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Securities registered pursuant to Section 12(g) of the Act: Class A common stock

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by a check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes þ No o

The aggregate market value of the registrant’s common stock, $0.0001 par value per share, held by non-affiliates of the registrant on June 30, 2003, the last business day of the registrant’s most recently completed second fiscal quarter, was $5,814,564,713 (based on the closing sales price of the registrant’s common stock on that date). Shares of the registrant’s common stock held by each officer and director and each person who owns 5% or more of the outstanding voting power of the registrant have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not a determination for other purposes.

The registrant has two classes of common stock authorized, Class A common stock and Class B common stock. The rights, preferences and privileges of each class of common stock are substantially identical except for voting rights. Each share of Class A common stock entitles its holder to one vote and each share of Class B common stock entitles its holder to ten votes. In addition, holders of Class B common stock are entitled to vote separately on the proposed issuance of additional shares of Class B common stock in certain circumstances. As of March 5, 2004 there were 248,361,487 shares of Class A common stock outstanding and 61,292,949 shares of Class B common stock outstanding.

Part III incorporates by reference certain information from the registrant’s definitive proxy statement (the “Proxy Statement”) for the 2004 Annual Meeting of Shareholders to be filed on or before March 29, 2004. Except with respect to information specifically incorporated by reference in this Form 10-K, the Proxy Statement is not deemed to be filed as part hereof.

Broadcom®, the pulse logo, Connecting everything®, Blutonium®, QAMLink®, QuadSquad®, SiByte®, StrataSwitch®, StrataXGS®, V-thernet®, 54g^TM, AirForce^TM, AirForce One^TM, BladeRunner^TM, BroadVoice^TM, CALISTO^TM, Champion^TM, CryptoNetX^TM, FirePath^TM, Grand Champion^TM, InConcert^TM, MetroSwitch^TM, NetXtreme^TM, PhonexChange^TM, ROBOswitch-plus^TM, ROBO-HS^TM, ServerWorks^TM and SystemI/O^TM are trademarks of Broadcom Corporation and/or its affiliates in the United States and certain other countries. All other trademarks or tradenames mentioned are the property of their respective owners.

All statements included or incorporated by reference in this Report, other than statements or characterizations of historical fact, are forward-looking statements. Examples of forward-looking statements include, but are not limited to, statements concerning projected revenue, expenses and gross profit; our accounting estimates, assumptions and judgments; the market acceptance and performance of our products; manufacturing capacity; our ability to retain and hire key executives, technical personnel and other employees in the numbers, with the capabilities, and at the compensation levels needed to implement our business and product plans; the competitive nature of and anticipated growth in our markets; our ability to achieve further product integration; the status of evolving technologies and their growth potential; the timing of new product introductions; the adoption of future industry standards; our dependence on a few key customers for a substantial portion of our revenue; our ability to migrate to smaller process geometries; our ability to consummate acquisitions and integrate their operations successfully; the need for additional capital; inventory and accounts receivable levels; and the success of pending litigation. These forward-looking statements are based on our current expectations, estimates and projections about our industry, management’s beliefs, and certain assumptions made by us, all of which are subject to change. Forward-looking statements can often be identified by words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “believes,” “seeks,” “estimates,” “may,” “will,” “should,” “would,” “could,” “potential,” “continue,” similar expressions, and variations or negatives of these words. These statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors, some of which are listed under the section “Risk Factors” at the end of Item 7 of this Report. These forward-looking statements speak only as of the date of this Report. We undertake no obligation to revise or update publicly any forward-looking statement for any reason.

Broadcom Corporation is a leading provider of highly integrated semiconductor solutions that enable broadband communications and networking of voice, video and data services. We design, develop and supply complete system-on-a-chip (SoC) solutions incorporating digital, analog and radio frequency (RF) technologies, as well as related hardware and software system-level applications. Our diverse product portfolio addresses every major broadband communications market and includes solutions for digital cable and satellite set-top boxes; high definition television (HDTV); cable and DSL modems and residential gateways; high-speed transmission and switching for local, metropolitan, wide area and storage networking; home and wireless networking; cellular and terrestrial wireless communications; Voice over Internet Protocol (VoIP) gateway and telephony systems; broadband network and security processors; and SystemI/O^TM server solutions.

Broadcom was incorporated in California in August 1991. Our principal executive offices are located at 16215 Alton Parkway, Irvine, California 92618-3616, and our telephone number at that location is 949.450.8700. Our Internet address is www.broadcom.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to those reports and other Securities and Exchange Commission, or SEC, filings are available free of charge through our website as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. Our Class A common stock trades on the NASDAQ National Market® under the symbol BRCM. The inclusion of our website address in this Report does not include or incorporate by reference into this Report any information on our website.

Over the past two decades communications technologies have evolved from simple analog voice signals transmitted over networks of copper telephone lines to complex analog and digital voice and data signals transmitted over hybrid networks of media, such as copper, coaxial and fiber optic cables and wireless transmissions over radio frequencies. This evolution has been driven by enormous increases in the number of users and new data-intensive computing and communications applications, such as web-based commerce, streaming audio and video, enterprise-wide information systems and telecommuting. In addition, information is

increasingly available via wired and wireless networks through a variety of access devices, including personal computers, digital cable and satellite set-top boxes, and handheld computing devices such as personal digital assistants, or PDAs, and cellular phones. These applications and devices require increasingly higher data transfer rates within computing systems and the data storage devices that support them and across the network communication infrastructures that serve them.

This evolution has inspired equipment manufacturers and service providers to develop and expand existing broadband communications markets and has created the need for new generations of integrated circuits. Broadband transmission of digital information over existing infrastructures requires highly integrated mixed-signal semiconductor solutions to perform critical systems functions such as complex signal processing and converting digital data to and from analog signals. Broadband communications equipment requires substantially higher levels of system performance, in terms of both speed and precision, which typically cannot be adequately addressed by traditional semiconductor solutions developed for low speed transmission applications. Moreover, solutions that are based on multiple discrete analog and digital chips generally cannot achieve the cost-effectiveness, performance and reliability required by today’s broadband marketplace. These requirements are best addressed by new generations of highly integrated mixed-signal devices that combine complex analog and digital functions with high performance circuitry, and that can be manufactured in high volumes using cost-effective process technologies.

We design, develop and supply a diverse portfolio of products targeted to every major broadband communications market. Our products are ubiquitous, embedded in cable and DSL modems and digital set-top boxes in the home, in office networking equipment, in wireless-enabled laptop and desktop computers, and in advanced PDAs and cellular phones, among other wired and wireless equipment.

The following is a brief description of each of our target markets and the semiconductor solutions that we provide for each market.

Cable modems provide users high-speed Internet access through a cable television network. Although cable network systems were originally established to deliver broadcast television signals to subscribers’ homes, cable television operators have been upgrading their systems to hybrid fiber coaxial cable to support two-way communications, high-speed Internet access and telecommuting through the use of cable modems. These modems are designed to achieve downstream transmission speeds of up to 43 megabits per second, or Mbps (North American standard), or 56 Mbps (international standard), and upstream transmission to the network at speeds of up to 30 Mbps, nearly 1,000 times faster than the fastest analog telephone modems, which transmit downstream at up to 56 kilobits per second, or Kbps, and upstream at up to 28.8 Kbps. Cable modems typically connect to PCs through a standard 10/ 100BASE-T Ethernet card or Universal Serial Bus connection. A device called a cable modem termination system, or CMTS, located at a local cable operator’s network hub, communicates through television channels to cable modems in subscribers’ homes and controls access to cable modems on the network.

The cable industry’s adoption of an open standard, the Data Over Cable Service Interface Specification, commonly known as DOCSIS®, has made possible interoperability among different manufacturers’ cable modems and CMTS equipment across different cable networks. The first specification, DOCSIS 1.0, was adopted in 1997 and enabled the cost-effective deployment of cable modems via retail channels. In 1998 the DOCSIS 1.1 specification was announced. The new specification enhanced DOCSIS 1.0 to include support for cable telephony using VoIP technology, streaming video and managed data services. In December 2002 DOCSIS 2.0 was approved. DOCSIS 2.0 adds support for higher upstream transmission speeds of up to 30 Mbps and more symmetric Internet Protocol, or IP, services and provides extra capacity for cable telephony.

The high speeds of today’s cable modems can enable an entirely new generation of multimedia-rich content over the Internet and allow cable operators to expand their traditional video product offerings to include data and telephone services. The adoption of cable modem services and the continued proliferation of homes with multiple

PCs have also generated the need for residential networking. Cable television operators have recognized the opportunity to include this feature in the equipment they utilize for cable modem services through either home telephone line or wireless solutions, and the cable industry has created a specification called CableHome^TM that defines how a home intranet interoperates with a cable operator’s Internet service.

We offer integrated semiconductor solutions for cable modems and cable modem termination systems. We currently have a leading market position in both equipment areas, with an extensive product offering for the high-speed, two-way transmission and display of digital information for the delivery of voice, video and data services to residential customers over existing hybrid fiber coaxial cable. We offer a complete system-level solution that not only includes integrated circuits, but also reference design hardware and a full software suite to support our customers’ needs and accelerate time to market.

Cable Modem Solutions. All of our cable modem chips are built around our QAMLink® DOCSIS-compliant transceiver and media access controller, or MAC, technologies, which enable downstream data rates up to 56 Mbps and upstream data rates up to 30 Mbps and are compliant with DOCSIS versions 1.0, 1.1 and 2.0. These devices provide real-time DOCSIS component capabilities in silicon, enabling quality of service to support constant bit rate services like VoIP and video streaming.

Residential Broadband Gateway Solutions. The level of integration and performance that we continue to accomplish in our cable modem chips is reducing the cost and size of cable modems while providing consumers with easy to use features and seamless integration to other transmission media. As a result, cable modem functionality is evolving into a small silicon core that can be incorporated into other consumer devices for broader distribution of IP-based services throughout the home. Broadcom offers residential broadband gateway solutions that bring together a range of capabilities, including those for cable modems, digital set-top boxes, home networking, VoIP and Ethernet connectivity. These products allow cable operators worldwide to provide residential broadband gateways capable of delivering digital telephone service via the PacketCable^TM specification, IP video, home networking and cable modem Internet services over cable systems, existing telephone lines and wireless connections.

CMTS Solutions. We have a complete end-to-end DOCSIS 1.0, 1.1 and 2.0 compliant cable modem semiconductor solution for both head-end and subscriber locations. Our CMTS chipset consists of downstream and upstream physical layer, or PHY, devices and a DOCSIS MAC. This cable modem termination system enables the exchange of information to and from the subscriber location, making it a key element in the delivery of broadband access over cable.

Digital subscriber line technologies, commonly known as DSL, represent a family of broadband technologies that use a greater range of frequencies over existing copper telephone lines than traditional telephone services, which in turn allows greater bandwidth to send and receive information. DSL speeds range from 128 Kbps to 52 Mbps depending on the distance between the central office and the subscriber. These data rates enable local exchange carriers to provide, and end users to receive, a wide range of new bundled broadband services.

DSL technology has a number of standards or line codes used worldwide. We support all standards-based line codes, such as asymmetric DSL, or ADSL, ADSL2, ADSL2+ and very-high-speed DSL, or VDSL, including the standard Annexes used in Europe and Japan. In addition, we provide end-to-end technology, with solutions designed for both customer premises equipment, or CPE, and central office applications. Our DSL technologies enable local exchange carriers and enterprise networking vendors to deliver bundled broadband services, such as digital video, high-speed Internet access, VoIP, video teleconferencing and IP data business services, over existing copper twisted pair wiring.

DSL Modem and Residential Gateway Solutions. For ADSL CPE applications, we provide products that address the wide variety of local area network, or LAN, connectivity options, including Ethernet, USB-powered solutions, VoIP-enabled access devices and IEEE 802.11 wireless access points with multiple Ethernet ports. These solutions also provide a fully scalable architecture to address emerging value-added services such as in-home voice

DSL Central Office Solutions. We provide highly integrated semiconductor solutions for ADSL central office applications as well. Our BladeRunner^TM high-density central office ADSL chipset supports all worldwide ADSL standards using our proprietary Firepath^TM 64-bit digital signal processor. We believe these solutions will enable equipment manufacturers of digital subscriber line access multiplexers, or DSLAMs, and next generation digital loop carriers to offer a significant increase in the number of DSL-enabled copper twisted pairs that can be supported within telecommunication companies’ tight heat, power and space constraints.

VDSL Solutions. For VDSL applications, we offer our QAM-based V-thernet® product family, which supports Ethernet transport over standard telephone wires.

The last decade has seen rapid growth in the quantity and diversity of television programming. Despite ongoing efforts to upgrade the existing cable infrastructure, an inadequate number of channels exists to provide the content demanded by consumers. In an effort to increase the number of channels and provide higher picture quality, cable service providers began offering digital programming in 1996 through the use of new digital cable set-top boxes. These digital cable set-top boxes facilitate high-speed digital communications between a subscriber’s television and the cable network. Digital cable set-top boxes are currently able to support downstream transmission speeds to the subscriber of up to 43 Mbps (North American standard) or 56 Mbps (international standard), and several hundred MPEG-2 compressed digital television channels.

Direct broadcast satellite, or DBS, is the primary alternative to cable for providing digital television programming. DBS broadcasts video and audio data from satellites directly to digital set-top boxes in the home via dish antennas. Due to the ability of DBS to provide television programming where no cable infrastructure is in place, we believe that the United States market for DBS may eventually be surpassed by the international market, where the cable infrastructure is generally less extensive.

The Federal Communications Commission has stated that traditional terrestrial broadcast stations will be required to broadcast in digital format in the future. Currently, the FCC is targeting 2007 for this mandated digital conversion. This conversion will ultimately require all television sets that are 13 inches or larger, DVD players and video cassette recorders to incorporate an HDTV receiver. We believe this conversion to digital broadcasting will also create demand for new digital cable and satellite set-top boxes and digital television receivers. In addition, manufacturers continue to develop and introduce new generations of digital cable and satellite set-top boxes that incorporate enhanced functionalities, such as Internet access, PVR, video on demand, interactive television, HDTV, 3-D gaming, audio players and various forms of home networking.

