10-K 1 a05855e10vk.htm FORM 10-K e10vk
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-K
     
(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, 2004
or
 
o
   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 000-23993
Broadcom logo
Broadcom Corporation
(Exact Name of Registrant as Specified in Its Charter)
     
California
   33-0480482
(State or Other Jurisdiction
of Incorporation or Organization)		   (I.R.S. Employer
Identification No.)
16215 Alton Parkway
Irvine, California 92618-3616
(Address of Principal Executive Offices) (Zip Code)
Registrant’s Telephone Number, Including Area Code: (949) 450-8700
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:  Class A common stock
(Title of class)                                                    
      Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes 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, 2004, the last business day of the registrant’s most recently completed second fiscal quarter, was $12,202,995,163 (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 known to the registrant to own 10% 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. Shares of Class B common stock are not publicly traded but are convertible at any time into shares of Class A common stock. As of December 31, 2004 there were 273,112,763 shares of Class A common stock and 57,395,782 shares of Class B common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
      Part III incorporates by reference certain information from the registrant’s definitive proxy statement (the “Proxy Statement”) for the 2005 Annual Meeting of Shareholders to be filed on or before March 29, 2005. 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.

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Broadcom®, the pulse logo, Blutonium®, BroadVoice®, NetXtreme®, QAMLink®, QuadSquad®, ServerWorks®, SiByte®, StrataSwitch®, StrataXGS®, V-thernet®, Videocore®, 54gtm, 125 High Speed Modetm, AirForcetm, AirForce Onetm, BladeRunnertm, BroadRangetm, CryptoNetXtm, FirePathtm, InConcerttm, NetXtreme IItm, ROBOswitch-plustm, ROBO-HStm, SecureEasySetuptm, StrataSwitch IItm, StrataXGS IIItm and SystemI/Otm are among the trademarks of Broadcom Corporation and/or its affiliates in the United States, certain other countries and/or the EU. Any other trademarks or tradenames mentioned are the property of their respective owners.
©2005 Broadcom Corporation. All rights reserved.

BROADCOM CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
TABLE OF CONTENTS
             
        Page
         
 PART I
   Business     1  
   Properties     19  
   Legal Proceedings     20  
   Submission of Matters to a Vote of Security Holders     20  
 PART II
   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities     20  
   Selected Financial Data     22  
   Management’s Discussion and Analysis of Financial Condition and Results of Operations     23  
     Risk Factors     50  
   Quantitative and Qualitative Disclosures About Market Risk     67  
   Financial Statements and Supplementary Data     68  
   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     68  
   Controls and Procedures     68  
   Other Information     70  
 PART III
   Directors and Executive Officers of the Registrant     70  
   Executive Compensation     70  
   Security Ownership of Certain Beneficial Owners and Management     70  
   Certain Relationships and Related Transactions     70  
   Principal Accounting Fees and Services     70  
 PART IV
   Exhibits and Financial Statement Schedules     71  
 EXHIBIT 10.3
 EXHIBIT 10.9
 EXHIBIT 10.16
 EXHIBIT 10.33
 EXHIBIT 10.37
 EXHIBIT 10.38
 EXHIBIT 10.39
 EXHIBIT 21.1
 EXHIBIT 23.1
 EXHIBIT 31.1
 EXHIBIT 31.2
 EXHIBIT 32

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CAUTIONARY STATEMENT
      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 net revenue, costs and expenses and gross margin; our accounting estimates, assumptions and judgments; the market acceptance and performance of our products; 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; manufacturing capacity; our ability to consummate acquisitions and integrate their operations successfully; the need for additional capital; inventory and accounts receivable levels; and our success in pending litigation. These forward-looking statements are based on our current expectations, estimates and projections about our industry and business, 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,” “ongoing,” 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.
PART I
Item 1. Business
Overview
      Broadcom Corporation is a global leader in wired and wireless broadband communications semiconductors. Our products enable the convergence of high-speed data, high definition video, voice and audio at home, in the office and on the go. Broadcom provides manufacturers of computing and networking equipment, digital entertainment and broadband access products, and mobile devices with complete system-on-a-chip and software solutions. Our diverse product portfolio addresses every major broadband communications market, and includes solutions for digital cable, satellite and Internet Protocol (IP) 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/ Otm 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.
Industry Environment and Our Business
      Over the past two decades communications technologies have evolved dramatically in response to the proliferation of the Internet and the emergence of new data-intensive computing and communications applications. These new applications include high-speed Internet web browsing, online audio and video communication, high definition television, corporate networking and information systems, wireless networking, and mobile voice and data connectivity. This evolution has also changed the ways in which we communicate. We

