streamlining of the
Company's overhead structure to reduce operating expenses. The restructuring
charge excludes any integration costs relating to Symbios. As discussed in Note
2 of Notes to the Consolidated Financial Statements, integration costs relating
to Symbios was accrued as a liability assumed in the purchase in accordance with
EITF No. 95-3.

Restructuring costs include $37.2 million related primarily to fixed assets
impaired as a result of the decision to close, by the third quarter of 1999, a
manufacturing facility in Tsukuba, Japan; $4.7 million for terminations of
leases and maintenance contracts primarily in the U.S. and Europe; $1.7 million
for non-cancelable purchase commitments primarily in Europe; $13.1 million in
fixed asset and other asset write-downs primarily in the U.S., Japan and Europe;
approximately $2.4 million in other exit costs, which result principally from
the consolidation and closure of certain design centers, sales and
administrative offices primarily in the U.S. and Europe; and work force
reduction costs of $16.3 million. Other exit costs include

F-14
<PAGE> 85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

$0.9 million related to payments made for early leave contract terminations and
the write-down of surplus assets to their estimated realizable value; $0.7
million for the write-off of excess licenses for closed locations in Europe and
$0.8 million of other exit costs associated with the consolidation of design
centers worldwide. The workforce reduction costs primarily include severance
costs related to involuntary termination of employment for approximately 900
employees from manufacturing in Japan, and engineering, sales, marketing and
finance personnel located primarily in the U.S., Japan and Europe. The fair
value of assets determined to be impaired in accordance with the guidance for
assets to be held and used in SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of," were the result
of independent appraisals and use of management estimates. Severance costs and
other above noted exit costs were determined in accordance with EITF No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity." The restructuring actions, as outlined by the plan, are
intended to be executed to completion by September 30, 1999, one year from the
date the reserve was taken.

The following table sets forth the Company's 1998 restructuring reserves as
of September 30, 1998 and activity against the reserve for the three month
period ending December 31, 1998:

<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
RESTRUCTURING TRANSLATION BALANCE
EXPENSE UTILIZED ADJUSTMENT 12/31/98
------------------ -------- ----------- --------
<S> <C> <C> <C> <C>
Write-down of manufacturing facility(a).......... $37,200 $(35,700) $ -- $ 1,500
Other fixed asset related charges(a)............. 13,100 (13,100) -- --
Payments to employees for severance(b)........... 16,300 (4,700) -- 11,600
Lease terminations and maintenance
contracts(c)................................... 4,700 (100) -- 4,600
Noncancelable purchase commitments (c)........... 1,700 (100) -- 1,600
Other exit costs(c).............................. 2,400 (1,200) -- 1,200
Cumulative currency translation adjustment....... 1,512 1,512
------- -------- ------ -------
Total................................... $75,400 $(54,900) $1,512 $22,012
======= ======== ====== =======
</TABLE>

(b) Amounts utilized represent cash payments related to the severance of
approximately 290 employees.

NOTE 4 -- DEBT

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Notes payable to banks...................................... $739,774 $111,242
Capital lease obligations................................... 7,749 4,766
-------- --------
747,523 116,008
Current portion of long-term debt, capital lease obligations
and short-term borrowings................................. (187,852) (45,662)
-------- --------
Long-term debt and capital lease obligations................ $559,671 $ 70,346
======== ========
</TABLE>

F-15
<PAGE> 86
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

agreement consists 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 August 5, 1998, the Company borrowed $150 million under the 364 day
Facility and $485 million under the Revolver. On December 22, 1998, the Company
borrowed an additional $30 million under the Revolver. The credit facilities
allow for borrowings at adjustable rates of LIBOR/TIBOR with a 1.25% spread. As
of December 31, 1998, the interest rate for the 364 day Facility and the
Revolver ranged from 6.65% to 6.82%. Interest payments are due quarterly. The
364 day Facility expires on August 3, 1999 at which time borrowings outstanding
are payable in full. The Revolver is for a term of four years with the principal
reduced quarterly beginning on December 31, 1999. The Revolver includes a term
loan sub-facility in the amount of 8.6 billion yen made available to JSI over
the same term. The yen term loan sub-facility is for a period of four years with
no required payments until it expires on August 5, 2002. As of December 31,
1999, the interest rate for the yen sub-facility was 1.99%. Pursuant to the
restated credit agreement, on August 30, 1998, JSI repaid it's existing 11.4
billion yen (US$79.2 million) credit facility and borrowed 8.6 billion yen
(US$74 million at December 31, 1998) bearing interest at adjustable rates.
Borrowings outstanding under the 364 day Facility and the Revolver including the
yen sub-facility were $740 million as of December 31, 1998. JSI also had
borrowings outstanding of approximately 85 million yen (US$0.7 million) at
December 31, 1998. The Company paid approximately $3.8 million in debt issuance
costs related to the new debt facility. This amount was capitalized as an other
asset and is being amortized over the life of the credit facility.

The Company, in accordance with the new credit arrangement, must comply
with certain financial covenants related to profitability, tangible net worth,
liquidity, senior debt leverage, debt service coverage and subordinated
indebtedness. At December 31, 1998, the Company was in compliance with these
covenants.

In February 1997, the Company called for redemption of its $144 million,
5 1/2% Convertible Subordinated Notes ("Convertible Notes") which were
outstanding at December 31, 1996. The Convertible Notes were converted at a
price of $12.25 per share resulting in the issuance of 11,735,000 shares of
common stock. The redeemed value of the Convertible Notes of $142 million, net
of deferred offering costs, was recorded as part of stockholders' equity.

In December 1996, the Company entered into a credit arrangement with
several banks for a $300 million revolving line of credit expiring in December
1999. The Company canceled this agreement on July 31, 1998.

Aggregate principal payments required on outstanding debt and capital lease
obligations are $188 million, $139 million, $105 million, $315 million, and $0.5
million for 1999, 2000, 2001, 2002, and thereafter respectively.

The Company paid $9 million, $9 million and $17 million in interest during
1998, 1997 and 1996, respectively.

F-16
<PAGE> 87
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5 -- CASH AND INVESTMENTS

Cash and cash equivalents and short-term investments included the following
debt and equity securities at December 31:

<TABLE>
<CAPTION>
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents
Overnight deposits.......................................... $ 82,591 $ 30,724
Commercial paper............................................ 44,803 11,955
Corporate debt securities................................... -- 10,384
Time deposits............................................... -- 5,409
Other....................................................... -- 8,319
-------- --------
Total held-to-maturity............................ 127,394 66,791
Cash........................................................ 82,912 47,296
-------- --------
Total cash and cash equivalents................... $210,306 $114,087
======== ========
Short-term investments
Corporate debt securities................................... $ 34,545 $138,143
Time deposits............................................... 24,934 102,165
U.S. government and agency securities....................... 5,065 69,294
Commercial paper............................................ -- 44,735
Bank notes.................................................. 11,663 18,207
Auction rate preferred...................................... 5,013 13,825
-------- --------
Total available-for-sale.......................... $ 81,220 $386,369
======== ========
</TABLE>

Cash and cash equivalents and short-term investments held at December 31,
1998 and 1997 approximate fair market value. As of December 31, 1998,
contractual maturities of available-for-sale securities are within one year.

NOTE 6 -- FINANCIAL INSTRUMENTS

The Company has foreign subsidiaries which 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 contract, currency swap,
interest rate swap and currency option contracts, to manage its exposure
associated with firm intercompany and third-party transactions and net asset and
liability positions denominated in non-functional currencies. The Company does
not hold derivative financial instruments for speculative or trading purposes.

On August 5, 1998, the Company recognized a loss of $1.5 million from the
decision to close interest rate swap contracts which converted the interest
associated with yen borrowings by JSI from adjustable to fixed rates. The
contracts were closed because the underlying debt was repaid as discussed in
Note 4 of Notes to the Consolidated Financial Statements. Current period gains
and losses associated with the interest rate swaps are included in interest
expense, or as other gains and losses at such time as related borrowings are
terminated. At December 31, 1998, there were no interest rate swap contracts
outstanding, however, the Company may enter into interest rate swaps in the
future. As of December 31, 1997, the Company had several interest rate swap
contracts outstanding which convert the interest associated with 14 billion yen
(US$109 million) of borrowings by the Company's Japanese manufacturing
subsidiary from adjustable to fixed rates (ranging from 1.75% to 2.46%). The
interest rate swaps covered payments to be made under term borrowings through
2001.

The Company enters into forward contracts, currency swaps and currency
option contracts to hedge firm commitments, intercompany transactions and third
party exposures. The forward and currency swap

F-17
<PAGE> 88
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

contracts hedging firm intercompany asset and liability positions denominated in
non-functional currencies expired on the last day of the year ended December 31,
1998 and year ended December 31, 1997. Forward contracts are considered
identifiable hedges and realized and unrealized gains and losses are deferred
until settlement of the underlying commitments. They are recorded as other gains
or losses when a hedged transaction is no longer expected to occur. Deferred
foreign gains and losses were not significant at December 31, 1998 and 1997,
respectively. Foreign currency transaction gains and losses included in interest
income and other were insignificant for the year ended December 31, 1998 and
1997, respectively.

At December 31, 1998, total outstanding purchased currency option contracts
were $130 million. These contracts expire quarterly through June 1999. These
currency options were treated as hedges of third-party yen revenue exposures.
The realized and unrealized gains and option premiums are deferred until the
exposure underlying the option is recorded. The deferred premiums on all
outstanding options were $5.5 million as of December 31, 1998 and included in
other current assets. The Company closed option contracts not qualifying for
hedge accounting treatment during the third quarter of 1998 at a gain of $0.7
million.

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." 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. The statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. Upon adoption of SFAS No. 133, the Company will
be required to adjust hedging instruments to fair value in the balance sheet,
and recognize the offsetting gain or loss as transition adjustments to be
reported in net income or other comprehensive income, as appropriate, and
presented in a manner similar to the cumulative effect of a change in accounting
principle. While the Company believes the adoption of this statement will not
have a significant effect on the Company's results of operations as most
derivative instruments are closed on the last day of each fiscal quarter, the
impact of the adoption of SFAS No. 133 as of the effective date cannot be
reasonably estimated at this time.

F-18
<PAGE> 89
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7 -- BALANCE SHEET DETAIL

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Inventories:
Raw materials............................................. $ 32,347 $ 19,892
Work-in-process........................................... 53,042 60,136
Finished goods............................................ 96,051 26,044
---------- ----------
$ 181,440 $ 106,072
========== ==========
Property and equipment:
Land...................................................... $ 50,278 $ 39,885
Buildings and improvements................................ 459,157 145,297
Equipment................................................. 1,349,443 865,203
Leasehold improvements.................................... 56,898 47,242
Preproduction engineering................................. 97,356 58,972
Furniture and fixtures.................................... 49,707 39,391
Construction in progress.................................. 210,426 557,350
---------- ----------
2,273,265 1,753,340
Accumulated depreciation and amortization................... (787,009) (625,317)
---------- ----------
$1,486,256 $1,128,023
========== ==========
</TABLE>

The Company had $97 million and $34 million of unamortized preproduction
engineering costs at December 31, 1998 and 1997, respectively, associated with
the construction of a new manufacturing facility in Gresham, Oregon. This new
facility became operational as of December 1, 1998, at which time capitalized
preproduction began to be amortized over the expected useful life of the
manufacturing technology of approximately four years. In April 1998, the
Accounting Standards Executive Committee released SOP No. 98-5, "Reporting on
the Costs of Start-up Activities." SOP No. 98-5 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. The Company will
expense the unamortized preproduction balance of $92 million, net of tax on
January 1, 1999 and present it as a cumulative effect of a change in accounting
principle in accordance with SOP No. 98-5. The preproduction costs are included
in property and equipment at December 31, 1998 and 1997.