TV manufacturers also plan to incorporate digital cable-ready functionality into television sets for the North American market by incorporating today’s cable set-top box functionality into TV sets. The manufacturers of TVs, through their trade association, the Consumer Electronics Association, and in cooperation with North American cable operators, have created an industry specification called the “plug-n-play” agreement. This agreement and its associated specification define how to design one-way digital cable-ready TVs for connection into the North American cable infrastructure. We anticipate that an additional specification will be issued that defines how to incorporate two-way interactive functionality into a TV set.

Cable-TV Set-Top Box Solutions. We offer a complete silicon platform for the digital cable-TV set-top box market. These highly integrated chips give manufacturers a broad range of features and capabilities for building standard digital cable-TV boxes for digital video broadcasting, as well as high-end interactive set-top boxes that merge high-speed cable modem functionality with studio-quality graphics, text and video for both standard definition television, or SDTV, and HDTV formats.

Our cable-TV set-top box silicon consists of front-end transceivers with downstream, upstream and MAC functions, single-chip cable modems, advanced 2D/3D video-graphics encoders and decoders, complementary metal oxide semiconductor, or CMOS-based radio frequency television tuners, and digital visual interface chipsets. These cable-TV set-top box chips support most industry transmission and television standards, enabling universal

Our chips provide a comprehensive silicon platform for high-end interactive set-top boxes, supporting the simultaneous viewing of television programming with Internet content capability in either HDTV or SDTV format. This capability offers consumers a true interactive environment, allowing them to access Internet content while watching television. By adding our home networking and VoIP technologies, these set-top boxes can also support the functions of a residential broadband gateway for receiving and distributing digital voice and data services throughout the home over the telephone line. In addition, our set-top box semiconductor solutions incorporate PVR functionality that allows viewers to watch and record multiple programs and enables additional features such as selective viewing, fast forward, fast reverse, skip forward, skip back, and slow motion and frame-by-frame viewing.

DBS Solutions. By leveraging our extensive investment and expertise in the cable-TV set-top box market, we have also been able to develop comprehensive DBS solutions, including an advanced, high-definition video graphics subsystem, which drives the audio, video and graphic interfaces in DBS set-top boxes and provides multi-stream control to support PVR capabilities; a CMOS satellite tuner, which allows our customers to provide additional channel offerings; front-end receiver chips for digital broadcast satellite set-top boxes, including an advanced modulation system to increase satellite capacity with existing satellites; and a digital visual interface transmitter. In addition, we offer a complete end-to-end chipset for receiving and displaying HDTV. This chipset provides television and set-top box manufacturers with a high performance vestigial side band receiver and a 2D/3D video-graphics subsystem for SDTV and HDTV displays.

To meet the needs of the growing broadband satellite market, we have also developed a complete satellite system solution that enables DBS providers to cost effectively deploy two-way broadband satellite services, enabling Internet access via satellite. This solution includes an advanced modulation digital satellite receiver, digital satellite tuner/receiver and a high-performance broadband gateway modem, which combines the functionality of a satellite modem, a firewall router and home networking into a single chip.

Digital TV Solutions. We were an early developer of advanced television systems committee, or ATSC, demodulators used for the reception of terrestrial HDTV signals broadcast in North America. Capitalizing on the FCC HDTV mandate and the “plug-n-play” agreement, as well as our extensive cable-TV set-top box technology portfolio, we have developed a highly integrated digital TV system-on-a-chip solution. This digital TV solution, when combined with our existing satellite, cable or terrestrial demodulators, forms a complete semiconductor solution for HDTV delivery platforms, including satellite, cable or terrestrial set-top boxes and integrated high-definition televisions. Our integrated HDTV solution will allow television manufactures to develop digital cable-ready televisions that connect directly to the North American cable infrastructure without the need for an external set-top box.

Local area networks consist of different types of equipment interconnected by copper, fiber or coaxial cables utilizing a common computer networking protocol, generally the Ethernet protocol. Ethernet scales in speed from 10 Mbps to 10 gigabits per second, or Gbps, providing both the bandwidth and scalability required in today’s dynamic networking environment. As communications bottlenecks have appeared in corporate LANs with the deployment of bandwidth intensive and latency sensitive applications, new technologies such as Gigabit Ethernet, a networking standard that supports data transfer rates of up to one Gbps, and the 10 Gigabit Ethernet standard, which supports data transfer rates of up to 10 Gbps, are replacing older technologies such as Fast Ethernet, which supports data transfer rates of up to 100 Mbps, and 10BASE-T Ethernet, which supports data transfer rates of 10 Mbps.

Gigabit Ethernet is emerging as the predominant networking technology for desktop and laptop computers. As Gigabit Ethernet is deployed to desktop and laptop computers, we expect server and backbone connections to

continue to migrate to the new 10 Gigabit Ethernet standard. We further expect the continued use of switch connections in place of legacy repeater connections. Switches not only have the ability to provide dedicated bandwidth to each connection, but also provide routing functionality and possess the intelligence to deal with differentiated traffic such as voice, video and data. We anticipate that a significant portion of the installed base of 10/100BASE-T Ethernet switches as well as network interface cards, or NICs, will be upgraded to faster technologies.

Our 10/100 Mbps Ethernet and Gigabit Ethernet transceivers, controllers and switches are integrated, low-power semiconductor solutions for servers, workstations, and desktop and laptop computers that enable the high-speed transmission of voice, video and data services over the Category 5 unshielded twisted-pair copper wiring widely deployed in enterprise and small office networks. We also offer 10 Gigabit Ethernet transceivers for network infrastructure products. These high-speed connections are enabling users to share Internet access, exchange graphics and video presentations, receive VoIP and video conferencing services, and share peripheral equipment, such as printers and scanners. We also incorporate intelligent networking functionality into our devices, enabling system vendors to deploy enhanced classes of services and applications, typically found only in the core of the network, to every corporate desktop.

Digital Signal Processing Communication Architecture. Our complex Ethernet transceivers are built upon a proprietary digital signal processing, or DSP, communication architecture optimized for high-speed enterprise network connections. Our DSP silicon core enables interoperability and robust performance over a wide range of cable lengths and operating conditions, and delivers performance of greater than 250 billion operations per second. This proprietary DSP architecture facilitates the migration path to smaller process geometries and minimizes the development schedule and cost of our transceivers. It has been successfully implemented in .5, .35, .25, .18 and .13 micron CMOS processes, and in chips with one, four, six and eight ports.

Fast Ethernet and Gigabit Ethernet Transceivers. Our 10/100 Ethernet transceiver product line ranges from single-chip 10/100 Ethernet transceivers to single-chip octal 10/100 Ethernet transceivers. These devices allow information to travel over standard Category 5 copper cable at rates of 10 Mbps and 100 Mbps. Our Gigabit Ethernet transceivers are enabling manufacturers to make equipment that delivers data at Gigabit speeds over Category 5 cabling. We believe this equipment can significantly upgrade the performance of existing networks without the need to rewire the network infrastructure with fiber or enhanced copper cabling. Additionally, we have developed a family of semiconductor solutions incorporating four transceivers on a single chip optimized for high-port-density Gigabit Ethernet switches and routers. Our QuadSquad® transceivers greatly reduce system costs by simplifying typical high-density board designs, further facilitating the deployment of Gigabit Ethernet bandwidth to the desktop.

Our Gigabit transceivers are driving the market toward lower power, smaller footprint solutions, making it easier and less expensive to build 10/100/1000 Ethernet NICs, switches, hubs and routers and to put networking chips directly on computer motherboards in LAN on motherboard, or LOM, configurations. We plan to continue to incorporate additional functionality into all of our transceivers, providing customers with advanced networking features, on-chip diagnostic capabilities and higher performance capabilities.

10 Gigabit Ethernet Transceivers. We have developed a family of 10 Gigabit Ethernet CMOS transceivers. When combined with serial 10 Gigabit optics, these devices can simultaneously transmit and receive at 10 Gbps data rates over 50 kilometers of existing single mode optical fiber. A 10 Gigabit Ethernet link over such distances extends the reach of Ethernet into local, regional and metropolitan fiber optic networks. We believe that significant cost, performance and latency advantages can be realized when the Ethernet protocol and other associated quality of service capabilities are available in these network domains. We anticipate that convergence around 10 Gigabit Ethernet will allow massive data flow from remote storage sites across the country over the metropolitan area network, or MAN, and into the corporate LAN, without unnecessary delays, costly buffering for speed mismatches or latency, or breaks in the quality of service protocol.

SerDes Technology and Products. We have developed an extensive library of Serializer/Deserializer, or SerDes, cores for Ethernet, storage and telecommunications network infrastructures. The technology is available in stand-alone SerDes devices or integrated with our standard and custom products. New generations of SerDes architectures provide advanced on-chip diagnostic intelligence to allow system designers to monitor, test and

Gigabit Ethernet Controllers. Built upon five generations of Gigabit Ethernet MAC technology, our NetXtreme^TM family of Gigabit Ethernet controllers supports peripheral component interconnect, or PCI, PCI-X and PCI Express^TM local bus interfaces for use in NICs and LOM implementations. The NetXtreme family includes comprehensive solutions for servers, workstations, and desktop and laptop computers. These devices incorporate an integrated Gigabit Ethernet PHY transceiver and are provided with an advanced software suite available for a variety of operating systems. The NetXtreme architecture also features a processor-based design that enables advanced management software to run in firmware so it can be remotely upgraded through simple downloads. The entire product family is fabricated in a .13 micron or .18 micron CMOS process.

Ethernet Switches. We offer a broad switch-on-a-chip product line ranging from low-cost, unmanaged and managed, OSI Layer 2 eight port switch chips to high-end managed, Layer 3 through Layer 7 enterprise class switch chips.

Our ROBOswitch-plus^TM product family consists of five and eight port Layer 2 switch chips supporting five, eight, 16 and 24 port 10/100 Ethernet switches, and our ROBO-HS^TM product family supports single-chip networking solutions for Layer 2 Gigabit Ethernet configurations of four, five, eight, 16 and 24 ports. We believe our switch chips make it economical for the remote office/business office and small office/home office network markets to have the same high-speed local connectivity as the large corporate office market. Our highly integrated family of switch products combines the switching fabric, MACs, 10/100 and Gigabit Ethernet transceivers, media independent interface and packet buffer memory onto single-chip solutions. These chips give manufacturers multiple switch design options that combine plug and play ease-of-use, scalability, network management features and non-blocking switching performance at optimal price points for the remote office and branch office user.

Our family of high-end StrataSwitch® II products consists of wire-speed, multi-layer chips that combine multi-service provisioning capabilities with switching, routing and traffic classification functionality onto single-chip solutions. Replacing as many as 10 chips, our StrataSwitch II family of chips incorporates 24 Fast Ethernet and two Gigabit Ethernet ports with advanced Layer 3 switching and multi-layer packet classification.

Our StrataXGS® product family provides the multi-layer switching capabilities of our StrataSwitch II technology with wire-speed Gigabit and 10 Gigabit Ethernet switching performance for enterprise business networks. These devices, in combination with our quad Gigabit Ethernet transceivers, enable system vendors to build 12, 24 and 48 port multi-layer Gigabit Ethernet stackable switches, supporting systems with up to 384 Gigabit Ethernet ports. These multi-layer switches are capable of receiving, prioritizing and forwarding packets of voice, video and data at high speeds over existing corporate networks. In addition, the StrataXGS family enables advanced network management capabilities in the switching infrastructure to track different data flows and monitor or control bandwidth on any one of these flows. This results in a more intelligent use of network resources and enables a whole new set of network service applications that require high bandwidth, reliable data transmission, low latency and advanced quality service features such as streaming video and VoIP.

Our MetroSwitch^TM product family is used in networking equipment to link MANs and large corporate centers and reduce bottlenecks in the system. These products integrate 12 Gigabit Ethernet ports and one 10 Gigabit Ethernet port into a single-chip solution.

We also offer an integrated carrier-class switch fabric chipset that can scale in bandwidth from 80 Gbps to 1.2 terabits per second, or Tbps. This fabric is the core building block for transferring voice, video and data among high speed line cards in multi-protocol label switching multi-service switches, core enterprise switches, data center routers and core IP routers. This chipset enables equipment vendors to build a range of reliable systems, with high quality of service at an acceptable cost point, to accelerate the deployment of high-speed IP-based services that require carrier-class service level agreements.

With the proliferation of data being accessed and sorted by the Internet and corporate intranets, the demand for servers has increased substantially. As integral pieces of the overall communications infrastructure, servers are

multiprocessor-based computers that are used to support users’ PCs over networks and to perform data intensive PC functions such as accessing, maintaining and updating databases. Unlike mobile and desktop PCs, which are dominated by central processing units, or CPUs, server, storage and workstation platforms require highly-tuned core logic to provide high bandwidth, high performance and the reliability, availability and scalability that customers demand. The Internet has created a new market for servers, storage and workstation platforms as users access data and entertainment stored on servers from their PCs, handheld computers and wireless handsets.

Our SystemI/O semiconductor solutions act as the essential conduits for delivering high-bandwidth data in and out of servers, and coordinating all input/output, or I/O, transactions within server, storage and workstation platforms, including among external I/O devices, the main system memory and multiple CPUs.

ServerWorks Corporation, our wholly-owned subsidiary, provides core logic technology that manages the flow of data to and from a system’s processors, memory and peripheral I/O devices. ServerWorks^TM products are used to design low-end and mid-range servers with two to four CPUs, as well as storage, workstation and networking platforms. The bandwidth of our SystemI/O solutions, both from CPU to memory and memory to I/O subsystems such as disk drives or networks, leads the industry. These products also provide reliability, availability and serviceability features. The current generation of our Grand Champion^TM SystemI/O products, the GC-HE, GC-LE and the GC-SL, supports Intel Pentium® 4 processors that run at speeds beyond 2.4 GHz and provides memory bandwidth of up to five gigabytes per second and I/O bandwidth of up to four gigabytes per second. ServerWorks was also the first to integrate Gigabit Ethernet into the core logic for Intel-based servers through its Champion^TM Ethernet I/O Bridge, which can be used with all versions of the Grand Champion SystemI/O core logic.