Accumulated amortization for preproduction engineering was $27 million and
$25 million at December 31, 1998 and 1997, respectively. Capitalized interest
included within property and equipment totaled $29 million and $17 million at
December 31, 1998 and 1997, respectively. Accumulated amortization of
capitalized interest was $9 million and $7 million at December 31, 1998 and
1997, respectively.

During 1997, the Company dispositioned assets held for sale with a carrying
amount of $15 million that were associated with the 1996 shutdown of the
Milpitas wafer manufacturing facility. In August 1997, approximately $5.6
million of the Milpitas equipment held for sale was transferred to another
facility within the Company as it was determined that the equipment could be
used to meet current capacity requirements.

NOTE 8 -- PURCHASES OF MINORITY INTEREST AND OTHER ACQUISITIONS

F-19
<PAGE> 90
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

over eight years using the straight-line method. The Company owned approximately
93% of the Japanese affiliate at December 31, 1998. There were no minority
interest purchases during 1997. As of December 31, 1997, the Company owned 92%
of the Japanese affiliate and 100% of the U.K. affiliate.

During 1996, the Company acquired 117,000 common shares of its Japanese
sales affiliate from its minority interest shareholders for approximately $0.7
million. In December 1996, the Company acquired the remaining minority shares
outstanding of its European sales affiliate, LSI Logic Europe, Ltd. (formerly
LSI Logic Europe, plc) for $2 million. These acquisitions were accounted for as
purchases and the excess of the purchase price over the fair value of the assets
acquired of $2 million was allocated to goodwill and is being amortized over
seven years. As of December 31, 1996, the Company owned approximately 92% of the
Japanese affiliate and 100% of the U.K. affiliate.

BUSINESS COMBINATION

On June 22, 1999, the Company completed a merger of Stealth Acquisition
Corporation, a wholly-owned subsidiary of the Company with SEEQ Technology, Inc.
("SEEQ"), and SEEQ became a wholly-owned subsidiary of the Company. The
stock-for-stock transaction was approved by the shareholders of SEEQ, after
which SEEQ was merged with and into LSI Logic Corporation, with LSI Logic
Corporation continuing as the surviving corporation in the merger. As a result
of the merger, the separate existence of SEEQ ceased. Under the merger
agreement, each outstanding share of SEEQ common stock was converted into the
right to receive 0.0759 LSI Logic Corporation common shares and resulted in the
issuance of 2.5 million shares. SEEQ stock options outstanding as of the merger
date were converted to options to acquire 0.4 million shares. This transaction
has been accounted for as a pooling of interests, and accordingly, financial
information for periods prior to the merger reflect retroactive restatement of
the companies' combined financial position and operating results. For periods
preceding the merger, there were no intercompany transactions which required
elimination from the combined consolidated results of operations and there were
no significant adjustments necessary to conform the accounting practices of the
two companies.

Selected financial information for the combining entities included in the
consolidated statements of income for the three months ended March 31, 1999
(unaudited) and the two years ended December 31, 1998 and 1997 are as follows
(in thousands):

<TABLE>
<CAPTION>
FOR THE PERIOD
-----------------------------------------
MARCH 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
--------- ------------ ------------
<S> <C> <C> <C>
Net sales
LSI Logic Corp......................................... $463,617 $1,490,701 $1,290,275
SEEQ................................................... 6,780 26,190 32,351
-------- ---------- ----------
Combined............................................... $463,617 $1,516,891 $1,322,626
======== ========== ==========
Net income
LSI Logic Corp......................................... $(86,902) $ (131,632) $ 159,248
SEEQ................................................... (862) (7,846) 5,733
Integration/Restructuring charge(a).................... (2,600) -- --
-------- ---------- ----------
Combined............................................... $(90,364) $ (139,478) $ 164,981
======== ========== ==========
</TABLE>

(a) The integration and restructuring charge of $3.4 million, after related
income tax effects, reduced earnings of the combined company by $2.6
million.

F-20
<PAGE> 91
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

application-specific integrated circuits and field programmable gate array based
system designs. The acquisition was accounted for as a purchase. The acquisition
price consisted of $9.5 million in cash and options to purchase approximately
681,726 shares of common stock with an intrinsic value of $11.3 million. The
intrinsic value of the stock is being expensed over four years. Approximately
$2.9 million of the purchase price was allocated to in-process research and
development and was expensed in the third quarter of 1997. Total goodwill
recorded as part of the acquisition was $5.7 million and is being amortized over
four years. Pro forma results of operations have not been presented as the
amounts would not significantly differ from the Company's historical results.
The nature of the projects in process at the date of acquisition related to
computer aided design tools, in particular, those that would be used for
functional verification of the chip design. The additional costs to complete the
tools were approximately $850,000 and were completed in the fourth quarter of
1997. The actual development timeline and costs were in line with estimates.

NOTE 9 -- COMMON STOCK

The following summarizes all shares of common stock reserved for issuance
as of December 31, 1998:

<TABLE>
<CAPTION>
NUMBER OF SHARES
----------------
(IN THOUSANDS)
<S> <C>
Issuable upon:
Exercise of stock options, including options available for
grant..................................................... 24,639
Purchase under Employee Stock Purchase Plan................. 550
------
25,189
======
</TABLE>

The Company's Board of Directors approved an action which authorizes
management to acquire up to 5 million and 4 million shares of its own stock in
the open market at current market prices in August 1997 and February 1996,
respectively. Accordingly, the Company repurchased 445,000 and 2.4 million
shares of its common stock from the open market for approximately $5.7 million
and $60 million in 1998 and 1997, respectively. The transactions were recorded
as reductions to common stock and additional paid-in capital. The authorization
for stock repurchases was rescinded by the Company's Board of Directors in
February of 1999.

STOCK OPTION PLANS. The Company's 1982 Incentive Stock Option Plan ("1982
Option Plan") is administered by the Board of Directors. Terms of the 1982
Option Plan required that the exercise price of options be no less than the fair
value at the date of grant and required that options be granted only to
employees or consultants of the Company. Generally, options granted vest in
annual increments of 25% per year commencing one year from the date of grant and
have a term of ten years. During 1992, the 1982 Option Plan expired by its
terms. Accordingly, no further options may be granted thereunder. Certain
options previously granted under the 1982 Option Plan remained outstanding at
December 31, 1998.

The 1991 Equity Incentive Plan, as amended July 30,1997, enables the
Company to grant stock options to its officers, employees or 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 25 million shares have been reserved for issuance under this plan, including
7 million shares approved by the Company's Board of Directors and stockholders
in 1998.

In May 1995, the stockholders approved the 1995 Director Option Plan
("Director Plan"), which replaced the 1986 Directors' Stock Option Plan, and
reserved 500,000 shares for issuance thereunder. Terms of the Director 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

F-21
<PAGE> 92
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

increments over four years. The exercise price of options granted is the fair
market value of the stock on the date of grant.

In connection with the acquisition of Symbios (See Note 2 of Notes to the
Consolidated Financial Statements), each outstanding stock option under Symbios'
Stock Option plan was converted to an option of the Company's common stock at a
ratio of 1.0094. As a result, outstanding options to purchase 2,073,593 shares
were assumed. No further options may be granted under the Symbios plan.

In connection with the acquisition of Mint (See Note 8 of Notes to the
Consolidated Financial Statements), each outstanding stock option under Mint's
Stock Option Plan ("Mint Plan") was converted to an option for the Company's
common stock at a ratio of 0.6286. As a result, outstanding options to purchase
681,726 shares were assumed. No further options may be granted under the Mint
Plan.

At December 31, 1998 shares available for grant under all stock option
plans were 4,486,000.

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, 1998, 1997 and 1996 (share amounts in thousands):

<TABLE>
<CAPTION>
1998 1997 1996
---------------- ---------------- ----------------
SHARES PRICE SHARES PRICE SHARES PRICE
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at January 1.......... 14,040 $24.34 11,108 $20.86 9,065 $20.26
Options assumed........................... 2,074 13.93 682 16.71 2.67 22.22
Options canceled.......................... (2,433) (26.30) (1,176) (27.20) (4,408) (34.43)
Options granted........................... 7,070 19.64 4,598 30.78 7,308 27.79
Options exercised......................... (635) (12.15) (1,172) 9.54 (1,124) (7.39)
------ ------ ------ ------ ------ ------
Options outstanding at December 31........ 20,116 $21.84 14,040 $24.34 11,108 $20.89
====== ====== ====== ====== ====== ======
Options exercisable at December 31........ 7,125 $20.39 4,425 $17.88 2,977 $10.77
====== ====== ====== ====== ====== ======
</TABLE>

On August 16, 1996 the Company canceled options to purchase 2,853,000
shares of common stock with exercise prices ranging from $32.13 to $58.13,
previously granted to employees, excluding certain executive officers, and
reissued all such options at an exercise price of $22.38, the fair market value
of the stock on August 16, 1996. The reissued options have a ten year term and
vest in equal increments over four years from the date of reissuance.

Significant option groups outstanding at December 31, 1998 and related
weighted average exercise price and contractual life information is as follows
(share amounts in thousands):

<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE REMAINING
OPTIONS WITH EXERCISE ---------------- ---------------- ------------
PRICES RANGING FROM: SHARES PRICE SHARES PRICE LIFE (YEARS)
--------------------- ------ ------ ------ ------ ------------
<S> <C> <C> <C> <C> <C>
$1.98 to $10.00............................. 1,617 $ 6.06 1,372 $ 5.65 4.91
$10.01 to $20.00............................ 7,414 16.33 1,387 13.06 9.18
$20.01 to $30.00............................ 7,286 23.90 2,982 23.79 7.85
$30.01 to $40.00............................ 3,037 32.42 1,118 31.99 8.10
greater than $40.00......................... 763 44.60 267 47.74 6.94
------ ------ ----- ------
20,117 $21.76 7,125 $21.89
====== ====== ===== ======
</TABLE>

F-22
<PAGE> 93
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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 are included in the
estimated grant date fair value calculations for the Company's stock option
awards:

<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Expected life (years)....................................... 4.85 4.57 5.25
Risk-free interest rate..................................... 5.00% 5.99% 6.10%
Volatility.................................................. 57% 56% 55%
Dividend yield.............................................. 0% 0% 0%
</TABLE>

STOCK PURCHASE PLANS. Since 1983, the Company has offered Employee Stock
Purchase Plans ("Employee Plans") under which rights are granted 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 offering period. Sales under the Employee Plans in 1998,
1997 and 1996 were 1,084,000, and 669,000 and 668,000 shares of common stock at
an average price of $13.85, 19.77 and $17.36 per share, respectively. During
1997, the Company's stockholders approved an amendment to the Company's Employee
Plan to increase the number of shares reserved for issuance by 500,000 shares.
Additionally in 1997, the stockholders approved an amendment to the Company's
Employee Plan to increase the number of shares of common stock reserved for
issuance pursuant to the Employee Plan 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
Plans on the last day of the preceding fiscal year. Shares available for future
purchase under the Employee Plans were 550,000 at December 31, 1998.