To date ServerWorks chips have been used primarily in servers sold by major PC server OEMs and motherboard manufacturers; however, ServerWorks has leveraged its technology over the past year into other growing markets such as storage and networking. In addition to developing our own chips for storage platforms, in early 2004 we acquired a complete enterprise-class, redundant array of inexpensive disks, or RAID, software stack to allow ServerWorks to deliver complete RAID solutions for local server storage. RAID is a technology in which data is stored in a distributed manner across multiple disk drives to enhance fault tolerance and the ability to survive and recover from a hard drive failure. RAID provides real-time data recovery, with uninterrupted access, when a hard drive fails, as well as increased system uptime and continuous network availability. The initial RAID products being offered by ServerWorks are highly integrated RAID-on-chip and RAID-on-motherboard solutions for entry-level and mid-range server applications, including the software stack to provide our customers complete validated solutions.

To address the increasing volume of data traffic emanating from the growing number of broadband connections in homes and businesses, MANs and wide area networks, or WANs, will have to evolve at both the transport and switching layers. We believe that the CMOS fabrication process will be a key technology in this evolution by enabling the development of smaller optical modules and system components that cost less, consume less power and integrate greater functionality.

Electronic components for optical communications are a natural extension of our large portfolio of high-speed LAN chips, one that will allow us to provide end-to-end semiconductor solutions across the WAN, MAN and LAN that increase the performance, intelligence and cost-effectiveness of broadband communications networks.

We offer a portfolio of CMOS OC-48 and OC-192 transceiver and forward error correction, or FEC, chips for Synchronous Optical Networks, or SONET, and dense wave division multiplexing, or DWDM, applications, as well as a serial CMOS transceiver for 10 Gigabit Ethernet applications. Our use of the CMOS process allows substantially higher levels of integration and lower power consumption than competitive gallium arsenide, bipolar or silicon germanium solutions. Our DWDM transport processor combines an OC-192 transceiver, FEC, performance monitoring logic and G.709 digital wrapper into a single CMOS chip solution, occupying less than one half the space and consuming one-third the power of non-integrated solutions.

Most corporations today use the Internet for the transmission of data among corporate offices and remote sites and for a variety of e-commerce and business-to-business applications. To secure corporate networks from intrusive attacks and provide for secure communications among corporate sites and remote users, an increasing amount of networking equipment will include technology to establish virtual private networks, or VPNs, which use the Internet protocol security, or IPSec, protocol. In addition to VPNs, secure socket layer, commonly referred to as SSL, is used to secure sensitive information among users and service providers for e-commerce applications.

Our SSL family of CryptoNetX^TM high-speed security processors and adapters for enterprise networks is enabling companies to guard against Internet attacks without compromising the speed and performance of their networks. Our PCI 2.2-compliant adapters provide a range of performance from 800 to 4,000 SSL transactions per second. Our IPsec processors are built upon a proprietary, scalable silicon architecture that performs standards-compliant cryptographic functions at data rates ranging from a few Mbps to multi-Gbps. This architecture is being deployed across all of our product lines, addressing the entire broadband security network spectrum from residential applications to enterprise networking equipment. This scalable architecture allows us to develop stand alone security products for very high-speed networking applications and to integrate the IP security processor core into lower speed solutions for consumer products, such as cable and DSL modem applications.

Broadband processors are high performance devices enabling high-speed computations that help identify, optimize and control the flow of data within the broadband network. The continued growth of IP traffic, coupled with the increasing demand for new and improved services and applications such as security, high-speed access and quality of service is placing additional processing demands on next-generation networking and communications infrastructures. From the enterprise to access network to the service provider edge, networking equipment must be able to deliver wire-speed performance from the OC-3 standard, which transmits data at 155 Mbps, through the OC-192 standard, which transmits data at 10 Gbps, as well as the scalability and flexibility required to support next-generation services and features. In the enterprise and data center markets, server and storage applications require high computational performance to support complex protocol conversions, and services such as virtualization. With the migration from second generation cellular mobile systems, or 2G, to the third generation cellular mobile systems, or 3G, networks and mobile infrastructure equipment must be able to support higher bandwidth rates utilizing low power resource levels.

Leveraging our expertise in high-performance, low-power very large scale integration, or VLSI, design, we have developed a family of high performance, low power processor solutions designed specifically to meet the needs of next-generation networks. Our SiByte® family of processors delivers four key features essential for today’s embedded broadband network processors: very high performance, low power dissipation, high integration of network-centric functions, and programmability based on an industry-standard instruction set architecture. At the heart of the SiByte family of processors is the SB-1 core, a MIPS® 64-bit superscalar CPU capable of operating at frequencies of 400 MHz up to one GHz. These processors provide customers with a solution for high-speed network processing, including packet classification, queuing, forwarding and exception processing for wired and wireless networks. They enable complex applications such as deep content switching, routing and load balancing to be performed at wire speed, at line rates between OC-3 and OC-48, which transmits data at 2.5 Gbps. Our devices are also being designed for utilization in the fast growing network storage market, including network attached storage and storage area networking, or SAN. Our general purpose processors are ideal for the complex protocol conversions, virtualization and proxy computations that storage applications require.

Custom silicon products are devices for applications that customers are able to semi-customize by integrating their own intellectual property with our proprietary intellectual property cores. We have successfully deployed such devices into the LAN, WAN and PC markets. Our typical semi-custom devices are complex mixed-signal designs that leverage our advanced design processes.

Technologies for wireless local area networking, Wi-Fi® networking or wireless LAN, based upon the IEEE 802.11 standards are a natural extension of broadband connectivity in the home and office, adding the convenience of mobility to the powerful utility provided by high-speed data networks. The first widely adapted standard for wireless networks was the 802.11b specification, which is the wireless equivalent of 10 Mbps Ethernet, allowing transfer speeds up to 11 Mbps and spanning distances of up to 100 meters. 802.11b products are found in the education, consumer, home, small-to-medium sized business and enterprise markets. However, over the past year technology based upon the 802.11g specification has begun to replace 802.11b as the mainstream wireless technology for both business and consumer applications. The industry has also begun transitioning, although to a lesser degree, to the 802.11a standard. The 802.11g and 802.11a specifications provide almost five times the data rate of existing 802.11b networks.

Our AirForce^TM wireless LAN product family consists of transceiver and wireless network process chipsets and software that allow PCs and other devices to connect to wireless home or enterprise networks using 802.11b, 802.11g or 802.11a/g dual-band technology. Our 54g^TM chipsets represent our maximum performance implementation of the IEEE 802.11g wireless LAN standard that preserves full interoperability with 802.11b but provides connectivity at speeds of up to 54 Mbps. 54g^TM products also offer advanced security features, including certified support for Wi-Fi Protected Access^TM, or WPA, the Cisco Compatible Extensions, and hardware accelerated Advanced Encryption Standard, or AES, encryption. In 2003 we also introduced our AirForce One^TM single-chip wireless LAN solution that enables wireless LAN connectivity in pocket-sized mobile devices such as PDAs, cellular phones, MP3 players and digital cameras. The entire wireless LAN family is comprised of all-CMOS solutions that are capable of self-calibrating based on usage temperature and other environmental conditions.

The cellular chip, design and software markets are transitioning from pure voice to broadband multimedia and data, transforming the traditional cellular phone handset from a voice-only device into a multimedia gateway. Products emerging from this transition will allow end-users to download e-mail, web pages and streaming media to cellular phones, PDAs, laptops and other mobile devices.

The international Global System for Mobile Communication, or GSM, is currently the dominant standard for digital mobile communications. Adopting digital circuit-switched communications technology, GSM enables a variety of network access, voice and data services. Enhanced data communications standards derived from GSM include General Packet Radio Services, or GPRS, and Enhanced Data Rates for GSM Evolution, or EDGE. Both of these standards have extended GSM to enable packet-based “always on” Internet applications and more efficient data transport with higher transmission rates for a new generation of data services such as Internet browsing, 3-D gaming and multimedia messaging with rich graphics and audio content. However, EDGE achieves effective data rates nearly four times those of GPRS within the same channel bandwidth and provides increased network capacity while retaining GPRS compatibility.

We develop, manufacture and market GSM, GPRS and EDGE chipsets and reference designs with complete software and terminal solutions for use in cellular phones, cellular modem cards and wireless PDAs. Our cellular and wide area wireless networking products include baseband processor solutions, which integrate both mixed signal and digital functions on a single chip. We also provide a range of handset and cellular modem engineering design services, encompassing printed circuit board, RF and handset hardware, software development and integration, product verification and certification, and manufacturing support, to select customers.

The Bluetooth® short-range wireless networking standard is a low-cost wire-replacement technology that enables connectivity among a wide variety of mainstream consumer electronic devices including PCs, mobile phones, PDAs, headsets and automotive electronics. Bluetooth short-range wireless connectivity enables personal

area networking, or PAN, at speeds of up to one Mbps, and can cover distances up to 30 feet. Bluetooth technology allows devices to automatically synchronize and exchange data with other Bluetooth-enabled devices without the need for wires, and enables wireless headset connections to cellular phones and wireless mouse and keyboard applications.

Our Blutonium® family of single-chip and radio-only Bluetooth solutions enable manufacturers to add Bluetooth functionality to almost any electronic device with a minimal amount of development time and resources. Our Bluetooth solutions, three of which have been qualified by the Bluetooth Qualification Board to meet version 1.2 of the Bluetooth specification, are incorporated in PDAs, wireless mouse and keyboard applications, and GSM/ GPRS/ UMTS and CDMA mobile phones.

Our solutions in these areas offer the industry’s highest levels of performance and integration with designs in standard CMOS, allowing them to be highly reliable while lowering manufacturing costs. In addition, we have developed InConcert^TM software to allow products enabled with our AirForce Wi-Fi and Blutonium Bluetooth chips to collaboratively coexist within the same radio frequency.

Voice over Internet Protocol, or VoIP, refers to the transmission of telephony — voice, fax and analog data — over an IP packet-based network. The delivery of voice, fax and analog data over LANs and WANs with inherently unpredictable routing requires complex DSP technology to preserve voice fidelity, fax reliability and telephone quality of service.

VoIP is stimulating dramatic changes in the traditional public switched and enterprise telephone networks. IP packet-based networks provide significant economic advantages over traditional circuit-switched voice networks. The trend to IP networks for voice has been driven by the significant build-out of the Internet and deregulation of long distance and local phone service.

Within the enterprise, equipment markets are being radically affected by the convergence of circuit switched and IP packet-based technologies. A host of new enterprise services can be enabled when a LAN-based Ethernet switching infrastructure is used to carry both data and voice. We provide both silicon and software to enable our equipment customers to provide cost-effective solutions in this area.

IP Phone Processors. Our IP phone silicon and software solutions integrate the essential packet processing, voice processing and switching technologies to provide the quality of service, high fidelity and reliability necessary for enterprise telephony applications. Our PhonexChange^TM software enables VoIP communications over Ethernet, cable and DSL networks and is incorporated in all of our VoIP products. Our processors are enabling the development of new XML-based and WindowsCE®-based IP phones that can perform functions that traditional phones cannot support. These processors support our BroadVoice^TM coding technology, which features a wideband mode that significantly improves the clarity and quality of telephony voice service. Our products also enable manufacturers to develop IP phones that can be powered through the same Category 5 unshielded twisted pair cable used for Ethernet data.

Residential Terminal Adapter Processors. Our terminal adapter VoIP solutions enable existing analog phones to be connected to broadband modems via Ethernet. These products support residential VoIP services that are now being offered by a variety of broadband service providers.

Gateway Processors. We offer the CALISTO^TM family of single-chip communications processors along with software and development tools for carrier-class voice gateways and access concentrators that connect the traditional public switched telephone network to packet-based networks such as the Internet. This advanced architecture provides increased signal processing throughput in a more efficient silicon implementation. CALISTO supports up to 240 packet telephony channels on a single chip, replacing up to 10 traditional DSP discrete components with a power consumption of less than 10 milliwatts per channel.

We also develop reference platforms designed around our integrated circuit products that represent example system-level applications for incorporation into our customers’ equipment. These reference platforms generally include a fairly extensive suite of software drivers as well as protocol and application layer software to assist our

customers in developing their own end products. By providing these reference platforms, we can assist our customers in achieving easier and faster transitions from initial prototype designs to final production releases. These reference platforms enhance the customer’s confidence that our products will meet their market requirements and product introduction schedules.

We sell our products to leading manufacturers of broadband communications equipment in each of our target markets. Because we leverage our technologies across different markets, certain of our integrated circuits may be incorporated into equipment used in several different markets.

Customers currently shipping broadband communications equipment incorporating our products include Alcatel, Ambit, Apple, Askey, Cisco, Dell, Echostar, Hewlett-Packard, Hughes Electronics, IBM, Mitsubishi Electric Company, Motorola, Ningbo Bird, Nortel Networks, Pace, Pioneer, Scientific-Atlanta, Sony Ericsson, Sun Microsystems, Thomson CE and 3Com, among others. To meet the current and future technical needs in our target markets, we have established strategic relationships with multi-service operators that provide broadband communications services to consumers and businesses.

As part of our business strategy, we periodically establish strategic relationships with certain key customers. In September 1997 we entered into a development, supply and license agreement with General Instrument, now a wholly-owned subsidiary of Motorola, which provided that we would develop and supply chips for General Instrument’s digital cable set-top boxes. In November 2000 we modified that agreement to amend General Instrument’s minimum purchase requirements and also entered into a new supply agreement with General Instrument covering our sale of cable modem chips. In January 2002 we modified the new supply agreement to add minimum purchase requirements of chips for digital set-top boxes. In December 2002 and January 2003 we further amended the supply agreement to extend minimum purchase requirements of chips for cable modems and digital set-top boxes, respectively.

From time to time, we have entered into development agreements with Cisco, Nortel Networks, Sony Ericsson, 3Com and others. We have worked closely with these customers to co-develop products.