Compensation cost (included in pro forma net income and net income per
share amounts) for the grant date fair value of the purchase rights granted
under the Employee Plan was calculated using the Black-Scholes model. The
following weighted average assumptions are included in the estimated grant date
fair value calculations for rights to purchase stock under the Company's
Employee Plan:

<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Expected life (years)....................................... 1.25 1.25 1.25
Risk-free interest rate..................................... 4.42% 5.82% 5.70%
Volatility.................................................. 59% 58% 54%
Dividend yield.............................................. 0% 0% 0%
</TABLE>

The weighted average estimated grant date fair value, as defined by SFAS
No. 123, of rights to purchase stock under the Employee Plan granted in 1998,
1997 and 1996 were $5.94, $12.99 and $10.84 per share, respectively.

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 ("Right"). Each Right entitles the holder, under certain circumstances, to
purchase one-thousandth of a share of Preferred Stock of the Company or its
acquiror at a discounted price. The Rights are redeemable by the Company and
will expire in 2008.

PRO FORMA NET INCOME AND NET 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, 1998, 1997 and
1996.

F-23
<PAGE> 94
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

<TABLE>
<CAPTION>
1998 1997 1996
----------- ---------- ----------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Pro forma net (loss)/income
Basic........................................... $(193,346) $135,461 $131,247
Diluted......................................... $(193,346) $136,740 $135,686
Pro forma net (loss)/income per share
Basic........................................... $ (1.35) $ 0.96 $ 1.00
Diluted......................................... $ (1.35) $ 0.93 $ 0.93
</TABLE>

The pro forma effect on net income and net income per share for 1998, 1997
and 1996 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.

NOTE 10 -- INCOME TAXES

The provision for taxes consisted of the following:

<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
CURRENT:
Federal......................................... $ 11,075 $12,726 $29,200
State........................................... 2,560 4,172 6,969
Foreign......................................... 22,075 43,106 19,398
-------- ------- -------
Total...................................... 35,710 60,004 55,567
-------- ------- -------
DEFERRED (BENEFIT) LIABILITY:
Federal......................................... (8,396) 5,135 (2,437)
State........................................... (2,085) 1,575 (6,635)
Foreign......................................... (15,324) (5,895) 11,026
-------- ------- -------
Total...................................... (25,805) 815 1,954
-------- ------- -------
TOTAL................................................ $ 9,905 $60,819 $57,521
======== ======= =======
</TABLE>

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

<TABLE>
<CAPTION>
1998 1997 1996
--------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Domestic.......................................... $ (36,857) $ 69,054 $ 86,149
Foreign........................................... (92,648) 158,913 122,233
--------- -------- --------
Income before income taxes and minority
interest........................................ $(129,505) $227,967 $208,382
========= ======== ========
</TABLE>

Undistributed earnings of the Company's foreign subsidiaries aggregate to
approximately $283 million at December 31, 1998 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 deferred tax assets valuation allowance at December 31, 1998 is
attributed to U.S. federal, state and foreign deferred tax assets which result
primarily from restructuring and other one-time charges, net operating loss
carryovers and the Company's acquisition of Symbios. Management believes that
realization of deferred tax assets is not more likely than not at December 31,
1998 other than to the extent of taxable income for the carryover period. At
December 31, 1997, management believed that realization of a portion of the
deferred tax assets related to the net operating loss carryover is not more
likely than not and established the requisite valuation allowance.

As of June 22, 1999, the Company has pre-acquisition net operating loss
carry forwards of SEEQ of approximately $94 million which expire from 1999
through 2018. Due to the ownership change which

F-24
<PAGE> 95
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

occurred as a result of the SEEQ acquisition, utilization of these losses is
subject to an annual limitation of approximately $5 million.

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

<TABLE>
<CAPTION>
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
DEFERRED TAX ASSETS:
Net operating loss carryforwards.......................... $ 43,347 $ 38,196
Tax credit carryovers..................................... 2,380 2,380
Future deductions for purchased intangible assets......... 45,239 --
Future deductions for reserves and other.................. 90,791 47,032
-------- --------
Total deferred tax assets......................... 181,757 87,608
Valuation allowance......................................... (58,166) (36,787)
-------- --------
Net deferred tax assets..................................... 123,591 50,821
Deferred tax liabilities -- depreciation and amortization... (84,644) (37,670)
-------- --------
Total net deferred tax assets............................... $ 38,947 $ 13,151
======== ========
</TABLE>

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

<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Federal statutory rate............ $(44,886) (35)% $ 79,788 35% $ 72,831 35%
State taxes, net of federal
benefit......................... 2,049 2% 3,937 2% 6,517 3%
Difference between U.S. and
foreign tax rates............... 21,970 17% (22,453) (10)% (12,358) (6)%
Nondeductible expenses............ 6,200 5% 2,847 1% 4,693 2%
Foreign tax credits............... (420) -- (1,195) -- (11,260) (5)%
Research and development tax
credit.......................... (2) -- (4,500) (2)% (4,243) (2)%
Future benefit of deferred tax
assets not recognized........... 24,438 19% (2,029) (1%) (3,400) (1)%
Other............................. 556 -- 4,424 2% 4,741 2%
-------- --- -------- --- -------- --
Effective tax rate................ $ 9,905 8% $ 60,819 27% $ 57,521 28%
======== === ======== === ======== ==
</TABLE>

The Company paid $30 million, $31 million and $53 million for income taxes
in 1998, 1997 and 1996, respectively.

The IRS is currently auditing the Company's federal income tax returns for
fiscal years 1991, 1992, 1993 and 1994. The Company received a notice of
proposed tax deficiency for the years 1991 and 1992 and filed an appeal with the
IRS on March 26, 1997 in response to that IRS notice. 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 AND FOREIGN OPERATIONS

F-25
<PAGE> 96
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

design and related services compared to semiconductor product sales varies among
customers depending upon their specific requirements. In the Storage Systems
segment, the Company designs, manufactures, markets and supports high
performance data storage management and storage systems solutions, including a
complete line of RAID storage systems, subsystems and related software. The
Storage Systems segment did not meet the requirements for a reportable segment
as defined in SFAS No. 131.

The Company's significant operations outside the United States include
manufacturing facilities, design centers and sales offices in Japan and Europe.

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.

The following is a summary of operations by entities located within the
indicated geographic areas for 1998, 1997 and 1996. United States revenues
include export sales.

<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES:
United States................................ $ 957,257 $ 649,703 $ 694,990
Japan........................................ 261,705 366,508 264,316
Europe....................................... 218,015 240,249 212,410
Other foreign countries...................... 79,914 66,166 100,139
---------- ---------- ----------
Total................................ $1,516,891 $1,322,626 $1,271,855
---------- ---------- ----------
LONG-LIVED ASSETS:
United States................................ $1,589,451 $ 849,133
Japan........................................ 301,423 332,073
Europe....................................... 24,286 23,454
Other foreign countries...................... 44,966 57,159
---------- ----------
Total................................ $1,960,126 $1,261,819
========== ==========
</TABLE>

NOTE 12 -- LEASES

The Company leases the majority of its facilities and certain equipment
under non-cancelable operating leases which expire in 1999 through 2022. The
facilities lease agreements typically provide for base rental rates which are
increased at various times during the terms of the leases and for renewal
options at the fair market rental value.

The non-cancellable equipment leases generally provide for the lessor to
retain the depreciation for income taxes and most of the leases require the
Company to pay property taxes, insurance and normal maintenance and repairs.
Leases meeting certain specific criteria are accounted for as the acquisition of
an asset and the incurrence of a liability (in a capital lease). The base values
of assets held under capital leases are as follows.

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Machinery and equipment..................................... $ 5,983 $ 3,505
Furniture and fixtures...................................... 1,934 1,181
------- -------
7,916 4,686
Accumulated amortization.................................... (2,694) (1,326)
------- -------
$ 5,222 $ 3,360
======= =======
</TABLE>

F-26
<PAGE> 97
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Minimum future lease payments (in thousands) for non-cancelable leases as
of December 31, 1998 were as follows:

<TABLE>
<CAPTION>
YEARS ENDED OPERATING CAPITAL
DECEMBER 31, LEASES LEASES
------------ --------- -------
<S> <C> <C>
1999........................................................ $ 28,658 $ 1,982
2000........................................................ 23,687 1,566
2001........................................................ 19,702 1,082
2002........................................................ 14,650 459
2003........................................................ 8,525 383
Thereafter.................................................. 21,492 220
--------- -------
Total minimum lease payments...................... $ 116,714 5,692
---------
Less: amount representing interest.......................... (717)
-------
Present value of minimum lease payments..................... 4,975
Less: current portion....................................... (1,612)
-------
Long term lease obligations................................. $ 3,363
=======
</TABLE>

Rental expense under all operating leases was $58.6 million for fiscal
1998, $58.6 million for fiscal 1997, and $62.6 million for fiscal 1996.

In June 1995, the Company, through its Japanese subsidiary, entered into a
master lease agreement and a master purchase agreement with a group of leasing
companies ("Lessor") for up to 15 billion yen (US$129 million). Each Lease
Supplement pursuant to the transaction will have a lease term of one year with
four consecutive annual renewal options. The Company may, at the end of any
lease term, return or purchase at a stated amount all the equipment. Upon return
of the equipment, the Company must pay the Lessor a terminal adjustment amount.
The Lessor also has entered into a remarketing agreement with a third party to
remarket and sell any equipment returned pursuant to which the third party is
obligated to reimburse the Company a guaranteed residual value. The lease line
was fully utilized as of December 31, 1998. There were no significant gains or
losses from these leasing transactions. Minimum rental payments under these
operating leases, including option periods, are $23 million for 1999 and $16
million for 2000. The terminal adjustment, which the Company would be required
to pay upon cancellation of all leases and return of the equipment, would be as
follows: 1999 -- $42 million; 2000 -- $22 million; 2001 -- $2 million.

NOTE 13. COMMITMENTS AND CONTINGENTS

During the third quarter of 1995, the remaining shares of our Canadian
subsidiary, LSI Logic Corporation of Canada, Inc. ("LSI Canada"), that were
previously owned by other parties were acquired by another one of our subsidiary
companies. At that time former shareholders of LSI Canada representing
approximately 800,000 shares or about 3% (which is now approximately 620,000
shares) of the previously outstanding shares, exercised dissent an appraisal
rights as provided by Canadian law. By so doing, these parties notified LSI
Canada of their disagreement with the per share value in Canadian dollars
($4.00) that was paid to the other former shareholders. In order to resolve this
matter, a petition was filed by LSI Canada in late 1995 in the Court of Queen's
Bench of Alberta, Judicial District of Calgary (the "Court") and has been
pending since that time. The trial of that case was to occur in late 1998. Prior
to the scheduled commencement of the trial, some of the parties who represent
approximately 410,000 shares retained a new attorney. Their new attorney is now
attempting to set aside the action based on the petition filed by LSI Canada and
commence a new action, which we understand will be based on a different legal
theory. Until their request is heard and resolved by the Court, a new trial date
for the pending matter is not expected to be set. They have also notified us
that they intend to bring a new action alleging that other conduct by LSI Logic
Corporation was oppressive of the rights of minority shareholders in LSI Canada,
for which they will seek damages. 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

F-27
<PAGE> 98
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

results of operations or financial condition. Also, during 1998, a claim that
was brought in 1994 by another former shareholder of LSI Canada against LSI
Logic Corporation in the Court of Chancery of the State of Delaware in and for
the New Castle County was dismissed. That dismissal was upheld on appeal to the
Delaware Supreme Court.

A lawsuit alleging patent infringement has been filed in the United States
District Court for the District of Arizona by the Lemelson Medical, Education &
Research Foundation, Limited Partnership against eighty-eight electronics
industry companies, including us. The case number is CIV990377PHXRGS. The
patents involved in this lawsuit generally relate to semiconductor manufacturing
and computer imaging, including the use of bar coding for automatic
identification of articles. 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, and while the results of such
litigations and claims cannot be predicted with certainty, the Company believes
that the final outcome of such matters will not have a significantly adverse
effect on the Company's consolidated financial position or results of
operations.

F-28
<PAGE> 99

CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

ASSETS

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
---------- ------------
<S> <C> <C>
Cash and cash equivalents................................... $ 190,530 $ 210,306
Short-term investments...................................... 154,613 81,220
Accounts receivable, less allowance for doubtful accounts of
$4,914 and $3,537......................................... 333,831 249,106
Inventories................................................. 191,485 181,440
Deferred tax assets......................................... 62,699 62,699
Prepaid expenses and other current assets................... 44,030 52,250
---------- ----------
Total current assets.............................. 977,188 837,021
---------- ----------
Property and equipment, net................................. 1,246,541 1,486,256
Goodwill and other intangibles.............................. 316,705 332,779
Other assets................................................ 215,281 167,749
---------- ----------
Total assets...................................... $2,755,715 $2,823,805
========== ==========

LIABILITIES AND STOCKHOLDERS' EQUITY

Accounts payable............................................ $ 172,032 $ 195,228
Accrued salaries, wages and benefits........................ 67,632 47,988
Other accrued liabilities................................... 103,352 109,236
Income taxes payable........................................ 43,719 57,993
Current portion of long-term obligations.................... 72,051 187,852
---------- ----------
Total current liabilities......................... 458,786 598,297
---------- ----------
Long-term obligations and deferred income taxes............. 805,778 695,797
Minority interest in subsidiaries........................... 5,068 5,238
Commitments and contingencies............................... -- --
Stockholders' equity:
Preferred shares; $.01 par value; 2,000 shares
authorized............................................. -- --
Common stock; $.01 par value; 450,000 shares authorized;
145,967 and 143,867 shares outstanding................. 1,460 1,439
Additional paid-in capital.................................. 1,159,402 1,135,219
Retained earnings........................................... 290,445 368,378
Accumulated other comprehensive income...................... 34,776 19,437
---------- ----------
Total stockholders' equity........................ 1,486,083 1,524,473
---------- ----------
Total liabilities and stockholders' equity........ $2,755,715 $2,823,805
========== ==========
</TABLE>

See accompanying notes to unaudited consolidated condensed financial statements.
F-29
<PAGE> 100

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues.............................................. $501,012 $336,272 $964,629 $669,002
-------- -------- -------- --------
Costs and expenses:
Cost of revenues.................................... 314,398 179,844 616,289 367,392
Research and development............................ 75,046 65,943 151,569 130,857
Selling, general and administrative................. 62,783 52,404 124,272 97,601
Acquired in-process research and development........ 4,600 -- 4,600 --
Restructuring of operations and other non-recurring
charges.......................................... 7,848 -- 5,871 --
Amortization of intangibles......................... 11,815 1,386 23,022 2,772
-------- -------- -------- --------
Total costs and expenses......................... 476,490 299,577 925,623 598,622
-------- -------- -------- --------
Income from operations................................ 24,522 36,695 39,006 70,380
Interest expense...................................... (9,620) (95) (20,200) (175)
Interest income and other expense..................... 2,459 5,470 4,195 13,480
-------- -------- -------- --------
Income before income taxes and cumulative effect of
change in accounting principle...................... 17,361 42,070 23,001 83,685
Provision for income taxes............................ 7,530 10,691 9,160 20,890
-------- -------- -------- --------
Income before cumulative effect of change in
accounting principle................................ 9,831 31,379 13,841 62,795
Cumulative effect of change in accounting principle... -- -- (91,774) --
-------- -------- -------- --------
Net income/(loss)..................................... $ 9,831 $ 31,379 $(77,933) $ 62,795
======== ======== ======== ========
Basic earnings per share:
Income before cumulative effect of change in
accounting principle............................. $ 0.07 $ 0.22 $ 0.10 $ 0.44
Cumulative effect of change in accounting
principle........................................ -- -- (0.64) --
-------- -------- -------- --------
Net income/(loss)................................... $ 0.07 $ 0.22 $ (0.54) $ 0.44
======== ======== ======== ========
Dilutive earnings per share:
Income before cumulative effect of change in
accounting principle............................. $ 0.06 $ 0.22 $ 0.09 $ 0.43
Cumulative effect of change in accounting
principle........................................ -- -- (0.61) --
-------- -------- -------- --------
Net income/(loss)................................... $ 0.06 $ 0.22 $ (0.52) $ 0.43
======== ======== ======== ========
Shares used in computing per share amounts:
Basic............................................... 145,622 143,168 144,883 142,868
======== ======== ======== ========
Dilutive............................................ 151,947 144,719 149,614 144,377
======== ======== ======== ========
</TABLE>

See accompanying notes to unaudited consolidated condensed financial statements.
F-30
<PAGE> 101

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
1999 1998
--------- ---------
<S> <C> <C>
Operating activities:
Net (loss)/income........................................... $ (77,933) $ 62,795
Adjustments:
Depreciation and amortization............................. 190,752 91,701
Write-off of unamortized preproduction costs.............. 97,356 --
Acquired in-process research and development.............. 4,600 --
Non-cash restructuring and other non-recurring charges.... 827 --
Changes in:
Accounts receivable.................................... (87,639) (26,754)
Inventories............................................ (11,499) (3,191)
Prepaid expenses and other assets...................... 2,935 (29,363)
Accounts payable....................................... (26,091) (33,690)
Accrued and other liabilities.......................... 7,040 6,119
--------- ---------
Net cash provided by operating activities................... 100,348 67,617
--------- ---------
Investing activities:
Purchases of debt and equity securities
available-for-sale..................................... (198,577) (253,249)
Maturities and sales of debt and equity securities
available-for-sale..................................... 125,014 361,267
Purchase of equity securities............................. (117) (6,866)
Acquisition of a non-public technology company............ (6,779) --
Purchases of property and equipment, net of retirements... (28,503) (148,274)
--------- ---------
Net cash used for investing activities...................... (108,962) (47,122)
--------- ---------
Financing activities:
Proceeds from borrowings.................................. 345,000 --
Repayment of debt obligations............................. (368,302) (736)
Debt issuance costs....................................... (9,488) --
Issuance of common stock, net............................. 24,204 12,356
--------- ---------
Net cash (used for)/provided by financing activities........ (8,586) 11,620
--------- ---------
Effect of exchange rate changes on cash and cash
equivalents............................................... (2,576) (5,185)
--------- ---------
(Decrease)/increase in cash and cash equivalents............ (19,776) 26,930
Cash and cash equivalents at beginning of period............ 210,306 114,087
--------- ---------
Cash and cash equivalents at end of period.................. $ 190,530 $ 141,017
========= =========
</TABLE>

See accompanying notes to unaudited consolidated condensed financial statements.
F-31
<PAGE> 102

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1 -- BASIS OF PRESENTATION

In the opinion of the Company, the accompanying unaudited consolidated
condensed financial statements contain all adjustments (consisting only of
normal recurring adjustments except as noted below for unamortized
preproduction, acquired in-process research and development as discussed in Note
3 and the restructuring expenses as discussed in Note 5) necessary to present
fairly the financial information included therein. While the Company believes
that the disclosures are adequate to make the information not misleading, it is
suggested that these financial statements be read in conjunction with the
audited consolidated financial statements and accompanying notes included in the
Company's Annual Report on Form 10-K/A for the year ended December 31, 1998.

On June 22, 1999, the Company completed a merger of Stealth Acquisition
Corporation, a wholly-owned subsidiary of the Company, with SEEQ Technology,
Inc. ("SEEQ") in a transaction accounted for as a pooling of interests, and SEEQ
became a wholly owned subsidiary of the Company. All financial information has
been restated retroactively to reflect the combined operations of the Company
and SEEQ as if the merger had occurred at the beginning of the earliest period
presented (see Note 2). Prior to the merger, 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.

For financial reporting purposes, the Company reports on a 13 or 14 week
quarter with a year ending December 31. For presentation purposes, the
consolidated condensed financial statements refer to the quarter's calendar
month end for convenience. The results of operations for the quarter ended June
30, 1999 are not necessarily indicative of the results to be expected for the
full year.

On April 14, 1999, the Company acquired all of outstanding capital stock of
ZSP Corporation. ("ZSP") in a merger transaction accounted for as a purchase.
Accordingly, the results of operations of ZSP and estimated fair value of assets
acquired and liabilities assumed were included in the Company's consolidated
condensed financial statements as of April 14, 1999, the effective date of the
purchase, through the end of the period (see Note 3). There are no significant
differences between the accounting policies of the Company and ZSP.

In April 1998, the Accounting Standards Executive Committee ("AcSEC")
released Statement of Position ("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 has
expensed the unamortized preproduction balance of $92 million associated with
the Gresham manufacturing facility, net of tax, on January 1, 1999 and has
presented it as a cumulative effect of a change in accounting principle in
accordance with SOP No. 98-5.

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
condensed financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those estimates.

Certain items previously reported in specific financial statement captions
have been reclassified to conform with the 1999 presentation.

During the second quarter of 1999, one customer represented 11% of the
Company's consolidated revenues. There were no customers with revenues greater
than or equal to 10% of total consolidated revenues for the six months ended
June 30, 1999.

This Current Report on Form 10-Q 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.