A small number of customers have historically accounted for a substantial portion of our net revenue. Sales to Hewlett-Packard, including sales to its manufacturing subcontractors, represented approximately 15.4% of our net revenue in 2003, 14.8% of our net revenue in 2002 and 14.1% of our net revenue in 2001. These percentages include sales to Compaq, which was acquired by Hewlett-Packard in May 2002, for all periods presented. Sales to Dell, including sales to its manufacturing subcontractors, represented approximately 11.9% of our net revenue in 2003 and 11.3% of our net revenue in 2002. Sales to Motorola, including sales to its manufacturing subcontractors, represented approximately 12.1% of our net revenue in 2002 and approximately 18.2% of our net revenue in 2001. Sales to Cisco, including sales to its manufacturing subcontractors, represented approximately 10.0% of our net revenue in 2002. Sales to our five largest customers represented approximately 51.6% of our net revenue in 2003, 52.3% of our net revenue in 2002 and 54.9% of our net revenue in 2001. We expect that our key customers will continue to account for a substantial portion of our net revenue in 2004 and in the foreseeable future. These customers and their respective contributions to our net revenue have varied and will likely continue to vary from period to period. We typically sell products pursuant to purchase orders that customers can generally cancel or defer on short notice without incurring a significant penalty, and currently do not have agreements with any of our key customers that contain long-term commitments to purchase specified volumes of our products.

Using proprietary technologies and advanced design methodologies, we design, develop and supply complete system-on-a-chip solutions and related hardware and software system-level applications for our target markets. Our proven system-on-a-chip design methodology has enabled us to be first to market with advanced chips that are highly integrated and cost-effective, and that facilitate the easy integration of our customers’ intellectual property. Our design methodology leverages industry-standard, state-of-the-art electronic design automation tools, and generally migrates easily to new silicon processes and technology platforms. It also allows for the easy integration

We believe that one of our key competitive advantages is our broad base of core technologies encompassing the complete design space from systems to silicon. We have developed and continue to build on the following technology foundations:


	•	proprietary communications systems algorithms and protocols;
	•	advanced DSP hardware architectures;
	•	system-on-a-chip design methodologies and advanced library development for both standard cell and full-custom integrated circuit design;
	•	high-performance radio frequency, analog and mixed-signal circuit design using industry-standard CMOS processes;
	•	high-performance custom microprocessor architectures and circuit designs; and
	•	extensive software reference platforms to enable complete system-level solutions.

We have assembled a large team of experienced engineers and technologists, many of whom are leaders in their particular field or discipline. As of February 29, 2004 we had 1,904 research and development employees, the majority of whom hold advanced degrees. Our work force includes approximately 255 employees with Ph.Ds. These key employees are involved in advancing our core technologies, as well as applying them to our product development activities. Because the system-on-a-chip solutions for many of our target markets benefit from the same underlying core technologies, we are able to address a wide range of broadband communications markets with a relatively focused investment in research and development.

We believe that the ongoing achievement of higher levels of integration and the timely introduction of new products in our target markets are essential to our growth. Our current plans are to maintain our significant research and development staffing levels in 2004. In addition to our principal design facilities in Irvine and Santa Clara County, California, we have additional design facilities in Tempe, Arizona; San Diego County, California; Duluth, Georgia; Nashua, New Hampshire; Middletown, New Jersey; and Seattle, Washington. Internationally, we also have design facilities in Belgium, Canada, China, India, Israel, the Netherlands, Singapore, Taiwan and the United Kingdom. We anticipate establishing additional design centers in the United States and other countries in the future.

Our research and development expense was $434.0 million, $461.8 million and $446.6 million in 2003, 2002 and 2001, respectively. In addition, for employees engaged in research and development, we had non-cash stock-based compensation expense and stock option exchange expense of $384.1 million, $252.4 million and $321.6 million in 2003, 2002 and 2001, respectively. We also had amortization of purchased intangible assets related to research and development of $0.8 million, $19.6 million and $26.3 million in 2003, 2002 and 2001, respectively.

We manufacture our products using standard CMOS process techniques. The standard nature of these processes permits us to engage independent silicon foundries to fabricate our integrated circuits. By subcontracting our manufacturing requirements, we are able to focus our resources on design and test applications where we believe we have greater competitive advantages. This strategy also eliminates the high cost of owning and operating a semiconductor wafer fabrication facility.

Our operations and quality engineering team closely manages the interface between manufacturing and design engineering. While our design methodology typically creates smaller than average die for a given function, it also generates full-custom integrated circuit designs. As a result, we are responsible for the complete functional and parametric performance testing of our devices, including quality. We employ a fully staffed operations and quality organization similar to that of a vertically integrated semiconductor manufacturer. We also arrange with

We depend on six independent foundry subcontractors located in Asia to manufacture substantially all of our products. Our key silicon foundries are Taiwan Semiconductor Manufacturing Corporation in Taiwan, Chartered Semiconductor Manufacturing in Singapore, NEC Corporation in Japan, Semiconductor Manufacturing International Corporation in China, Silterra Malaysia Sdn. Bhd. in Malaysia and United Microelectronics Corporation in Taiwan. Any inability of one of our six independent foundry subcontractors to provide the necessary capacity or output for our products could result in significant production delays and could materially and adversely affect our business, financial condition and results of operations. While we currently believe we have adequate capacity to support our current sales levels, we continue to work with our existing foundries to obtain more production capacity, and we intend to qualify new foundries to provide additional production capacity. It is possible that adequate foundry capacity may not be available on acceptable terms, if at all. In the event a foundry experiences financial difficulties, or if a foundry suffers any damage to or destruction of its facilities, or in the event of any other disruption of foundry capacity, we may not be able to qualify alternative manufacturing sources for existing or new products in a timely manner.

Our products are currently fabricated with .5 micron, triple layer metal; .35 micron, quad layer metal; .22 micron, five layer metal; .18 micron, five and six layer metal; and .13 micron, five, six and seven layer metal, feature sizes. We continuously evaluate the benefits, on a product-by-product basis, of migrating to smaller geometry process technologies. Although our experience to date with the migration of products to smaller processes geometries has been predominantly favorable, we could experience difficulties in future process migration. Other companies in our industry have experienced difficulty transitioning to new manufacturing processes and, consequently, have suffered reduced yields or delays in product deliveries. We believe that the transition of our products to smaller geometries will be important for us to remain competitive. Our business, financial condition and results of operations could be materially and adversely affected if any such transition is substantially delayed or inefficiently implemented.

Our wafer probe testing is conducted by either independent foundries or independent wafer probe test subcontractors. Following completion of the wafer probe tests, the die are assembled into packages and the finished products are tested by one of our seven key subcontractors located in Asia: ASAT Ltd. in Hong Kong, ST Assembly Test Services in Singapore, Siliconware Precision in Taiwan, NEC Corporation in Japan, United Test and Assembly Center in Singapore, and ChipPac and Signetics in South Korea. While we have not experienced material disruptions in supply from assembly subcontractors to date, we and others in our industry have experienced shortages in the supply of packaging materials from time to time, and we could experience shortages or assembly problems in the future. The availability of assembly and testing services from these subcontractors could be materially and adversely affected in the event a subcontractor experiences financial difficulties, or if a subcontractor suffers any damage to or destruction of its facilities, or in the event of any other disruption of assembly and testing capacity.

Manufacturers of broadband communications equipment demand high quality and reliable semiconductors for incorporation into their products. We focus on product reliability from the initial stage of the design cycle through each specific design process, including layout and production test design. In addition, we subject our designs to in-depth circuit simulation at temperature, voltage and processing extremes before initiating the manufacturing process.

We prequalify each assembly and foundry subcontractor. This prequalification process consists of a series of industry standard environmental product stress tests, as well as an audit and analysis of the subcontractor’s quality system and manufacturing capability. We also participate in quality and reliability monitoring through each stage of the production cycle by reviewing electrical and parametric data from our wafer foundry and assembly subcontractors. We closely monitor wafer foundry production to ensure consistent overall quality, reliability and

As part of our total quality program, we received ISO 9002 certification, a comprehensive International Standards Organization specified quality system, for our Singapore facility. All of our principal independent foundries and package assembly facilities are currently ISO 9001 certified.

Historically we distributed products to our customers through an operations and distribution center located in Irvine, California. In 1999 we established an international distribution center in Singapore. This facility puts us closer to our suppliers and many key customers and improves our ability to meet customers’ needs. Our Irvine facility continues to ship products to U.S. destinations, while our Singapore facility distributes products to international destinations. We also ship products of our wholly-owned subsidiary ServerWorks from a Los Angeles distribution facility. Products shipped to international destinations represented 72.1%, 70.0% and 65.9% of our total net revenue in 2003, 2002 and 2001, respectively.

Our sales and marketing strategy is to achieve design wins with technology leaders in each of our targeted broadband communications markets by providing quality, state-of-the-art products and superior sales, field application and engineering support. We market and sell our products in the United States through a direct sales force, distributors and manufacturers’ representatives. The majority of our sales occur through our direct sales force, which is based in offices located in California, Colorado, Florida, Georgia, Illinois, Maine, Maryland, Massachusetts, Michigan, New York, New Jersey, North Carolina, Ohio, Texas and Virginia. We have engaged independent distributors, Arrow Electronics and Insight Electronics, to service the North American and South American markets.

We dedicate sales managers to principal customers to promote close cooperation and communication. We also provide our customers with reference platform designs for most products. We believe this enables our customers to achieve easier and faster transitions from the initial prototype designs through final production releases. We believe these reference platform designs also significantly enhance our customers’ confidence that our products will meet their market requirements and product introduction schedules.

We market and sell our products internationally through regional offices located in Canada, China, Finland, France, Germany, Japan, Korea, the Netherlands, Singapore, Sweden, Taiwan and the United Kingdom, as well as through a network of independent distributors and representatives in Australia, Canada, Germany, Hong Kong, India, Israel, Japan, Korea, Singapore and Taiwan. We select these independent entities based on their ability to provide effective field sales, marketing communications and technical support to our customers. All international sales to date have been denominated in U.S. dollars. For information regarding revenue from independent customers by geographic area, see Note 14 of Notes to Consolidated Financial Statements, included in Part IV, Item 15 of this Report.

Our sales are made primarily pursuant to standard purchase orders for delivery of products. Due to industry practice that allows customers to cancel or change orders with limited advance notice prior to shipment, we do not believe that backlog is a reliable indicator of future revenue levels.

Broadband communications markets and the semiconductor industry are intensely competitive and are characterized by rapid change, evolving standards, short product life cycles and price erosion. We believe that the principal factors of competition for integrated circuit providers in our target markets include:


	•	level of integration;
	•	reliability;
	•	price;
	•	time-to-market;
	•	market presence;
	•	standards compliance;
	•	system cost;
	•	intellectual property;
	•	customer support; and
	•	reputation.

We compete with a number of major domestic and international suppliers of integrated circuits and related applications in our target broadband communications markets. We also compete with suppliers of system-level and motherboard-level solutions incorporating integrated circuits that are proprietary or sourced from manufacturers other than Broadcom. This competition has resulted and will continue to result in declining average selling prices for our products. In all of our target markets, we also may face competition from newly established competitors and suppliers of products based on new or emerging technologies, and customers who choose to develop their own silicon solutions. We also expect to encounter further consolidation in the markets in which we compete.

Many of our competitors operate their own fabrication facilities and have longer operating histories and presence in key markets, greater name recognition, larger customer bases and significantly greater financial, sales and marketing, manufacturing, distribution, technical and other resources than we do. As a result, these competitors may be able to adapt more quickly to new or emerging technologies and changes in customer requirements or to devote greater resources to the promotion and sale of their products. Current and potential competitors have established or may establish financial or strategic relationships among themselves or with existing or potential customers, resellers or other third parties. Accordingly, it is possible that new competitors or alliances among competitors could emerge and rapidly acquire significant market share. In addition, competitors may develop technologies that more effectively address our markets with products that offer enhanced features, lower power requirements or lower costs. Increased competition could result in pricing pressures, decreased gross margins and loss of market share and may materially and adversely affect our business, financial condition and results of operations.

Our success and future revenue growth depend, in part, on our ability to protect our intellectual property. We rely primarily on patent, copyright, trademark and trade secret laws, as well as nondisclosure agreements and other methods, to protect our proprietary technologies and processes. However, these measures may not provide meaningful protection for our intellectual property. We hold over 500 U.S. patents and have filed over 2,200 additional U.S. patent applications. We may not receive any additional patents as a result of these applications or future applications. Even if additional patents are issued, any claims allowed may not be sufficiently broad to protect our technology. In addition, any existing or future patents could be challenged, invalidated or circumvented, and any rights granted under such patents may not provide us with meaningful protection. The failure of any patents to adequately protect our technology would make it easier for our competitors to offer similar products. In connection with our participation in the development of various industry standards, we may be required to license certain of our patents to other parties, including competitors, that develop products based upon the adopted industry standards. We may not have foreign patents or pending applications corresponding to our U.S. patents and applications. Even if foreign patents are granted, effective enforcement in foreign countries may not be available. We also generally enter into confidentiality agreements with our employees and strategic partners, and typically control access to and distribution of our documentation and other proprietary information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use our products, services or technology without authorization, to develop similar technology independently, or to design around our patents. In addition, effective copyright, trademark and trade secret protection may not be available or may

be limited in certain foreign countries. We have also entered into agreements with certain of our customers and granted these customers the right to use our proprietary technology in the event we default in our contractual obligations, including product supply obligations, and fail to cure the default within a specified period of time. In addition, we often incorporate the intellectual property of our strategic customers into our designs, and we have certain obligations with respect to the non-use and non-disclosure of their intellectual property. It is possible that the steps taken by us to prevent misappropriation or infringement of our intellectual property or our customers’ intellectual property may not be successful. Moreover, we are currently engaged in litigation and may need to engage in additional litigation in the future to enforce our intellectual property rights or the rights of our customers, to protect our trade secrets, or to determine the validity and scope of proprietary rights of others, including our customers. Such litigation could result in substantial costs and diversion of our resources and could materially and adversely affect our business, financial condition and results of operations.

Companies in the semiconductor industry often aggressively protect and pursue their intellectual property rights. From time to time, we have received, and may continue to receive in the future, notices that claim we have infringed upon, misappropriated or misused other parties’ proprietary rights. Moreover, in the past we have been engaged and currently we are engaged in litigation with parties who claim that we have infringed their patents or misappropriated or misused their trade secrets. For additional information regarding our pending litigation, see Note 13 of Notes to Consolidated Financial Statements, included in Part IV, Item 15 of this Report. Although we are defending the pending litigation vigorously, it is possible that we will not prevail in pending or future lawsuits. In addition, we may be sued by other parties who claim that we have infringed their patents or misappropriated or misused their trade secrets, or who may seek to invalidate one or more of our patents. Any of these present or future claims may materially and adversely affect our business, financial condition and results of operations. For example, in a patent or trade secret action, a court could issue a preliminary or permanent injunction that would require us to withdraw or recall certain products from the market or redesign certain products offered for sale or under development. In addition, we may be liable for damages for past infringement and royalties for future use of the technology. We may also have to indemnify certain customers and strategic partners under our agreements with such parties if a third party alleges or if a court finds that our products or activities have infringed upon, misappropriated or misused another party’s proprietary rights. Even if claims against us are not valid or successfully asserted, the defense of these claims could result in significant costs and a diversion of management and personnel resources. In any of these events, our business, financial condition and results of operations may be materially and adversely affected. Additionally, we have in the past sought and may in the future seek to obtain a license under a third party’s intellectual property rights and have granted and may in the future grant a license to certain of our intellectual property rights to a third party in connection with a cross-license agreement or a settlement of claims or actions asserted against us. However, we may not be able to obtain a license on commercially reasonable terms, if at all.

As of February 29, 2004 we had 2,729 full-time employees and 104 contract and temporary employees, including 1,904 individuals engaged in research and development, 361 engaged in sales and marketing, 241 engaged in manufacturing operations and 327 engaged in finance, legal and general administration activities. Our employees are not represented by any collective bargaining agreements, and we have never experienced a work stoppage. We believe our employee relations are good.

We lease facilities in Irvine (our corporate headquarters) and Santa Clara County, California. Each of these facilities includes administration, sales and marketing, research and development and operations functions. In addition to our principal design facilities in Irvine and Santa Clara County, California, we lease additional design facilities in Tempe, Arizona; San Diego County, California; Duluth, Georgia; Nashua, New Hampshire; Middletown, New Jersey; and Seattle, Washington.

Internationally, we lease a distribution center that includes engineering design and administrative facilities in Singapore as well as engineering design and administrative facilities in Belgium, Canada, China, India, Israel, the Netherlands, Taiwan and the United Kingdom.

In addition, we lease various sales and marketing facilities in the United States and several other countries.

The leased facilities currently in use comprise an aggregate of approximately 0.9 million square feet. Our principal facilities have lease terms expiring between 2005 and 2014. We believe that the facilities under lease by us will be adequate for at least the next 12 months.

For additional information regarding our obligations under property leases, see Note 7 of Notes to Consolidated Financial Statements, included in Part IV, Item 15 of this Report.

The information set forth under Note 13 of Notes to the Consolidated Financial Statements, included in Part IV, Item 15 of this Report, is incorporated herein by reference.

No matters were submitted to a vote of security holders during the quarter ended December 31, 2003.

Our Class A common stock is traded on the NASDAQ National Market under the symbol BRCM. The following table sets forth, for the periods indicated, the high and low sale prices for our Class A common stock on the NASDAQ National Market:

As of March 5, 2004 there were approximately 2,187 record holders of our Class A common stock and approximately 371 record holders of our Class B common stock. On March 5, 2004 the last reported sale price of the Class A common stock on the NASDAQ National Market was $41.25 per share.

Our Class B common stock is not publicly traded. Each share of Class B common stock is convertible at any time at the option of the holder into one share of Class A common stock and is automatically converted upon sale and most other transfers.

We have never declared or paid cash dividends on shares of our capital stock. We currently intend to retain all of our earnings, if any, for use in our business and in acquisitions of other businesses, assets, products or technologies, and we do not anticipate paying any cash dividends in the foreseeable future.

There were no sales of unregistered securities during the quarter ended December 31, 2003.


(1)	Excludes stock-based compensation expense, amortization of purchased intangible assets and stock option exchange expense. See Consolidated Statements of Operations, included in Part IV, Item 15 of this Report.

(2)	See Notes 1 and 2 of Notes to Consolidated Financial Statements, included in Part IV, Item 15 of this Report, for an explanation of the calculation of earnings (loss) per share. Adjusted to reflect our 2-for-1 stock split, in the form of a 100% stock dividend, effective February 11, 2000.

The table above sets forth our selected consolidated financial data. We prepared this information using the consolidated financial statements of Broadcom for the five years ended December 31, 2003, which have been restated to include the operations of acquisitions accounted for using the pooling-of-interests method of accounting as if they had been combined with Broadcom prior to the beginning of each period presented. In addition, the consolidated financial statements include the results of operations of acquisitions accounted for using the purchase method of accounting commencing as of their respective acquisition dates. See Note 3 of Notes to Consolidated Financial Statements, included in Part IV, Item 15 of this Report.

You should read this selected consolidated financial data together with the Consolidated Financial Statements and related Notes contained in this Report and in our subsequent reports filed with the SEC, as well as the section of this Report and our other reports entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

You should read the following discussion and analysis in conjunction with our Consolidated Financial Statements and related Notes thereto included in Part IV, Item 15 of this Report and the “Risk Factors” section at the end of this Item 7, as well as other cautionary statements and risks described elsewhere in this Report, before deciding to purchase, hold or sell our common stock.

Net Revenue. We sell our products to leading manufacturers of broadband communications equipment in each of our target markets. Because we leverage our technologies across different markets, certain of our integrated circuits may be incorporated into equipment used in several different markets. We utilize independent foundries to manufacture all of our semiconductor products.

Our net revenue consists principally of product revenue generated by sales of our semiconductor products. Such sales represented over 95% of our total net revenue in 2003, 2002 and 2001, respectively. We generate the balance of our net revenue mainly from development agreements, software licenses and maintenance agreements, and system-level reference designs.

The vast majority of our sales occur through our direct sales force. However, we derived approximately 7.1%, 10.4% and 10.8% of our total net revenue from sales made through distributors in 2003, 2002 and 2001, respectively.

The demand for our products has been affected in the past, and may continue to be affected in the future, by various factors, including, but not limited to, the following:


	•	the economic and market conditions in the semiconductor industry and the broadband communications markets;
	•	the timing, rescheduling or cancellation of significant customer orders and our ability, as well as the ability of our customers, to manage inventory;
	•	our ability to specify, develop or acquire, complete, introduce, market and transition to volume production new products and technologies in a timely manner;
	•	the qualification, availability and pricing of competing products and technologies and the resulting effects on sales and pricing of our products; and
	•	the rate at which our present and future customers and end-users adopt our products and technologies in our target markets.

For these and other reasons, our net revenue in 2003 and prior periods may not necessarily be indicative of future net revenue.

From time to time, our key customers place large orders causing our quarterly net revenue to fluctuate significantly. We expect these fluctuations will continue.

Sales to our significant customers, including sales to their manufacturing subcontractors, as a percentage of net revenue were as follows:


(1)	Includes sales to Compaq, which was acquired by Hewlett-Packard in May 2002, for all periods presented.

(2)	Includes sales to Linksys, which was acquired by Cisco in June 2003, for all periods presented.

We expect that our largest customers will continue to account for a substantial portion of our net revenue in 2004 and for the foreseeable future. These customers and their respective contributions to our net revenue have varied and will likely continue to vary from period to period.

Net revenue derived from all independent customers located outside the United States as a percent of total net revenue was as follows:

Such net revenue does not include revenue from products shipped to subsidiaries or manufacturing subcontractors of customers that have headquarters in the United States even though such subsidiaries or manufacturing subcontractors are located outside of the United States. All of our revenue to date has been denominated in U.S. dollars.

Gross Margin. Our gross margin has been affected in the past, and may continue to be affected in the future, by various factors, including, but not limited to, the following:


	•	our product mix and volumes of product sales;
	•	the position of our products in their respective life cycles;
	•	the effects of competition and competitive pricing strategies;
	•	manufacturing cost efficiencies and inefficiencies;
	•	fluctuations in direct product costs such as wafer pricing and assembly, packaging and testing costs, and overhead costs such as prototyping expenses;
	•	amortization of purchased intangible assets;
	•	stock-based compensation expense;
	•	product warranty costs;
	•	provisions for excess or obsolete inventories;
	•	licensing and royalty arrangements; and
	•	the mix of product revenue and development revenue.

Product Cycles. The cycle for test, evaluation and adoption of our products by customers can range from three to more than six months, with an additional three to more than nine months before a customer commences volume production of equipment incorporating our products. Due to this lengthy sales cycle, we may experience significant delays from the time we incur expenses for research and development, selling, general and

administrative efforts, and investments in inventory, to the time we generate corresponding revenue, if any. We anticipate that the rate of new orders may vary significantly from month to month. If anticipated sales or shipments in any quarter do not occur when expected, expenses and inventory levels could be disproportionately high, and our results of operations for that quarter, and potentially for future quarters, would be materially and adversely affected.

Acquisition Strategy. A key element of our business strategy involves the acquisition of businesses, assets, products or technologies that allow us to reduce the time required to develop new technologies and products and bring them to market, complement our existing product offerings, expand our market coverage, increase our engineering workforce or enhance our technological capabilities. We plan to continue to evaluate strategic opportunities as they arise, including business combination transactions, strategic relationships, capital infusions and the purchase or sale of assets.

In 2003, 2002 and 2001 we completed six acquisitions for original aggregate equity consideration of $1.214 billion and cash consideration of $5.9 million. In 2003 we acquired certain assets of Gadzoox Networks, Inc., a provider of open standards-based storage networking technology. In 2002 we acquired Mobilink Telecom, Inc., a supplier of chipsets and reference designs for use in cellular phones, cellular modem cards and wireless PDAs. In 2001 we acquired Visiontech Ltd., a supplier of digital video/audio MPEG-2 compression and decompression chips; ServerWorks Corporation, a supplier of high-performance system input/output integrated circuits for servers, workstations and storage platforms; KimaLink, a developer of integrated circuits for wireless data communications; and PortaTec Corporation, a developer of integrated solutions for smart mobile devices. Because each of these acquisitions was accounted for as a purchase transaction, the accompanying consolidated financial statements include the results of operations of the acquired companies commencing as of their respective acquisition dates. See Note 3 of Notes to Consolidated Financial Statements.

Business Enterprise Segments. We operate in one reportable operating segment, broadband communications. Statement of Financial Accounting Standards, or SFAS, No. 131, Disclosures about Segments of an Enterprise and Related Information, or SFAS 131, establishes standards for the way that public business enterprises report information about operating segments in annual consolidated financial statements. Although we had four operating segments at December 31, 2003, under the aggregation criteria set forth in SFAS 131, we only operate in one reportable operating segment, broadband communications.

Under SFAS 131, two or more operating segments may be aggregated into a single operating segment for financial reporting purposes if aggregation is consistent with the objective and basic principles of SFAS 131, if the segments have similar economic characteristics, and if the segments are similar in each of the following areas:


	•	the nature of products and services;
	•	the nature of the production processes;
	•	the type or class of customer for their products and services; and
	•	the methods used to distribute their products or provide their services.


	•	the sale of integrated circuits is the only material source of revenue for each of our four operating segments;
	•	the integrated circuits sold by each of our operating segments use the same standard CMOS manufacturing process;
	•	the integrated circuits marketed by each of our operating segments are sold to one type of customer: manufacturers of broadband equipment, who incorporate our integrated circuits into their electronic products; and
	•	all of our integrated circuits are sold through a centralized sales force and common wholesale distributors.

Because we meet each of the criteria set forth above and each of our operating segments has similar economic characteristics, we aggregate our results of operations in one reportable operating segment.

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net revenue and expenses in the reporting period. We regularly evaluate our estimates and assumptions related to allowances for doubtful accounts, sales returns and allowances, warranty reserves, inventory reserves, goodwill and purchased intangible asset valuations, strategic investments, deferred income tax asset valuation allowances, restructuring costs and litigation and other loss contingencies. We base our estimates and assumptions on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. To the extent there are material differences between our estimates and the actual results, our future results of operations will be affected.

We believe the following critical accounting policies require us to make significant judgments and estimates in the preparation of our consolidated financial statements:


	•	Revenue, Gross Margin, Accounts Receivable and Inventory. We recognize product revenue when the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists, (ii) transfer of title has occurred, (iii) our price to the customer is fixed or determinable, and (iv) collection of the resulting accounts receivable is reasonably assured. In addition, we do not recognize revenue until all customer acceptance requirements have been met. These criteria are usually met at the time of product shipment. However, a portion of our sales are made through distributors under agreements allowing for pricing credits and/or rights of return. Product revenue on sales made through these distributors is deferred until the distributors sell the product to end customers. In addition, we record reductions to revenue for estimated product returns and pricing adjustments, such as competitive pricing programs and rebates, in the same period that the related revenue is recorded. The amount of these reductions is based on historical sales returns, analysis of credit memo data, specific criteria included in rebate agreements, and other factors known at the time. Additional reductions to revenue would result if actual product returns or pricing adjustments exceed our estimates. Our products typically carry a one to three year warranty. We establish reserves for estimated product warranty costs at the time revenue is recognized. Although we engage in extensive product quality programs and processes, our warranty obligation is affected by product failure rates, use of materials and service delivery costs incurred in correcting any product failure. Should actual product failure rates, use of materials or service delivery costs differ from our estimates, additional warranty reserves could be required, which could reduce gross margins. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances could be required. We write down our inventory for estimated obsolescence or unmarketable inventory in an amount equal to the difference between the cost of inventory and the estimated realizable value based upon assumptions about future demand and market conditions. If actual demand and market conditions are less favorable than those projected by management, additional inventory write-downs could be required.