F-32
<PAGE> 103
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)

Actual results could differ significantly from those projected in the
forward-looking statements as a result of a number of risks and uncertainties,
including the risk factors set forth in the Company's Annual Report on Form
10-K/A for the year ended December 31, 1998 as well as other periodic reports
both previously and hereafter filed by the Company with the Securities Exchange
Commission. Statements made herein are as of the date of the filing of this 10-Q
with the Securities and Exchange Commission and should not be relied upon as of
any subsequent date. The Company expressly disclaims any obligation to update
information presented herein, except as may otherwise be required by law.

NOTE 2 -- ACQUISITION OF SEEQ

As discussed in Note 1, on June 22, 1999, the Company completed a merger
with SEEQ. SEEQ was formed in January 13, 1981 to engage in the development,
production and sale of state-of-the-art, high technology semiconductor devices.
The stock for stock transaction was approved by the shareholders of SEEQ. As a
result of the merger, the separate existence of SEEQ ceased. Under the terms of
the Agreement and Plan of Reorganization and Merger, SEEQ's shareholders
received 0.0759 of a share of the Company's common stock for each SEEQ share.
Accordingly, the Company will issue up to 2.5 million shares of its common stock
for all the outstanding shares of SEEQ common stock. Additionally, outstanding
options to acquire SEEQ common stock were converted to options to acquire 0.4
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. SEEQ's results of
operations are insignificant to the combined financial results (less than 3% by
income statement line item for the six months ended June 30, 1999), and
accordingly, separate results of operations of SEEQ and LSI are not presented.

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, LSI recorded $3
million in restructuring charges and $5 million in merger related expenses. The
merger expenses relate primarily to investment banking and other professional
fees directly attributable to the merger with SEEQ. The restructuring charge is
comprised of $2 million in write-downs of fixed assets which are duplicative to
the combined company, $0.5 million of exit costs relating to non-cancelable
building lease contracts and $0.5 million provision for severance costs related
to the involuntary termination of certain employees. The exit costs and employee
severance costs were recorded in accordance with EITF No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity". The fixed and other assets write-downs were recorded in accordance
with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." The restructuring actions as outlined by
the restructuring plan are intended to be completed by June 30, 2000, one year
from the date the reserve was taken. There was no activity against the SEEQ
restructuring reserves in the second quarter of 1999.

NOTE 3 -- ACQUISITION OF ZSP

As discussed in Note 1, on April 14, 1999, the Company acquired all of
outstanding capital stock of ZSP, a semiconductor company without a fabrication
facility that designs and markets programmable digital signal processors
("DSPs"). The acquisition was accounted for as a purchase. Accordingly, the
results of operations of ZSP and estimated fair value of assets acquired and
liabilities assumed were included in the Company's consolidated condensed
financial statements as of April 14, 1999, the effective

F-33
<PAGE> 104
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)

date of the purchase, through the end of the period. There are no significant
differences between the accounting policies of the Company and ZSP.

The Company paid approximately $7 million in cash which included direct
acquisition costs of $0.6 million for investment banking legal and accounting
fees and liabilities assumed of $4.3 million. The total purchase price of $11.3
million was allocated to the estimated fair value of assets acquired and
liabilities assumed based on independent appraisals, where appropriate and
management estimates as follows:

<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Fair value of tangible net (liabilities)/assets............. $ (301)
In-process research and development......................... 4,600
Other current technology.................................... 2,600
Excess of purchase price over net assets acquired........... 4,370
-------
$11,269
=======
</TABLE>

The Company accrued approximately $0.7 million of exit costs for a
non-cancelable building lease contract and to prepare the building for sublease.
The exit costs were accrued as a liability assumed in the purchase price
allocation in accordance with EITF No. 95-3, "Recognition of Liabilities in
Connection with a Purchase Business Combination." The Company expects no other
additional liabilities that may result in an adjustment to the allocation of the
purchase price.

In-process research and development:

In connection with the purchase of ZSP, the Company recorded a $4.6 million
charge to in-process research and development during the second quarter of 1999.
The amount was determined by identifying research projects for which
technological feasibility had not been established and no alternative future
uses existed. The Company acquired ZSP's in-process DSP research and development
project that was targeted at the telecommunications market. This product is
being developed specifically for voice over net or voice over internet protocol
applications and is intended to have substantial incremental functionality,
greatly improved speed and a wider range of interfaces than ZSP's current
technology.

The value of the one project identified to be in progress was determined by
estimating the future cash flows from the project 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 percentage of completion
for the project was determined using milestones representing management's
estimate of effort, value added and degree of difficulty of the portion of the
project completed as of April 14, 1999, as compared to the remaining research
and development to be completed to bring the project to technical 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). Development of ZSP's digital
signal processor project started in May 1998. As of April 14, 1999, the Company
estimated that the project was 65% complete.

However, development of the technology remains a substantial risk to the
Company due to factors including the remaining effort to achieve technical
feasibility, rapidly changing customer markets and competitive threats from
other companies. Additionally, the value of other intangible assets acquired may
become impaired. Company management believes that the in-process research and
development charge of $4.6 million is valued consistently with the SEC staff's
view regarding valuation methodologies. There can be no assurance, however, that
the SEC staff will not take issue with any assumptions used in the Company's
valuation model and require the Company to revise the amount allocated to
in-process research and development.

F-34
<PAGE> 105
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)

Useful life of intangible assets:

The amount allocated to current technology and residual goodwill is being
amortized over their estimated weighted average useful life of seven years using
a straight-line method.

NOTE 4 -- LICENSE AGREEMENT

The Company and Wafer Technology (Malaysia) Sdn. Bhd. ("WTM") are currently
definitizing an agreement under which the Company will grant licenses to WTM
with respect to certain of the Company's wafer fabrication technologies and will
provide associated manufacturing training and related services. In exchange, the
Company will receive cash and equity consideration preliminarily valued at $120
million over the period for which transfers and obligations of the Company are
scheduled to occur. Pursuant to an interim agreement, the Company has performed
certain obligations which were valued at $3.0 million. This amount was recorded
as an offset to the Company's research and development expenses during the
quarter ended June 30, 1999.

NOTE 5 -- RESTRUCTURING

SEEQ restructuring

In connection with the merger with SEEQ on June 22, 1999, LSI recorded $3
million in restructuring charges and $5 million in merger related expenses (see
Note 2). There were no changes to the SEEQ restructuring reserves in the second
quarter of 1999.

Restructuring reserve activity

During the second quarter of 1999, the Company utilized $1.1 million in
restructuring reserves which were originally established in the third quarter of
1998. The amounts utilized reflect severance payments of $0.6 million for
approximately 130 employees terminated during the second quarter and $0.5
million for lease terminations and other exit costs primarily in the U.S. and
Europe. See table below describing the 1998 restructuring.

During the first quarter of 1999, the Company determined that $2.5 million
of the restructuring reserve established in the third quarter of 1998 would not
be utilized because of a change in management's estimate of the reserve
requirements in the U.S., Europe and Japan. Accordingly, the restructuring
reserve reversal was included in the determination of income from operations for
the six month period ended June 30, 1999. The remaining restructuring reserve
activity in the first quarter is described in the table below.

Description of 1998 restructuring:

The Company remains committed to improving profitability and strengthening
competitiveness. As a result of identifying opportunities to streamline
operations and maximize the integration of Symbios, Inc. ("Symbios") acquired on
August 6, 1998 (see Note 6) into the Company's operations, the Company's
management, with the approval of the Board of Directors, committed itself to a
restructuring plan and recorded a $75.4 million restructuring charge in the
third quarter of 1998. The action undertaken included a worldwide realignment of
manufacturing capacity, the consolidation of certain design centers and
administrative offices, and a streamlining of the Company's overhead structure
to reduce operating expenses. The restructuring charge excludes any integration
costs relating to Symbios. As discussed in Note 6 of Notes to the Unaudited
Consolidated Condensed Financial Statements, integration costs relating to
Symbios were accrued as a liability assumed in the purchase in accordance with
EITF No. 95-3, "Recognition of Liabilities in Connection with a Purchase
Business Combination."

F-35
<PAGE> 106
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)

Restructuring costs include $37.2 million related primarily to fixed assets
impaired as a result of the decision to close a manufacturing facility in
Tsukuba, Japan by the third quarter of 1999; $4.7 million for termination of
leases and maintenance contracts primarily in the U.S. and Europe; $1.7 million
for non-cancelable purchase commitments primarily in Europe; $13.1 million in
fixed asset and other asset write-downs primarily in the U.S., Japan and Europe;
approximately $2.4 million in other exit costs, which result principally from
the consolidation and closure of certain design centers, sales facilities and
administrative offices primarily in the U.S. and Europe; and work force
reduction costs of $16.3 million.

Other exit costs include $0.9 million related to payments made for early
lease contract terminations and the write-down of surplus assets to their
estimated realizable value; $0.7 million for the write-off of excess licenses
for closed locations in Europe and $0.8 million of other exit costs associated
with the consolidation of design centers worldwide.

The workforce reduction costs primarily include severance costs related to
involuntary termination of employment for approximately 900 employees from
manufacturing in Japan, and engineering, sales, marketing and finance personnel
located primarily in the U.S., Japan and Europe. The fair value of assets
determined to be impaired in accordance with the guidance for assets to be held
and used in SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of," were the result of independent
appraisals and use of management estimates. Severance costs and other above
noted exit costs were determined in accordance with EITF No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity." The restructuring actions, as outlined by the plan, are intended to
be executed to completion by September 30, 1999, one year from the date the
reserve was taken.

The following table sets forth the Company's 1998 restructuring reserves as
of December 31, 1998 and activity against the reserve for the six month period
ended June 30, 1999:

<TABLE>
<CAPTION>
(IN THOUSANDS)
RESERVE/ RESERVE/
BALANCE TRANSLATION BALANCE TRANSLATION BALANCE
12/31/98 UTILIZED ADJUSTMENT 3/31/99 UTILIZED ADJUSTMENT 6/30/99
-------- -------- ----------- ------- -------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Write-down of manufacturing
facility(a)........................ $ 1,500 $ -- $(1,100) 400 $ 400
Other fixed asset related charges.... -- -- -- --
Payments to employees for
severance(b)....................... 11,600 (6,140) (820) 4,640 (640) 4,000
Lease terminations and maintenance
contracts(c)....................... 4,600 (550) (83) 3,967 (367) 3,600
Noncancelable purchase
commitments(c)..................... 1,600 (80) -- 1,520 1,520
Other exit costs(d).................. 1,200 (326) (530) 344 (124) 220
Cumulative currency translation
adjustment......................... 1,512 -- (500) 1,012 -- (400) 612
------- ------- ------- ------- ------- ----- -------
Total....................... $22,012 $(7,096) $(3,033) $11,883 $(1,131) $(400) $10,352
======= ======= ======= ======= ======= ===== =======
</TABLE>

- ---------------
(a) The $1.5 million balance at 12/31/98 for the write-down of the facility
related to machinery and equipment decommissioning costs.

(b) Amounts utilized represent cash payments related to the severance of
approximately 350 employees since 12/31/98 (approximately 130 in Q2 1999).

(d) Amounts utilized represent non-cash charges.