	•	Goodwill and Purchased Intangible Assets. The purchase method of accounting for acquisitions requires extensive use of accounting estimates and judgments to allocate the purchase price to the fair value of the net tangible and intangible assets acquired, including in-process research and development, or IPR&D. Goodwill and intangible assets deemed to have indefinite lives are not amortized but are subject to annual impairment tests. The amounts and useful lives assigned to other intangible assets impact future amortization, and the amount assigned to IPR&D is expensed immediately. If the assumptions and estimates used to allocate the purchase price are not correct, or if business conditions change, purchase price adjustments or future asset impairment charges could be required.

	•	Impairment of Goodwill and Other Intangible Assets. The value of our intangible assets, including goodwill, could be impacted by future adverse changes such as: (i) any future declines in our operating results, (ii) a decline in the valuation of technology company stocks, including the valuation of our stock,


		(iii) another significant slowdown in the worldwide economy and the semiconductor industry or (iv) any failure to meet the performance projections included in our forecasts of future operating results. We evaluate these assets used in operations, including purchased intangible assets deemed to have indefinite lives, on an annual basis or more frequently if indicators of impairment exist. In the process of our annual impairment review, we primarily use the income approach methodology of valuation that includes the discounted cash flow method as well as other generally accepted valuation methodologies to determine the fair value of our assets. Significant management judgment is required in the forecasts of future operating results that are used in the discounted cash flow method of valuation. The estimates we have used are consistent with the plans and estimates that we use to manage our business. It is possible, however, that the plans and estimates used may be incorrect. If our actual results, or the plans and estimates used in future impairment analyses, are lower than the original estimates used to assess the recoverability of these assets, we could incur additional impairment charges.

	•	Strategic Investments. We have made strategic investments in publicly traded and privately held companies for the promotion of business and strategic objectives. Strategic investments in which we hold less than a 20% voting interest and on which we do not have the ability to exercise significant influence are carried at the lower of cost or fair value. The share prices of publicly traded securities have been volatile, and the value of non-publicly traded securities is difficult to determine. We periodically review these investments for other-than-temporary declines in fair value based on the specific identification method and write down investments to their fair value, with a corresponding loss recorded in other income (expense), net, in the statement of operations, when we believe an other-than-temporary decline has occurred. When determining whether a decline is other-than-temporary, we examine: (i) the length of time and the extent to which the fair value of an investment has been lower than its carrying value; (ii) the financial condition and near-term prospects of the investee, including any specific events that may influence the operations of the investee such as changes in technology that may impair the earnings potential of the investee; and (iii) our intent and ability to retain our investment in the investee for a sufficient period of time to allow for any anticipated recovery in market value. We generally believe an other-than-temporary decline has occurred when the fair value of the investment is below the carrying value for two consecutive quarters, absent evidence to the contrary. Fair values for investments in public companies are determined using their quoted market prices. Fair values for investments in privately held companies are estimated based upon one or more of the following: (a) the values of recent rounds of financing, (b) pricing models using historical and forecasted financial information, and/or (c) quoted market prices of comparable public companies. Although we believe our estimates reasonably reflect the fair value of the non-publicly traded securities that we hold, had there been an active market for the equity securities, the carrying values might have been materially different than the amounts reported. Future adverse changes in market conditions or poor operating results of companies in which we have made such investments could result in losses or an inability to recover the carrying values of the investments that may not be reflected in the investments’ current carrying values, and could require future impairment charges.

	•	Deferred Taxes. We utilize the liability method of accounting for income taxes as set forth in SFAS No. 109, Accounting for Income Taxes, or SFAS 109. We record a valuation allowance to reduce our deferred tax assets to the amount that we believe is more likely than not to be realized. In assessing the need for a valuation allowance, we consider all positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and recent financial performance. As a result of our recent cumulative losses and the full utilization of our loss carrybacks, we concluded that a full valuation allowance against our net deferred tax assets was appropriate. In the future, if we realize a deferred tax asset that carries a valuation allowance, we will record a reduction to income tax expense in the period of such realization.

	•	Restructuring Charges. We have undertaken, and we may in the future undertake, significant restructuring initiatives, which have required us to develop formalized plans for exiting certain business activities and/or facilities. We have had to record estimated expenses for lease cancellations, long-term asset write-downs, severance and outplacement costs and other restructuring costs. Given the significance, complexity, and the timing of the execution of such activities, we periodically reassess the estimates we made at the time


		the original decisions were made. Through 2002 the accounting rules for restructuring costs and asset impairments required us to record provisions and charges when we had a formal and committed plan. In calculating the cost to dispose of our excess facilities, we had to estimate our future space requirements and the timing of exiting excess facilities and then estimate for each location the future lease and operating costs to be paid through the termination of the lease and the amount, if any, of sublease income. To form our estimates for these costs, we performed an assessment of the affected facilities and considered the current market conditions for each site. Our assumptions on future space requirements, operating costs until termination and/or offsetting sublease revenues may be incorrect, and our actual costs may be materially different from our estimates, which could result in the need to record additional costs or to reverse previously recorded liabilities. We periodically evaluate the adequacy of the remaining liabilities under our restructuring initiatives. Beginning in 2003 the accounting rules require us to record any future provisions and charges at fair value in the period in which they are incurred. As management continues to evaluate the business, there may be additional charges for new restructuring activities as well as changes in estimates to amounts previously recorded.

	•	Litigation and Settlement Costs. From time to time, we are involved in legal actions arising in the ordinary course of business. We are aggressively defending our current litigation matters. However, there are many uncertainties associated with any litigation and we cannot assure you that these actions or other third party claims against us will be resolved without costly litigation or settlement payments. If that occurs, our financial position, results of operations or cash flows could be materially and adversely affected, and we may be required to make future royalty payments, which could adversely impact gross margins. In addition, if further information becomes available that causes us to determine that a loss in any of our pending litigation is probable, and we can reasonably estimate a range of loss associated with such litigation, we would then record at least the minimum estimated liability. However the actual liability in any such litigation may be materially different from our estimates, which could result in the need to record additional costs.

The following table sets forth certain statement of operations data expressed as a percentage of net revenue for the periods indicated:


(1)	Excludes stock-based compensation expense, amortization of purchased intangible assets and stock option exchange expense.

The following table presents net revenue, cost of revenue and gross profit for 2003 and 2002:

Net Revenue. Our revenue consists principally of product revenue generated by sales of our semiconductor products. Net revenue is revenue less provisions for returns and allowances. The following table presents the contribution to the increase in net revenue in 2003 as compared to 2002 from each of our major target markets:

The growth in net revenue resulted primarily from an increase in volume shipments of our semiconductor products stemming from the rise in demand for our products in each of our major target markets in 2003.

Our enterprise networking products include Ethernet controllers, PHYs and switches, network processors, server chipsets, and security and storage products. Our broadband communications products include solutions for cable modem, cable-TV set-top box, direct broadcast satellite and DSL applications. Our mobile and wireless products include wireless LAN, cellular and Bluetooth solutions. We anticipate that total net revenue in the first quarter of 2004 will increase by approximately 16% to 18% over the fourth quarter 2003 level. We also expect the net revenue increase in the first quarter of 2004 will be distributed across all three of our major target markets.

Cost of Revenue and Gross Profit. Cost of revenue includes the cost of purchasing the finished silicon wafers manufactured by independent foundries, costs associated with assembly, packaging, test and quality assurance for semiconductor products, prototyping costs, amortization of purchased technology, and manufacturing overhead, including costs of personnel and equipment associated with manufacturing support, product warranty costs, provisions for excess or obsolete inventories and contracted development work. Gross profit represents net revenue less the cost of revenue.

The 2003 increase in absolute dollars for gross profit resulted primarily from the 48.7% growth in net revenue. The increase in gross profit as a percentage of net revenue in 2003 resulted primarily from lower amortization of purchased intangible assets, lower stock-based compensation expense and shifts in our product mix, offset in part by additional stock-based compensation expense due to our stock option exchange.

The following table presents details of non-cash expenses for employees engaged in manufacturing operations for 2003 and 2002 that are included in cost of revenue:

At December 31, 2003 the unamortized balance of deferred compensation was approximately $1.4 million, which will be amortized to cost of revenue through 2007. At December 31, 2003 the unamortized balance of purchased intangible assets was approximately $6.7 million, all of which will be amortized to cost of revenue in 2004.

Gross profit has been and will likely continue to be impacted in the future by competitive pricing strategies, fluctuations in the volume of our product sales, fluctuations in silicon wafer costs and assembly, packaging and testing costs, product warranty costs, provisions for excess or obsolete inventories and possible future changes in product mix and the introduction of products with lower margins, among other factors. In addition, we anticipate that gross profit could continue to be impacted by amortization charges related to possible future acquisitions.

The following table presents research and development and selling, general and administrative expenses for 2003 and 2002:

Research and Development Expense. Research and development expense consists primarily of salaries and related costs of employees engaged in research, design and development activities, costs related to engineering design tools and computer hardware, subcontracting costs, prototyping costs and facilities expenses. Research and development expense does not include amounts associated with stock-based compensation or stock option exchange expenses for employees engaged in research and development or expense amounts associated with amortization of purchased intangible assets related to research and development activities.

The 2003 decrease in research and development expense in absolute dollars resulted primarily from a $14.0 million decrease in personnel-related expenses and a $7.4 million decrease in prototyping costs due to our restructuring efforts. In addition, there were modest decreases in system level testing and costs related to engineering design tools and computer hardware. Research and developments costs in 2003 reflected costs savings resulting from the restructuring plan we began implementing in the fourth quarter of 2002, or the 2002 Restructuring Plan, which included workforce reductions. This was partially offset by new hires in 2003 as well as a change in our employee compensation policies implemented in the second quarter of 2003 that resulted in an increase in cash compensation to certain employees. Savings from our 2002 Restructuring Plan will continue to be offset by any new hires in the future and any future acquisitions. In addition, based upon past experience, we anticipate that research and development expense in absolute dollars will increase over the long term as a result of the growth and diversification of the markets we serve, new product opportunities, changes in our compensation policies and any expansion into new markets and technologies.

We remain committed to a significant level of research and development effort to extend our technology leadership in the broadband communications markets in which we operate. We hold over 500 U.S. patents and we maintain an active program of filing for and acquiring additional patents in broadband communications and other fields.

Selling, General and Administrative Expense. Selling, general and administrative expense consists primarily of personnel-related expenses, legal and other professional fees, facilities expenses, communications expenses and trade show expenses. Selling, general and administrative expense does not include amounts associated with stock-based compensation or stock option exchange expenses for administrative employees or expense amounts associated with amortization of purchased intangible assets related to selling, general and administrative activities.

The 2003 increase in selling, general and administrative expense in absolute dollars resulted primarily from a $16.6 million increase in legal costs. In addition, there were modest increases in salaries and related costs, insurance costs and bad debt expense, offset in part by a decrease in information technology maintenance and supplies expense and expenditures for travel and entertainment. Based upon past experience, we anticipate that over the long term selling, general and administrative expense in absolute dollars will continue to increase to

support any expansion of our operations through indigenous growth and acquisitions, as a result of periodic changes in our infrastructure to support any increased headcount, changes in our compensation policies, acquisition and integration activities, and international operations, and as a result of current and any future litigation to protect our business interests and intellectual property.

The following table presents stock-based compensation expense for employees engaged in research and development and selling, general and administrative activities for 2003 and 2002, all of which was excluded from those operating expenses:

Stock-based compensation expense generally represents the amortization of deferred compensation as well as expense related to options subject to variable accounting. Deferred compensation primarily represents the difference between the fair value of our Class A common stock at the measurement date of each acquisition and the original purchase price of the restricted stock or exercise price of the unvested stock options assumed in the acquisition. Deferred compensation is presented as a reduction of shareholders’ equity and is amortized ratably over the respective vesting periods of the applicable options, generally three to five years. Additional deferred compensation related to earned contingent consideration is measured and recorded at the date the contingency is satisfied. Employee terminations in 2003 and 2002 resulted in the elimination of deferred compensation of approximately $30.1 million and $103.0 million, respectively, that is no longer amortized. We recorded approximately $60.5 million of net deferred compensation in 2003 primarily for contingent consideration earned in connection with our acquisitions of ServerWorks and Mobilink. We recorded approximately $2.2 million of deferred compensation in 2002 primarily for restricted stock assumed in our acquisition of Mobilink.

The 2003 decrease in stock-based compensation expense related primarily to the elimination of deferred compensation due to the termination of certain employees and certain assumed options being fully amortized, offset in part by the acceleration from future periods of stock-based compensation expense related to certain assumed stock options and additional deferred compensation related to earned contingent consideration. At December 31, 2003 the unamortized balance of deferred compensation was approximately $76.2 million, which will be amortized to research and development and selling, general and administrative expenses through 2007. However, if there are any modifications or cancellations of the underlying restricted stock or unvested stock options, we may be required to either accelerate from future periods or cancel the remaining deferred compensation. In the event additional deferred compensation is recorded in connection with any future acquisitions, our operating expense would be impacted by its amortization.

The following table presents amortization of purchased intangible assets related to research and development and selling, general and administrative activities for 2003 and 2002, all of which was excluded from those operating expenses:

Purchased intangible assets primarily include completed technology, customer relationships, contracts and backlog, and are amortized on a straight-line basis over the estimated remaining useful lives of the respective assets, ranging from less than one to three years.

The 2003 decrease in amortization of purchased intangible assets was primarily a result of certain purchased intangible assets being fully amortized. We currently have no remaining purchased intangible assets to amortize to future operating expense. However, if we acquire purchased intangible assets in the future, our operating expense would be impacted by the amortization of these assets.

The following table presents impairment of goodwill and other intangible assets for 2003 and 2002:

We performed our annual impairment assessments of the carrying value of goodwill recorded in connection with our various acquisitions required under SFAS No. 142, Goodwill and Other Intangible Assets, or SFAS 142, in October 2003 and 2002. In addition, we determined that indicators of impairment existed for two of our reporting units in May 2003 and an additional impairment assessment was performed at that time. In accordance with SFAS 142, we compared the carrying value of each of our reporting units that existed at those times to their estimated fair values. At October 1, 2003 and 2002, we had four and seven reporting units, respectively. We determined and identified those reporting units in accordance with SFAS 142.

We estimated the fair values of our reporting units primarily using the income approach valuation methodology that includes the discounted cash flow method, taking into consideration the market approach and certain market multiples as verification of the values derived using the discounted cash flow methodology. The discounted cash flows for each reporting unit were based on discrete four year financial forecasts developed by management for planning purposes and consistent with those distributed to our Board of Directors. Cash flows beyond the four year discrete forecasts were estimated using a terminal value calculation, which incorporated historical and forecasted financial trends for each identified reporting unit and considered long-term earnings growth rates for publicly traded peer companies. Future cash flows were discounted to present value by incorporating the present value techniques discussed in Financial Accounting Standards Board, or FASB, Concepts Statement 7, Using Cash Flow Information and Present Value in Accounting Measurements. Specifically, the income approach valuation used reporting unit cash flow discount rates ranging from 13% to 16%, and terminal value growth rates ranging from 0% to 11%. Publicly available information regarding the market capitalization of our

Upon completion of the October 2003 annual impairment assessment, we determined no impairment was indicated as the estimated fair values of the four reporting units exceeded their respective carrying values. Upon completion of the October 2002 assessment, we determined that the carrying values of four of our seven reporting units exceeded their estimated fair values. The four affected reporting units were broadband processors, client server networking, mobile communications and ServerWorks. Because indicators of impairment existed for these four reporting units, we performed the second step of the test required under SFAS 142 to determine the fair value of the goodwill for each of the affected reporting units.

In accordance with SFAS 142, the implied fair value of goodwill was determined in the same manner as that which is utilized to estimate the amount of goodwill recognized in a business combination. As part of the second step of the impairment test performed in 2002, we calculated the fair value of certain assets, including developed technology and in-process research and development, or IPR&D, assets. To determine the implied value of goodwill, fair values were allocated to the assets and liabilities of each of the four affected reporting units in 2002. The implied fair value of goodwill was measured as the excess of the fair value of the affected reporting unit over the amounts assigned to its assets and liabilities. The impairment loss for each of the affected reporting units was measured by the amount the carrying value of goodwill for that reporting unit exceeded the implied fair value of the goodwill. Based on this assessment, we recorded a charge of $1.241 billion in October 2002. Of such charge, $536.0 million related to the goodwill of our broadband processor reporting unit, $206.1 million related to the goodwill of our client server networking reporting unit, $179.6 million related to the goodwill of our mobile communications reporting unit and $319.3 million related to the goodwill of our ServerWorks reporting unit.

The primary factors resulting in the 2002 impairment charge were: (i) the continued significant economic slowdown in the technology sector and the semiconductor industry, which affected both our operations at that time and our expectations with respect to future revenue, (ii) a decline in the valuation of technology company stocks, including the valuation of our stock, and (iii) unfavorable revisions in revenue and cash flow expectations regarding certain of our acquired businesses. These acquired businesses were priced based on valuation multiples that were indicative of the value at which businesses were purchased and sold at that time, but were inflated relative to historical and subsequent standards. In the second and third quarters of 2002 demand for servers, WAN networking equipment, handheld devices and other products using our chips declined relative to the demand that was anticipated when certain of our purchase acquisitions were consummated. In addition, we recognized that a sustained decline in demand combined with an oversupply of these products resulted in increased price competition for certain chipsets, giving effect to shrinking profit margins and expected future cash flows for our four affected reporting units. In response to the existing market conditions, we initiated a restructuring program in the fourth quarter of 2002 that included significant headcount reductions, and we decreased our investment in certain target markets that were either performing below our expectations or had low near term growth potential. As a result, we revised our forecasts of future operating results, which were in turn used in calculating the estimated fair values of the reporting units.

In May 2003 we determined there were indicators of impairment for two of our reporting units, ServerWorks and mobile communications. We tested the goodwill of these reporting units for impairment in accordance with SFAS No. 142 as described above. Based on this assessment, we recorded a charge of $438.6 million in June 2003 to write down the value of goodwill associated with the reporting units. Of this charge, $414.5 million represented the balance of goodwill related to the ServerWorks reporting unit and $24.1 million represented the balance of goodwill related to the mobile communications reporting unit.

With respect to the ServerWorks reporting unit, the primary factors that contributed to the impairment assessment were additional competitive pressures in the server market and recent design losses experienced by that reporting unit that were attributable, in part, to our ongoing inability to obtain required design information from a third party that is also a competitor. Another factor that contributed to the impairment assessment was the recording of additional goodwill due to contingent consideration earned by former ServerWorks stockholders and employees (see Note 3 of Notes to Consolidated Financial Statements). As a result of the competitive pressures

and design losses, we reduced our forecasts of future operating results for the ServerWorks reporting unit for periods beginning as early as the second quarter of 2004 with the expectation of future loss of market share for that business. These forecasts in turn formed the basis for estimating the fair value of the ServerWorks reporting unit as of June 2003. We are continuing to pursue strategies to reposition our ServerWorks business and develop alternative sources of revenue for that reporting unit.

With respect to the mobile communications reporting unit, the primary factor that contributed to the impairment assessment was the recording of additional goodwill due to contingent consideration earned by former Mobilink shareholders and employees in May 2003 (see Note 3 of Notes to Consolidated Financial Statements), after that reporting unit had already been written down to its implied fair value in October 2002.

In December 2003 and 2002, we acquired over 150 patents related to various technologies, including among others, wireless networking topologies and protocols, dual mode wireless transceivers, power management in integrated circuits, Ethernet networking, personal video recording, and VoIP telephony, for an aggregate of $1.0 million and $24.0 million, respectively. The immediate purpose of these patent acquisitions was to assist us in the defense and settlement of ongoing and future lawsuits. As a result, we were unable to estimate any future cash flows from the patents. We also do not have any plans to resell the patents to a third party. Due to our intended use for these assets, we concluded that indicators of impairment existed upon acquisition of the patents because it appeared that the carrying amount of the patents might not be recoverable. Upon determining that indicators of impairment existed, we performed a recoverability test in accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Estimates of future cash flows used to test the recoverability of long-lived assets should include only the future cash flows that are directly associated with and that are expected to arise as a direct result of the use and eventual disposition of the asset. The cash flows expected to arise as a direct result of the use of the patents are actually the cash savings resulting from reduced but undeterminable legal expenditures over the next several years. Due to the unpredictable nature of legal disputes, it is not possible to reasonably: (i) determine if our strategy with respect to the patents will be successful, (ii) forecast legal expenditures that would have been incurred if the patent portfolio was not acquired and (iii) forecast cash flows generated as a result of acquiring the patents. As a result, pursuant to SFAS 144 no reasonable analysis could be prepared to support future cash flows associated with the patents. Accordingly, the patents were determined to be fully impaired at their respective dates of acquisition.

For further discussion of impairment of goodwill and other intangible assets, see Notes 1 and 10 of Notes to Consolidated Financial Statements.

The following table presents stock option exchange expense for employees engaged in research and development and selling, general and administrative activities for 2003 and 2002, all of which was excluded from those operating expenses:

On April 7, 2003 we commenced an offering to our employees to voluntarily exchange certain vested and unvested stock options. Under the program, employees holding options to purchase our Class A or Class B common stock were given the opportunity to exchange certain of their existing options, with exercise prices at or above $23.58 per share. Stock options to purchase an aggregate of 57,271,153 shares with a weighted average exercise price of $47.32 per share were eligible for tender at the commencement of the program, representing approximately 43.6% of our outstanding stock options as of the commencement date.

On May 5, 2003 the offer period ended and we accepted for exchange and cancellation vested eligible options to purchase 32,642,634 shares of Class A or Class B common stock, with a weighted average exercise price of $48.59 per share. In exchange, we issued 8,574,033 fully vested, non-forfeitable shares of our Class A common stock and recorded stock-based compensation expense of approximately $162.3 million related to the issuance of such vested shares, based on the closing price of our Class A common stock on May 5, 2003 of $18.93 per share. The 8,574,033 shares were included in our calculation of net loss per share effective as of May 5, 2003. Additionally, on May 5, 2003 we accepted for exchange and cancellation unvested eligible options to purchase 20,086,234 shares of Class A or Class B common stock, with a weighted average exercise price of $50.93 per share. In exchange, new options to purchase 18,301,676 shares of our Class A common stock were issued on November 10, 2003. The terms and conditions of the new options, including the vesting schedules, were substantially the same as the terms and conditions of the options cancelled. The exercise price for the new options was $35.12 per share which was the last reported trading price of our Class A common stock on the grant date. At December 31, 2003 there were options to purchase 102,912,733 shares of Class A or Class B common stock outstanding.

Eligible employees (members of our Board of Directors were not eligible to participate in the offer) who participated in the offer received, in exchange for the cancellation of vested eligible options, an amount of consideration, represented by fully vested, non-forfeitable common stock, equal to the number of shares underlying such vested eligible options, multiplied by the offered value (as determined under certain terms and conditions set forth in our offer), divided by the closing price of our Class A common stock as reported on the NASDAQ National Market on May 5, 2003. We concluded that the consideration paid for the eligible options represented “substantial consideration” as required by Emerging Issues Task Force Issue No. 00-23 Issues Relating to Accounting for Stock Compensation Under APB Opinion No. 25 and FASB Interpretation No. 44, or EITF 00-23, as the offered value per vested option was at least equal to the fair value for each eligible option, as determined using the Black-Scholes option pricing model. In determining the fair value of the eligible options using the Black-Scholes option pricing model, we primarily used the following assumptions: (i) an expected life of approximately four years; (ii) a volatility of 70.0% during that expected life; (iii) a risk-free interest rate of 2.72%; and (iv) no dividends. The weighted average offered value per vested option share was $4.97.

Certain of our employees held unvested eligible options that were previously assumed by us in connection with acquisitions that were accounted for using the purchase method of accounting. We had recorded deferred compensation with respect to those options based upon the applicable stock market valuation at the time of acquisition. To the extent those employees tendered, and we accepted for exchange and cancellation, such assumed eligible options in exchange for new options, we were required to immediately accelerate the amortization of the remaining related deferred compensation previously recorded. Consequently, we recorded a non-cash charge of approximately $55.6 million in May 2003, reflecting the acceleration from future periods of stock-based compensation expense.

Variable accounting is not required under EITF 00-23 for eligible options subject to the offer that were not surrendered for cancellation, because: (i) the shares of Class A common stock offered as consideration for the surrendered options were fully vested and non-forfeitable and (ii) the number of shares received by an employee who accepted the offer was based on the number of surrendered eligible options multiplied by the offered value per vested option, divided by the fair value of the stock at the date of exchange.

We further concluded that the “look back” and “look forward” provisions of paragraph 45 of FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation — An Interpretation of APB Opinion No. 25, or FIN 44, applied to the stock options surrendered for cancellation. If any stock options were granted to participants in the offer within the six months prior to or following May 5, 2003, those stock options would be subject to variable accounting. As a result of these provisions, variable accounting is required for options to purchase approximately 208,966 shares as of December 31, 2003. In 2003 we recorded approximately $3.5 million of stock-based compensation expense related to the portion of these variable options that vested during the period.

In addition to the non-cash charges described above, we incurred certain associated employer payroll taxes and professional fees of approximately $2.8 million in connection with the offering. Employees were responsible

In May 2003 we completed a management transition at our ServerWorks Corporation subsidiary and entered into a settlement agreement resolving various issues and disputes raised by certain employees and former securities holders of ServerWorks, including issues and disputes with three departing employees, relating to agreements entered into when we acquired ServerWorks in January 2001. In connection with the settlement, we incurred approximately $25.2 million in cash payments and expenses and recorded a one-time non-cash charge of approximately $88.1 million in May 2003, reflecting the acceleration from future periods of stock-based compensation expense, most of which was previously recorded as deferred compensation established upon the acquisition of ServerWorks (and based upon stock market valuations at the time of the acquisition).

In August 2003 we agreed with Intel Corporation to settle all outstanding litigation between the companies as well as litigation involving our respective affiliates. In connection with the settlement agreement, we agreed to pay Intel $60.0 million, of which $30.0 million was paid in August 2003, and the remaining balance was paid in October 2003.

In January 2004 we entered into a settlement and license agreement to settle certain disputes. In connection with the settlement, we recorded $14.8 million as a one-time charge for the disputes and claims in December 2003 and also recorded an asset of $1.2 million pertaining to a related license agreement in January 2004. Under the agreement, we are required to pay $16.0 million in cash, $8.0 million of which was paid in January 2004, and the remainder of which will be paid in four equal installments of $2.0 million on the anniversary date of the settlement agreement over each of the next four years. The value of the license agreement will be amortized to cost of revenue over its estimated useful life.

We recorded an additional $6.4 million and $3.0 million in settlement costs in 2003 and 2002, respectively, in connection with the settlement of other outstanding litigation and third party claims.

For a more detailed discussion of our outstanding litigation, see Note 13 of Notes to Consolidated Financial Statements.

From the second quarter of 2001 through the third quarter of 2002, we implemented a plan, the 2001 Restructuring Plan, to restructure our operations in response to the challenging economic climate. As a result of the prolonged downturn in the semiconductor industry, we announced an additional restructuring program, the 2002 Restructuring Plan, which we implemented from the fourth quarter of 2002 through the second quarter of 2003. The plans focused on cost reductions and operating efficiencies, including workforce reductions and lease terminations. These restructuring plans resulted in certain business unit realignments, workforce reductions and

consolidation of excess facilities. Approximately 510 and 160 employees were terminated across all of our business functions and geographic regions in connection with the 2002 and 2001 Restructuring Plans, respectively. In addition, headcount was reduced through attrition and reductions in the number of temporary and contract workers we employed.

Activity and liability balances related to the 2002 and 2001 Restructuring Plans were as follows:


(1)	Non-cash costs related to stock-based compensation expense resulting from an extension of the exercise period for vested stock options of certain terminated employees and the acceleration of the vesting period of certain options of certain terminated employees as required by their assumed option agreements, and the write-off of leasehold improvements.