The Company expects to complete the activities underlying the restructuring
plan by September 1999.

F-36
<PAGE> 107
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 6 -- INTEGRATION OF SYMBIOS

On August 6, 1998, the Company completed the acquisition of all of the
outstanding capital stock of Symbios, Inc. from Hyundai Electronics America
("HEA"). HEA is a majority-owned subsidiary of Hyundai Electronics Industries
Co., Ltd. ("HEI"), a Korean corporation. The transaction was accounted for as a
purchase, and accordingly, the results of operations of Symbios and estimated
fair value of assets acquired and liabilities assumed were included in the
Company's consolidated financial statements as of August 6, 1998, the effective
date of the purchase, through the end of the period. There are no significant
differences between the accounting policies of the Company and Symbios. The
allocation of the purchase price was disclosed in the Report on Form 10K/A for
the year ended December 31, 1998 previously filed with the Securities and
Exchange Commission.

The Company has taken certain actions to combine the Symbios operations
with those of LSI Logic and, in certain instances, to consolidate duplicative
operations. Adjustments to accrued integration costs related to Symbios were
recorded as an adjustment to the fair value of net assets in the purchase price
allocation. The Company finalized the integration plan as of December 31, 1998.
Accrued integration charges included $4 million related to involuntary
separation and relocation benefits for approximately 300 Symbios employees and
$1.4 million in other exit costs primarily relating to the closing of Symbios
sales offices and the termination of certain contractual relationships. The
Symbios integration related accruals were based upon management's current
estimate of integration costs and are in accordance with EITF No. 95-3,
"Recognition of Liabilities in Connection with a Purchase Business Combination."

The following table sets forth the Company's Symbios integration reserve as
of December 31, 1998 and activity against the reserve for the six month period
ended June 30, 1999:

<TABLE>
<CAPTION>
(IN THOUSANDS)
DECEMBER 31, JUNE 30,
1998 1999
BALANCE UTILIZED BALANCE
-------------- -------- --------
<S> <C> <C> <C>
Payments to employees for severance and
relocation(a)...................................... $2,360 $(1,624) $ 736
Other exit costs(a).................................. 1,002 (474) 528
------ ------- ------
Total...................................... $3,362 $(2,098) $1,264
====== ======= ======
</TABLE>

- ---------------
(a) The amount utilized represents cash payments related to the severance and
relocation of approximately 160 employees. Utilization in Q2 1999 primarily
reflects severance payments of $0.4 million for 29 employees and other exit
costs of $0.5 million.

No significant adjustments were made to the reserve during the periods
presented. The Company expects to complete the activities underlying the
integration plan by August 1999.

NOTE 7 -- INVESTMENTS

The Company classifies its debt and marketable equity securities into an
available-for-sale category and values them at fair value in accordance with
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," with unrealized gains and losses, net of taxes, reported in
shareholders' equity until realized. For all investment securities, unrealized
losses that are other than temporary are recognized in net income. Gains and
losses on securities sold are based on the specific identification method and
are reflected in net income. The Company currently does not actively trade
securities.

Short-term investments consist primarily of U.S. and foreign corporate debt
securities, commercial paper, auction rate preferred stock, U.S. and foreign
government and agency securities and time deposits. As of June 30, 1999 and
December 31, 1998, the Company held $155 million and $81 million of
available-for-sale securities, respectively, that were classified as short-term
investments on the consolidated balance sheet. Short-term investments are
recorded at amortized cost, plus accrued interest, which

F-37
<PAGE> 108
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)

approximates fair market value at June 30, 1999 and December 31, 1998. The
contract maturities of these securities are within one year. Realized gains and
losses were not significant during the quarters ended June 30, 1999 and 1998.

The Company held marketable equity securities with an aggregate carrying
value of $49 million that were classified as long-term assets on the
consolidated balance sheet as of June 30, 1999. There were no significant
investments in marketable equity securities as of December 31, 1998 as the
companies became publicly traded during the six month period ended June 30,
1999. Unrealized gains, net of the related tax effect, of $28 million are
included in accumulated other comprehensive income as of June 30, 1999. During
the quarter, realized gains and losses were not significant.

NOTE 8 -- DERIVATIVE FINANCIAL INSTRUMENTS

The Company enters into forward contracts and currency swaps to hedge firm
intercompany asset and liability positions denominated in non-functional
currencies. The following table summarizes by major currency the forward
exchange contracts outstanding as of June 30, 1999 and December 31, 1998. The
buy amounts represent the U.S. dollar equivalent of commitments to purchase
foreign currencies, and the sell amounts represent the U.S. dollar equivalent of
commitments to sell foreign currencies. Foreign currency amounts are translated
at rates current at June 30, 1999 and December 31, 1998.

<TABLE>
<CAPTION>
(IN THOUSANDS)
JUNE 30, DECEMBER 31,
1999 1998
-------- ------------
<S> <C> <C>
Buy/(Sell):
Japanese Yen.......................................... $ 8,954 $--
Japanese Yen.......................................... (3,264) --
</TABLE>

These forward contracts are considered identifiable hedges and realized and
unrealized gains and losses are deferred until settlement of the underlying
commitments. They are recorded as other gains or losses when the underlying
exposure materializes or the hedged transaction is no longer expected to occur.
Deferred foreign gains and losses were not significant at June 30, 1999 and
December 31, 1998. Foreign currency transaction gains and losses included in
interest income and other were insignificant for the three and six-month periods
ended June 30, 1999 and 1998.

Currency option contracts were treated as hedges of third-party yen revenue
exposures. At June 30, 1999, total outstanding purchased currency option
contracts were $20 million. These contracts expire in September 1999. At
December 31, 1998, total outstanding purchased currency option contracts were
$130 million. These contracts expired quarterly through June 1999. The realized
and unrealized gains and option premiums are deferred until the exposure
underlying the option is recorded. The deferred premiums on all outstanding
options were $0.3 million as of June 30, 1999 and $6 million as of December 31,
1998. The deferred premiums were included in other current assets.

On August 5, 1998, the Company recognized a loss of $1.5 million from the
decision to close interest rate swap contracts which converted the interest
associated with yen borrowings by LSI Logic Japan Semiconductor, Inc., a wholly
owned subsidiary of the Company ("JSI"), from adjustable to fixed rates.
F-38
<PAGE> 109
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)

The contracts were closed because the underlying debt was repaid as discussed in
Note 10. Current period gains and losses associated with the interest rate swaps
are included in interest expense, or as other gains and losses at such time as
related borrowings are terminated.

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." 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. The statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. Upon adoption of SFAS No. 133, the Company will
be required to adjust hedging instruments to fair value in the balance sheet,
and recognize the offsetting gain or loss as transition adjustments to be
reported in net income or other comprehensive income, as appropriate, and
presented in a manner similar to the cumulative effect of a change in accounting
principle. While we believe the adoption of this statement will not have a
significant effect on our results of operations, the impact of the adoption of
SFAS No. 133 as of the effective date cannot be reasonably estimated at this
time.

NOTE 9 -- BALANCE SHEET:

<TABLE>
<CAPTION>
(IN THOUSANDS)
JUNE 30, DECEMBER 31,
1999 1998
-------- ------------
<S> <C> <C>
Inventories:
Raw materials........................................ $ 30,902 $ 32,347
Work-in-process...................................... 81,113 53,042
Finished Goods....................................... 79,470 96,051
-------- --------
Total...................................... $191,485 $181,440
======== ========
</TABLE>

The Company had $97 million of unamortized preproduction engineering costs
at December 31, 1998 associated with the construction of a new manufacturing
facility in Gresham, Oregon. This new facility became operational as of December
1, 1998, at which time capitalized preproduction began to be amortized over the
expected useful life of the manufacturing technology of approximately four
years. In April 1998, the AcSEC released SOP No. 98-5, "Reporting on the Costs
of Start-up Activities." SOP No. 98-5 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 has
expensed the unamortized preproduction balance of $92 million, net of tax, on
January 1, 1999 and has presented it as a cumulative effect of a change in
accounting principle in accordance with SOP No. 98-5.

NOTE 10 -- DEBT

During March 1999, the Company issued $345 million of 4 1/4% Convertible
Subordinated Notes (the "Convertible Notes") due in 2004. The Convertible Notes
are subordinated to all existing and future senior debt, are convertible 60 days
following issuance into shares of the Company's common stock at a conversion
price of $31.353 per share and are redeemable at the option of the Company, in
whole or in part, 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 certain events and in certain circumstances.
Interest is payable semiannually. The Company paid approximately $9.5 million
for debt issuance costs related to the Convertible Notes. The debt issuance
costs are being amortized using the interest method. The net

F-39
<PAGE> 110
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)

proceeds of the Convertible Notes were used to repay borrowings under the
Company's 364 day facility and the Revolver as described below.

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, JSI, ABN AMRO and thereafter syndicated to a group of lenders
determined by ABN AMRO and the Company. The credit agreement consists 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 August 5, 1998, the Company borrowed $150 million under the 364 day
Facility and $485 million under the Revolver. On December 22, 1998, the Company
borrowed an additional $30 million under the Revolver. The credit facilities
allow for borrowings at adjustable rates of LIBOR/TIBOR with a 1.25% spread. As
of March 31, 1999 the spread changed to 1%. Interest payments are due quarterly.
The 364 day Facility expires on August 3, 1999 at which time borrowings
outstanding are payable in full. The Revolver is for a term of four years with
the principal reduced quarterly beginning on December 31, 1999. The Revolver
includes a term loan sub-facility in the amount of 8.6 billion yen made
available to JSI over the same term. The yen term loan sub-facility is for a
period of four years with no required payments until it expires on August 5,
2002. Pursuant to the restated credit agreement, on August 30, 1998, JSI repaid
its existing 11.4 billion yen ($79.2 million) credit facility and borrowed 8.6
billion yen ($71 million at June 30, 1999) bearing interest at adjustable rates.
In March of 1999, the Company repaid the full $150 million outstanding under the
364 day Facility and $185.5 million outstanding under the Revolver primarily
using the proceeds from the Convertible Notes as described above. Borrowings
outstanding under the Revolver including the yen sub-facility were $370 million
as of June 30, 1999. As of June 30, 1999, the interest rate for the Revolver and
the yen sub-facility were 5.96% and 1.14%, respectively. The debt issuance costs
associated with these debt facilities were not significant.

In accordance with the terms of its existing credit agreement, the Company
must comply with certain financial covenants related to profitability, tangible
net worth, liquidity, senior debt leverage, debt service coverage and
subordinated indebtedness. As of June 30, 1999, the Company was in compliance
with these covenants.

NOTE 11 -- RECONCILIATION OF BASIC AND DILUTED EARNINGS PER SHARE

The following is a reconciliation of the numerators and denominators of the
basic and diluted per share computations as required by SFAS No. 128, "Earnings
Per Share ("EPS")."

<TABLE>
<CAPTION>
(IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
THREE MONTHS ENDED JUNE 30,
-------------------------------------------------------------
1999 1998
----------------------------- -----------------------------
PER-SHARE PER-SHARE
INCOME* SHARES+ AMOUNT INCOME* SHARES+ AMOUNT
------- ------- --------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income available to common
stockholders........................ $9,831 145,622 $0.07 $31,379 143,168 $0.22
Effect of dilutive securities:
Stock options.......................... 6,325 1,551
Diluted EPS:
Net income available to common
stockholders........................ $9,831 151,947 $0.06 $31,379 144,719 $0.22
</TABLE>

F-40
<PAGE> 111
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)

Options to purchase 704,863 and 7,477,499 shares were outstanding at June
30, 1999 and 1998, respectively, but were not included in the calculation of
diluted shares for the three month periods ended June 30, 1999 and 1998 because
the exercise prices were greater than the average market price of common shares
in each respective quarter. The exercise price ranges of these options were
$41.88 to $58.13 and $25.31 to $58.13 at June 30, 1999 and 1998, respectively.
For the three months ended June 30, 1999, common equivalent shares of 11,003,732
and interest expense of $2 million, net of taxes, associated with the
Convertible Notes (see Note 10) were excluded from the computation of diluted
earnings per share as a result of their antidilutive effect on earnings per
share

<TABLE>
<CAPTION>
(IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
SIX MONTHS ENDED JUNE 30,
--------------------------------------------------------------
1999 1998
------------------------------ -----------------------------
PER-SHARE PER-SHARE
INCOME* SHARES+ AMOUNT INCOME* SHARES+ AMOUNT
-------- ------- --------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income before cumulative effect
of change in accounting
principle......................... $ 13,841 144,883 $ 0.10 $62,795 142,868 $0.44
------ -----
Cumulative effect of change in
accounting principle.............. (91,774) 144,883 (0.64) -- -- --
------
Net (loss)/income available to common
stockholders...................... (77,933) 144,883 (0.54) 62,795 142,868 0.44
------ -----
Effect of dilutive securities:
Stock options........................ 4,731 1,509
Diluted EPS:
Net income before cumulative effect
of change in accounting
principle......................... 13,841 149,614 0.09 62,795 144,377 0.43
------ -----
Cumulative effect of change in
accounting principle.............. (91,774) 149,614 (0.61) -- -- --
------
Net (loss)/income available to common
stockholders...................... $(77,933) 149,614 $(0.52) $62,795 144,377 $0.43
------ -----
</TABLE>

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

Options to purchase 2,952,522 and 7,189,109 shares were outstanding at June
30, 1999 and 1998, respectively, but were not included in the calculation of
diluted shares for the six month periods ended June 30, 1999 and 1998 because
the exercise prices were greater than the average market price of common shares
in each respective period. The exercise price ranges of these options were
$32.13 to $58.13 and $25.31 to $58.13 at June 30, 1999 and 1998, respectively.
For the six month period ended June 30, 1999, common equivalent shares of
6,243,690 and interest expense of $3 million, net of taxes, associated with the
Convertible Notes (see Note 10) were excluded from the computation of diluted
earnings per share as a result of their antidilutive effect on earnings per
share

F-41
<PAGE> 112
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 12 -- COMPREHENSIVE INCOME

Comprehensive income is defined as the 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 differences between net income and comprehensive income, for the
Company, are due to foreign currency translation adjustments and unrealized
gains on available-for-sale securities. Comprehensive income for the current
reporting and comparable period in the prior year is as follows:

<TABLE>
<CAPTION>
(IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -------------------
1999 1998 1999 1998
------- ------- -------- -------
<S> <C> <C> <C> <C>
Comprehensive income/(loss)........ $21,438 $15,168 $(67,963) $47,220
</TABLE>

NOTE 13 -- SEGMENT REPORTING

The Company operates in two reportable segments: the Semiconductor segment
and the Storage Systems segment. In the Semiconductor segment, the Company
designs, develops, manufactures and markets integrated circuits, including
application-specific integrated circuits ("ASICs"), application-specific
standard products ("ASSPs") and related products and services. Semiconductor
design and service revenues include engineering design services, licensing of
LSI's advanced design tools software, and technology transfer and support
services. The Company's customers use these services in the design of
increasingly advanced integrated circuits characterized by higher levels of
functionality and performance. The proportion of revenues from ASIC design and
related services compared to semiconductor product sales varies among customers
depending upon their specific requirements. In the Storage Systems segment, the
Company designs, manufactures, markets and supports high performance data
storage management and storage systems solutions and a complete line of
Redundant Array of Independent Disks ("RAID") storage systems, subsystems and
related software.

The following is a summary of operations by segment for the three and
six-month periods ended June 30, 1999.

<TABLE>
<CAPTION>
(IN THOUSANDS)
THREE MONTHS ENDED
JUNE 30, 1999
--------------------------------------------
SEMICONDUCTOR STORAGE SYSTEMS TOTAL
------------- --------------- --------
<S> <C> <C> <C>
Revenue...................................... $434,047 $66,965 $501,012
Income from operations....................... $ 17,317 $ 7,205 $ 24,522
</TABLE>

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1999
--------------------------------------------
SEMICONDUCTOR STORAGE SYSTEMS TOTAL
------------- --------------- --------
<S> <C> <C> <C>
Revenue...................................... $830,154 $134,475 $964,629
Income from operations....................... $ 26,754 $ 12,252 $ 39,006
</TABLE>

The Storage Systems segment was added in August 1998 with the purchase of
Symbios, and therefore revenue and income from operations are not available for
the three and six-month periods ended June 30, 1998. Intersegment revenues for
the three and six-month periods ended June 30, 1999 were not significant.

F-42
<PAGE> 113
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)

The following is a summary of total assets by segment as of June 30, 1999
and December 31, 1998:

<TABLE>
<CAPTION>
(IN THOUSANDS)
JUNE 30, DECEMBER 31,
1999 1998
---------- ------------
<S> <C> <C>
Assets by segment:
Semiconductor.............................................. $2,616,391 $2,700,295
Storage Systems............................................ 139,324 123,510
---------- ----------
Total assets............................................. $2,755,715 $2,823,805
========== ==========
</TABLE>

The Storage Systems segment did not meet the requirement for a reportable
segment as defined in SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information" as of December 31, 1998. However, for purposes of
comparability, total assets by segment as of December 31, 1998 were included in
the table.

NOTE 14 -- LEGAL MATTERS

A discussion of certain pending legal proceedings is included in Item 3 of
the Company's Annual Report on Form 10-K/A for the fiscal year ended December
31, 1998. Except as set forth in this Note, the information provided therein
remains unchanged. On February 26, 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
eighty-eight electronics industry companies, including us. The case number is
CIV99-0377PHX RGS. The patents involved in this lawsuit generally relate to
semiconductor manufacturing and computer imaging, including the use of bar
coding for automatic identification of articles. The relief sought is an
injunction and damages in an unspecified amount. While we cannot make any
assurances 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 continues to believe that the final outcome of such matters
discussed will not have a material 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,
particularly if viewed on a quarterly basis, for having an adverse effect on the
Company's financial position or its results of operations.

Certain additional claims and litigation against the Company have also
arisen in the normal course of business. The Company believes that it is
unlikely that the outcome of these claims and lawsuits will have a materially
adverse effect on the Company's consolidated financial position or results of
operations.

F-43
<PAGE> 114

[LSI Logic Logo]
<PAGE> 115

PROSPECTUS (Subject to Completion)

Issued July 29, 1999

5,000,000 Shares
[LSI Logic Logo]

COMMON STOCK
------------------------
WE ARE OFFERING 5,000,000 SHARES OF OUR COMMON STOCK.
------------------------
CONCURRENT WITH THIS OFFERING OF COMMON STOCK, WE ARE CONDUCTING A SEPARATE
OFFERING OF $250,000,000 PRINCIPAL AMOUNT OF % CONVERTIBLE SUBORDINATED NOTES
CONVERTIBLE ANY TIME BEFORE , 2006 AT A CONVERSION PRICE OF
$ PER SHARE. THE OFFERING OF COMMON STOCK IS NOT CONDITIONED ON THE
COMPLETION OF OUR OFFERING OF NOTES.
------------------------
OUR COMMON STOCK IS LISTED ON THE NEW YORK STOCK EXCHANGE COMPOSITE TAPE UNDER
THE SYMBOL "LSI." ON JULY 27, 1999, THE REPORTED LAST SALE PRICE OF OUR COMMON
STOCK ON THE NEW YORK STOCK EXCHANGE COMPOSITE TAPE WAS $51 1/2 PER SHARE.
------------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 8 OF THIS PROSPECTUS.
------------------------
PRICE $ PER SHARE
------------------------

<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS
PRICE TO AND PROCEEDS TO
PUBLIC COMMISSIONS LSI LOGIC
-------- ------------- -----------
<S> <C> <C> <C>
Per Share................................................. $ $ $
Total..................................................... $ $ $
</TABLE>

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

We have granted the underwriters the right to purchase up to an additional
750,000 shares of our common stock to cover over-allotments. Morgan Stanley &
Co. Incorporated expects to deliver the shares to purchasers on , 1999.
------------------------
MORGAN STANLEY DEAN WITTER
BANCBOSTON ROBERTSON STEPHENS
J.P. MORGAN & CO.
MERRILL LYNCH & CO.
, 1999
<PAGE> 116

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Incorporation of Certain Documents by
Reference................................ 3
Forward-Looking Statements................. 4
Prospectus Summary......................... 5
Risk Factors............................... 8
Use of Proceeds............................ 15
Common Stock Price Range................... 15
Dividend Policy............................ 15
Capitalization............................. 16
Selected Consolidated Financial Data....... 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 19
</TABLE>

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Business................................... 37
Management................................. 46
Principal Stockholders..................... 48
Description of Capital Stock............... 49
Underwriters............................... 53
Legal Matters.............................. 54
Independent Accountants.................... 54
Available Information...................... 54
Trademark Acknowledgements................. 55
Index to Consolidated Financial
Statements............................... F-1
</TABLE>

You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in the prospectus. We are offering to sell the common stock and
seeking offers to buy the common stock only in jurisdictions where offers and
sales are permitted. The information contained in this prospectus is accurate
only as of the date of this prospectus, regardless of the time of delivery of
this prospectus or of any sale of the common stock.

Until , 1999, all dealers that buy, sell or trade the
common stock, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

- The description of the common stock in our Registration Statement on Form
8-A filed on August 29, 1989, under Section 12(g) of the Exchange Act.

- The description of our Amended and Restated Preferred Shares Rights
Agreement in our Registration Statement on Form 8-A-12G/A filed on
December 8, 1998, under Section 12(g) of the Exchange Act.

- Annual Report on Form 10-K filed on March 5, 1999 and 10-K/A filed on
July 28, 1999 for the fiscal year ended December 31, 1998.

- Quarterly Report on Form 10-Q/A for the fiscal quarter ended September
27, 1998, filed on April 8, 1999.