(2)	Cash payments relate to severance and fringe benefits, net lease payments on excess facilities, lease terminations and non-cancelable lease costs.

(3)	Although not related to the 2002 or 2001 Restructuring Plans, we assumed additional liabilities of approximately $6.8 million in connection with the Mobilink acquisition for the consolidation of excess facilities, relating primarily to lease terminations, non-cancelable lease costs and write-offs of leasehold improvements. The liabilities related to the Mobilink acquisition have been classified as restructuring liabilities for presentation in the consolidated balance sheets.

These restructuring charges are classified as operating expenses in our consolidated statements of operations.

Certain of the restructuring charges were recorded in periods subsequent to the initial implementations of the 2001 and 2002 Restructuring Plans. These subsequent charges were primarily due to the inability to reasonably estimate those costs at the time of the initial implementations as we were still in the process of reviewing many of our facilities to determine where we could consolidate and which locations would no longer be required. We do not anticipate recording any additional charges under the 2001 and 2002 Restructuring Plans.

The consolidation of excess facilities costs will be paid over the respective lease terms through 2010.

The goal of our 2002 and 2001 Restructuring Plans was to reduce our research and development and selling, general and administrative operating expenses, but we cannot assure you that we will achieve future expense reductions and other benefits that we anticipated. Anticipated savings from reduced headcount or facility consolidations have been and may in the future be, mitigated by subsequent increases to headcount, changes in our employee compensation policies and subsequent facilities additions related to our operating requirements.

Interest Income, Net. Interest income, net, reflects interest earned on average cash and cash equivalents and marketable securities balances, less interest accrued on our debt and capital lease obligations. The decrease in 2003 resulted primarily from a decline in interest rates, offset in part by a decline in interest expense on lower average debt balances.

Other Income (Expense), Net. Other income (expense), net, primarily includes recorded gains and losses on strategic investments as well as gains and losses on foreign currency transactions and dispositions of property and equipment. In September 2003 we realized a gain from a strategic investment in the amount of $24.4 million. That investment was previously written down by $24.1 million in September 2002, representing an other-than-temporary decline in the value of that investment at the time, as described below. This gain was offset in part by losses recorded in the amount of $2.3 million, representing other-than-temporary declines in the value of other strategic investments.

In 2002 we recorded impairment losses on strategic investments of approximately $37.8 million in two separate periods. We recorded a loss of approximately $4.1 million in February 2002, which was based on information that led us to believe that the investee was proceeding into either a major financial restructuring and/ or bankruptcy. This belief was based on our working knowledge of the investee, the fact that we had been solicited by the investee company for continued financings and the poor performance of venture technology investments in the geographical region. Previously, this privately held investment was reduced to its fair value of $4.1 million in September 2001 based on a then recent round of financing.

We also recorded impairment losses on strategic investments of $33.7 million in September 2002. Approximately $24.1 million related to a second privately held investment. Originally, this investment had high growth prospects and was proposed to be selected for a key customer design win. This key design win potentially would have generated hundreds of millions in revenue over the next several years and positioned the investee for either an initial public offering or as an acquisition target. Ultimately, the investee did not secure the key design win, and, accordingly, was forced to enter into discussions to obtain a subsequent round of financing at a lower valuation. Therefore, at September 30, 2002 we believed it was necessary to permanently reduce the carrying value of this investment to its respective fair value, based on the term sheet for the potential subsequent financing. In addition approximately $7.8 million in impairment losses was related to a third privately held investment. The impairment was caused by an impending financing that was offered at a price substantially lower than our previously reduced carrying value. Earlier, this privately held investment was reduced to its fair value of $8.8 million in September 2001 based on a pricing model using historical financial information. In September 2002 we recorded an additional $1.8 million in impairment losses relating to other strategic investments using the same methodologies described above.

The losses recorded in 2002 were offset in part by approximately $4.6 million in gains realized on sales of an investment in a publicly traded company.

No income tax benefit has been recorded for domestic tax losses. Our income tax expense in 2003 and 2002 primarily represents taxes on certain foreign operations and increases in the valuation allowance for deferred tax assets. We utilize the liability method of accounting for income taxes as set forth in SFAS 109. See Note 5 of Notes to Consolidated Financial Statements.

We record net deferred tax assets to the extent we believe these assets will more likely than not be realized in accordance with SFAS 109. As a result of our recent cumulative losses and the full utilization of our loss carrybacks, we have provided a full valuation allowance against our net deferred tax assets in 2003 and 2002.

The following table presents net revenue, cost of revenue and gross profit for 2002 and 2001:

Net Revenue. Net revenue was reduced by approximately $25.5 million in 2001 to account for the fair value of the performance-based warrants to purchase shares of Class A common stock earned by certain customers in connection with purchase and development agreements that we assumed in prior acquisitions. No comparable performance-based warrants were earned in 2002, and there were no remaining outstanding performance-based warrants at December 31, 2002.

The following table presents the contribution to the overall growth in net revenue in 2002 as compared to 2001 from each of our major target markets:

Net revenue in 2002 and 2001 has been classified based on our 2003 target market structure.

Cost of Revenue and Gross Profit. The 2002 increase in gross profit as a percentage of net revenue resulted primarily from increased volumes and improved yields, which reduced direct product costs, increased absorption

The following table presents details of non-cash expenses for employees engaged in manufacturing operations for 2002 and 2001 that are included in cost of revenue:

The following table presents research and development and selling, general and administrative expenses for 2002 and 2001:

Research and Development Expense. The 2002 increase in research and development expense in absolute dollars resulted primarily from the addition of personnel through our acquisition of Mobilink, certain strategic new hires, and investment in design tools for the development of new products and the enhancement of existing products, offset in part by cost reductions from the 2001 Restructuring Plan.

Selling, General and Administrative Expense. The 2002 increase in selling, general and administrative expense in absolute dollars reflected higher personnel-related costs resulting from the addition of certain strategic new hires as well as increased facilities expenses and legal fees, offset in part by cost reductions from our 2001 Restructuring Plan.

The following table presents stock-based compensation expense for employees engaged in research and development and selling, general and administrative activities for 2002 and 2001, all of which was excluded from those operating expenses:

We recorded approximately $2.2 million of net deferred compensation in 2002 and $377.9 million of deferred compensation in 2001, primarily in connection with restricted stock and stock options assumed in our acquisitions. Approximately $103.0 million and $84.6 million of deferred compensation was eliminated due to employee terminations in 2002 and 2001, respectively.

The 2002 decrease in stock-based compensation expense related primarily to the elimination of deferred compensation due to the termination of certain employees and the decrease in our year end stock price, which is used to remeasure stock-based compensation for options subject to variable accounting. Due to the decrease in our stock price in 2002, we recorded approximately $7.0 million in reversals of previously recorded stock-based compensation expense related to stock options subject to variable accounting in accordance with FIN 44 and FIN 28 Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans, or FIN 28. In 2001 we recorded approximately $35.0 million in stock-based compensation expense related to stock options subject to variable accounting in accordance with FIN 44 and FIN 28. These charges and reversals were based on the amount by which our Class A common stock closing price at the end of each quarterly reporting period, or at the date of exercise, if earlier, exceeded the exercise price.

The following table presents amortization of purchased intangible assets related to research and development and selling, general and administrative activities for 2002 and 2001, all of which was excluded from those operating expenses:

Purchased intangible assets primarily include completed technology and customer relationships, contracts and backlog, and are amortized on a straight-line basis over the estimated remaining useful lives of the respective assets, ranging from one to three years.

The 2002 decrease in amortization of purchased intangible assets resulted primarily from the reclassification, as required by SFAS 142, of assembled workforce as goodwill, which is no longer being amortized, offset partially by the amortization of other purchased intangibles.

The following table presents impairment of goodwill and other intangible assets for 2002 and 2001:


(Mark One)
þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003

or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


California		33-0480482
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)


		Page

PART I
Item 1.	Business		1
Item 2.	Properties		17
Item 3.	Legal Proceedings		18
Item 4.	Submission of Matters to a Vote of Security Holders		18
PART II
Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters		18
Item 6.	Selected Consolidated Financial Data		19
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
	Risk Factors		48
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk		63
Item 8.	Financial Statements and Supplementary Data		65
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		65
Item 9A.	Controls and Procedures		65
PART III
Item 10.	Directors and Executive Officers of the Registrant		66
Item 11.	Executive Compensation		66
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		66
Item 13.	Certain Relationships and Related Transactions		66
Item 14.	Principal Accounting Fees and Services		66
PART IV
Item 15.	Exhibits, Financial Statement Schedules and Reports on Form 8-K		67
Exhibit 3.2
EXHIBIT 10.5.1
EXHIBIT 21.1
EXHIBIT 23.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32


		High		Low

Year Ended December 31, 2002
	First Quarter	$	53.35	$	30.10
	Second Quarter		39.35		17.06
	Third Quarter		22.96		10.40
	Fourth Quarter		21.25		9.52
Year Ended December 31, 2003
	First Quarter	$	20.34	$	12.20
	Second Quarter		28.23		11.86
	Third Quarter		29.96		19.81
	Fourth Quarter		37.65		26.25
Year Ending December 31, 2004
	First Quarter (through March 5, 2004)	$	45.00	$	34.08



		Years Ended December 31,

		2003			2002			2001			2000			1999


		(In thousands, except per share data)
Consolidated Statement of Operations Data
Net revenue		$	1,610,095		$	1,082,948		$	961,821		$	1,096,160		$	521,225
Cost of revenue			839,776			604,397			557,733			484,219			211,991

Gross profit			770,319			478,551			404,088			611,941			309,234
Operating expense:
	Research and development⁽¹⁾		434,018			461,804			446,648			250,676			119,300
	Selling, general and administrative⁽¹⁾		190,138			165,267			155,448			103,305			61,475
	Stock-based compensation		263,960			359,790			484,039			115,307			3,560
	Amortization of purchased intangible assets		3,504			22,387			27,192			1,255			—
	Impairment of goodwill and other intangible assets		439,611			1,265,038			1,181,649			—			—
	Stock option exchange		209,266			—			—			—			—
	Settlement costs		194,509			3,000			3,000			—			17,036
	Restructuring costs		2,932			119,680			34,281			—			—
	Amortization of goodwill		—			—			753,042			136,984			—
	In-process research and development		—			—			109,710			713,050			—
	Merger-related costs		—			—			—			4,745			15,210

Income (loss) from operations			(967,619	)		(1,918,415	)		(2,790,921	)		(713,381	)		92,653
Interest income, net			6,828			12,183			23,019			24,299			8,388
Other income (expense), net			26,053			(32,750	)		(30,875	)		(2,693	)		260

Income (loss) before income taxes			(934,738	)		(1,938,982	)		(2,798,777	)		(691,775	)		101,301
Provision (benefit) for income taxes			25,127			297,594			(56,729	)		(3,953	)		28,830

Net income (loss)		$	(959,865	)	$	(2,236,576	)	$	(2,742,048	)	$	(687,822	)	$	72,471

Net income (loss) per share (basic)⁽²⁾		$	(3.29	)	$	(8.35	)	$	(10.79	)	$	(3.13	)	$	.36

Net income (loss) per share (diluted)⁽²⁾		$	(3.29	)	$	(8.35	)	$	(10.79	)	$	(3.13	)	$	.31

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	*Digital Cable and Direct Broadcast Satellite Set-Top Boxes*


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


Item 5.	*Market for Registrant’s Common Equity and Related Stockholder Matters*



	December 31,

	2003		2002		2001		2000		1999


	(In thousands)
Consolidated Balance Sheet Data
Cash and cash equivalents	$	558,669	$	389,555	$	403,758	$	523,904	$	180,816
Working capital		492,227		187,767		265,107		673,092		310,625
Goodwill and purchased intangible assets, net		834,319		1,252,639		2,338,740		3,260,464		—
Total assets		2,017,622		2,216,153		3,631,409		4,677,822		609,753
Long-term debt, including current portion		—		113,470		118,046		23,649		4,862
Total shareholders’ equity		1,489,805		1,644,521		3,207,410		4,475,260		516,872


Item 7.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations*



	Years Ended
	December 31,

	2003			2002			2001

Hewlett-Packard⁽¹⁾		15.4	%		14.8	%		14.1	%
Dell		11.9			11.3			*
Motorola		*			12.1			18.2
Cisco⁽²⁾		*			10.0			*
Five largest customers as a group		51.6			52.3			54.9


	Research and Development and Selling, General and Administrative Expenses



	2001 Restructuring Plan						2002 Restructuring Plan

				Consolidation						Consolidation
	Workforce			of Excess			Workforce			of Excess
	Reductions			Facilities			Reductions			Facilities			Total


	(In thousands)
Charged to expense in 2001	$	16,100		$	18,181		$	—		$	—		$	34,281
Non-cash costs⁽¹⁾		(11,070	)		(1,638	)		—			—			(12,708	)
Cash payments⁽²⁾		(4,906	)		(6,073	)		—			—			(10,979	)

Restructuring liabilities at December 31, 2001		124			10,470			—			—			10,594
Charged to expense in 2002		1,411			30,454			65,048			22,767			119,680
Liabilities assumed in acquisition ⁽³⁾		—			—			—			6,815			6,815
Non-cash costs⁽¹⁾		(135	)		(4,868	)		(46,821	)		(1,495	)		(53,319	)
Cash payments⁽²⁾		(1,400	)		(6,502	)		(16,683	)		(3,494	)		(28,079	)

Restructuring liabilities at December 31, 2002		—			29,554			1,544			24,593			55,691
Charged to expense in 2003		—			—			2,932			—			2,932
Non-cash costs⁽¹⁾		—			—			(972	)		—			(972	)
Cash payments⁽²⁾					(11,195	)		(3,504	)		(5,778	)		(20,477	)

Restructuring liabilities at December 31, 2003	$	—		$	18,359		$	—		$	18,815		$	37,174


Item 1.	*Business*


	Broadband Communications


	*Cable Modems*


	*DSL*