- Quarterly Report on Form 10-Q for the fiscal quarter ended March 28,
1999, filed on May 12, 1999

- Quarterly Report on Form 10-Q for the fiscal quarter ended June 27, 1999,
filed on July 28, 1999

3
<PAGE> 117

You may request a copy of these filings, at no cost, by writing or
telephoning us at the following address:

Investor Relations
LSI Logic Corporation
1551 McCarthy Boulevard
Milpitas, California 95035
(408) 433-6777

FORWARD-LOOKING STATEMENTS

This prospectus and the documents incorporated herein by reference contain
"forward-looking statements" within the meaning of Section 27A of the Securities
Act, and Section 21E of the Exchange Act, that involve risks and uncertainties,
such as statements concerning: growth and future operating results; future
customer benefits attributable to our products; developments in our markets and
strategic focus; new products and product enhancements; potential acquisitions
and the integration of acquired businesses, products and technologies; strategic
relationships; and future economic, business and regulatory conditions. Such
forward-looking statements are generally accompanied by words such as
"anticipate," "expect," "intend" or other words that convey uncertainty of
future events or outcomes. Statements made herein are as of the date of this
prospectus and should not be relied upon as of any subsequent date. The section
below entitled "Risk Factors" sets forth certain factors that could cause our
actual future results to differ materially from these forward-looking
statements. These factors and other cautionary statements made in this
prospectus should be read as being applicable to all related forward-looking
statements whenever they appear or are incorporated by reference herein.

4
<PAGE> 118

PROSPECTUS SUMMARY

LSI LOGIC CORPORATION

- networking,

- telecom/wireless,

- consumer,

- computer,

- storage components, and

- storage systems.

Many of our customers are worldwide leaders in their end markets. Our
customers include:

- Cisco Systems, Inc.,

- Compaq Computer Corporation,

- Hewlett-Packard Company,

- IBM Corporation,

- NCR,

- Sony Corporation, and

- Sun Microsystems, Inc.

5
<PAGE> 119

SUMMARY CONSOLIDATED FINANCIAL DATA

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31,(1) JUNE 30,
------------------------------------------------------------ -------------------
1994 1995 1996 1997 1998 1998 1999
-------- ---------- ---------- ---------- ---------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AND RATIO DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues..................... $923,663 $1,288,790 $1,271,855 $1,322,626 $1,516,891 $669,002 $964,629
Operating income (loss)(2)... 149,589 316,823 191,749 194,936 (128,359) 70,380 39,006
Net income (loss)(2)......... 103,146 238,663 150,362 164,981 (139,478) 62,795 (77,933)
Basic earnings (loss) per
share...................... .95 1.89 1.15 1.17 (.97) .44 (.54)
Shares used in computing
basic earnings (loss) per
share...................... 108,141 126,028 131,181 140,880 143,153 142,868 144,883

Diluted earnings (loss) per
share...................... .86 1.72 1.08 1.14 (.97) .43 (.52)
Shares used in computing
diluted earnings (loss) per
share...................... 127,233 142,113 145,423 146,446 143,153 144,377 149,614

OTHER DATA:
Ratio of earnings to fixed
charges(4)................. 5.7x 11.4x 7.2x 10.6x -- 9.5x 1.7x
</TABLE>

<TABLE>
<CAPTION>
JUNE 30, 1999
------------------------------------------------------
ACTUAL AS ADJUSTED(5) AS FURTHER ADJUSTED(6)
---------- -------------- ----------------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments.... $ 345,143 $ $
Working capital...................................... 518,402
Total assets......................................... 2,755,715
Total debt........................................... 719,987
Stockholders' equity................................. 1,486,083
</TABLE>

(2) In 1998, we recorded a $146 million charge for acquired in-process research
and development associated with the acquisition of Symbios and a $75 million
charge for restructuring. See Notes 2 and 3 of Notes to Annual Consolidated
Financial Statements. For the six months ended June 30, 1999, we recorded a
$4.6 million charge for in-process technology associated with the
acquisition of ZSP Corporation on April 14, 1999, restructuring and merger
costs primarily in connection with the merger with SEEQ and a $92 million
charge for a cumulative effect of a change in accounting principle, net of
tax, associated with the unamortized preproduction balance associated with
the Gresham manufacturing facility. See Notes 2, 3 and 9 to the Notes to the
Unaudited Consolidated Condensed Financial Statements for the six months
ended June 30, 1999.

(3) Diluted earnings per share for the year ended December 31, 1998 and for the
six month period ended June 30, 1999, would have been $0.68 per share and
$0.28 per share, respectively, using a 25% effective rate on pre-tax income
if the following items were excluded: (i) the acquired in-process research
and development charge of $145.5 million for the year ended December 31,
1998 and $4.6 million for the six month period ended June 30, 1999,
respectively, (ii) the restructuring and merger related charges of $75.4
million for the year ended December 31, 1998 and $5.9 million for the six
month period ended June 30, 1999, respectively, (iii) the amortization of
intangibles of $22.4 million for the year ended December 31, 1998 and $23.0
million for the six month period ended June 30, 1999, respectively, (iv) net
other non-recurring charges of $9.1 million for the year ended December 31,
1998 and (v) the cumulative effect of a change in accounting principle of
$92 million for the six months ended June 30, 1999.

(5) Reflects the issuance of the common stock offered by this prospectus
(assuming no exercise of the underwriters' over-allotment option) and the
application of the proceeds from this offering (after deducting estimated
expenses of this offering).

(6) Reflects the issuance of the common stock offered by this prospectus and the
concurrent issuance of $2,500,000 aggregate principal amount of our %
convertible subordinated notes due 2006 (assuming no exercise of the
underwriters' over-allotment option in either case) and the application of
the proceeds from both offerings (after deducting estimated expenses of both
offerings). This offering is not conditioned on the completion of our
offering of the notes.

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THE OFFERING

Common stock offered....... 5,000,000 shares

Common stock to be
outstanding after the
offering................. 152,319,417 shares(1)(2)

Over-allotment option...... 750,000 shares

Use of proceeds............ We intend to use the proceeds of this offering and
the concurrent offering of our convertible
subordinated notes due 2006 to repay indebtedness
under our existing credit facility and for general
corporate purposes. To the extent that we do not
consummate the concurrent offering of our
convertible subordinated notes due 2006, we intend
to use the proceeds of this offering to repay
indebtedness under our existing credit facility.

Concurrent offering........ Concurrent with this offering of our common stock
we are conducting a separate offering of
$250,000,000 principal amount of %
subordinated notes convertible into shares of our
common stock at $ per share. This
offering is not conditioned on the completion of
our offering of the notes.

Dividend policy............ We do not anticipate paying any cash dividends in
the foreseeable future. Any future determination to
pay dividends will be at the discretion of our
board of directors and will be dependent upon then
existing conditions, including our financial
condition, results of operations, contractual
restrictions, capital requirements, business
prospects, and other factors our board of directors
deems relevant.
- ---------------
(1) Unless otherwise noted, the information in this prospectus does not take
into account the possible issuance of 750,000 additional shares of our
common stock to the underwriters pursuant to their rights to purchase
additional shares to cover over-allotments.

(2) Excludes (i) 21.2 million shares issuable upon exercise of outstanding stock
options with a weighted average exercise price of $23.49 per share and 8.4
million shares available for grant under our 1982 Incentive Stock Option
Plan, 1991 Equity Incentive Plan and 1995 Director Option Plan, (ii) 1.7
million shares issuable under our Employee Stock Purchase Plan, (iii) 11
million shares issuable upon conversion of the notes due 2004 and (iv)
shares issuable upon conversion of the notes under our concurrent
offering. See Note 9 of Notes to our Audited Consolidated Financial
Statements for descriptions of our stock plans.

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RISK FACTORS

IF WE ARE NOT ABLE TO IMPLEMENT NEW PROCESS TECHNOLOGIES SUCCESSFULLY, OUR
OPERATING RESULTS AND FINANCIAL CONDITION WILL BE ADVERSELY IMPACTED.

DISRUPTION OF OUR MANUFACTURING FACILITIES COULD CAUSE DELAYS IN SHIPMENTS OF
PRODUCTS TO OUR CUSTOMERS AND COULD RESULT IN CANCELLATION OF ORDERS OR LOSS OF
CUSTOMERS.

OUR LACK OF LONG-TERM VOLUME PRODUCTION CONTRACTS WITH OUR CUSTOMERS COULD
RESULT IN INSUFFICIENT CUSTOMER ORDERS WHICH WOULD RESULT IN UNDERUTILIZATION OF
OUR MANUFACTURING FACILITIES.

We generally do not have long-term volume production contracts with our
customers. We cannot control whether and to what extent customers place orders
for any specific ASIC design or ASSPs and the

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quantities of products included in those orders. Insufficient orders will result
in underutilization of our manufacturing facilities and would adversely impact
our operating results and financial condition.

BRINGING OUR NEW WAFER FABRICATION FACILITY TO FULL OPERATING CAPACITY COULD
TAKE LONGER AND COST MORE THAN ANTICIPATED.

OUR LACK OF GUARANTEED SUPPLY ARRANGEMENTS WITH OUR SUPPLIERS COULD RESULT IN
OUR INABILITY TO OBTAIN SUFFICIENT RAW MATERIALS FOR USE IN THE PRODUCTION OF
OUR PRODUCTS.

HIGH CAPITAL REQUIREMENTS AND HIGH FIXED COSTS CHARACTERIZE OUR BUSINESS, AND WE
FACE A RISK THAT REQUIRED CAPITAL MIGHT BE UNAVAILABLE WHEN WE NEED IT.

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Future operating results will continue to be subject to quarterly
variations based upon a wide variety of factors including:

- The cyclical nature of both the semiconductor industry and the markets
addressed by our products,

- The availability and extent of utilization of manufacturing capacity,

- Erosion in the price of our products, and

- The timing of new product introductions, the ability to develop and
implement new technologies and other competitive factors.

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

- 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,

- Properly identify target markets,

- Respond effectively to new technological changes or new product
announcements by others,

- Reduce semiconductor chip size, increase device performance and improve
manufacturing yields,

- Adapt products and processes to technological changes, and

- Adopt and/or set emerging industry standards.

OUR ACQUISITION AND INVESTMENT ALLIANCE ACTIVITIES COULD DISRUPT OUR ONGOING
BUSINESS.

- We may experience difficulty in assimilating the acquired operations and
employees,

- We may be unable to retain the key employees of the acquired operation,

- The acquisition or investment may disrupt our ongoing business,

- We may not be able to incorporate successfully the acquired technology
and operations into our business and maintain uniform standards,
controls, policies and procedures, and

- We may lack the experience to enter into new markets, products or
technologies.

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Some of these factors are beyond our control. Failure to manage growth
effectively and to integrate acquisitions would affect our operating results or
financial condition.

CHANGES IN FOREIGN CURRENCY EXCHANGE RATES COULD AFFECT OUR OPERATIONS OR CASH
FLOWS.

CHANGES IN INTERNATIONAL TRADE AND ECONOMIC CONDITIONS COULD ADVERSELY IMPACT
OUR ABILITY TO MANUFACTURE OR SELL IN FOREIGN MARKETS AND COULD RESULT IN A
DECLINE IN CUSTOMER ORDERS.

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