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can now access and communicate information via wired and wireless networks through a variety of electronic devices, including personal computers, digital cable and satellite set-top boxes, high definition televisions, handheld computing devices such as personal digital assistants, or PDAs, and cellular phones. These applications and devices require increasingly higher processing speeds and information transfer rates within the 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. Integrated circuits, or chips, are made using semiconductor wafers imprinted with a network of electronic components. They are designed to perform various functions such as processing electronic signals, controlling electronic system functions and processing and storing data. Today all electronic products use integrated circuits, and they are essential components of personal computers, wired and wireless voice and data communications devices, networking products and home entertainment equipment.
      The broadband transmission of digital information over existing wired and wireless infrastructures requires very sophisticated semiconductor solutions to perform critical systems functions such as complex signal processing, converting digital data to and from analog signals, and switching and routing of packets of information over Internet Protocol, or IP, based networks. 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. These devices combine complex analog, digital, and in many cases, radio frequency functions onto a single integrated circuit, and can be manufactured in high volumes using cost-effective process technologies.
Target Markets and Broadcom® Products
      We design, develop and supply a diverse portfolio of products targeted to every significant broadband communications market. Our semiconductor solutions are ubiquitous, embedded in cable and DSL modems and digital set-top boxes in the home, networking equipment in the enterprise, wireless-enabled laptop and desktop computers and 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 silicon solutions that we provide for each market.
Broadband Communications
Cable Modems
      Unlike traditional dial-up modems that provide online access through the public telephone system, cable modems provide users high-speed Internet access through a cable television network. Although cable networks were originally established to deliver television programming to subscribers’ homes, cable television operators have generally upgraded their systems 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. The speeds achieved by cable modems are 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 a user’s PC through a standard 10/ 100BASE-T Ethernet card or Universal Serial Bus, also known as a USB, 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 used by different cable networks. The first specification, DOCSIS 1.0, was adopted in 1997 and enabled the cost-effective deployment of cable modems. In 1998 the DOCSIS 1.1 specification was

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announced. The new specification enhanced DOCSIS 1.0 to include support for cable telephony using VoIP technology, streaming video and managed data services. In 2002 DOCSIS 2.0 was approved. DOCSIS 2.0 adds support for higher upstream transmission speeds of up to 30 Mbps and more symmetric 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 CableHometm 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 of voice, video and data services to residential customers. 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 their 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. These technologies 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 a complete DOCSIS system solution in silicon, enabling quality of service to support constant bit rate services like VoIP and video streaming.
      Residential Broadband Gateway Solutions. The levels of integration and performance that we continue to achieve in our cable modem chips are 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 PacketCabletm specification, IP video, and cable modem Internet services, as well as data home networking over in-home Ethernet or wireless networks.
      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.
DSL
      Digital subscriber line technologies, commonly known as DSL, represent a family of broadband technologies that use a greater range of frequencies over existing telephone lines than traditional telephone services. This provides greater bandwidth to send and receive information. DSL speeds range from 128 Kbps to 52 Mbps depending upon the particular DSL standard and the distance between the central office and the subscriber. These data rates allow local exchange carriers to provide, and end users to receive, a wide range of new 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 North America, Europe, Japan and China. 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

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bundled broadband services, such as digital video, high-speed Internet access, VoIP, video teleconferencing and IP data business services, over existing telephone lines.
      DSL Modem and Residential Gateway Solutions. For DSL 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 and video distribution. Wide area network connectivity is provided using integrated, standards-compliant PHY technology.
      DSL Central Office Solutions. We provide highly integrated semiconductor solutions for DSL central office applications as well. Our BladeRunnertm high-density central office DSL chipset supports all worldwide DSL standards using our proprietary Firepathtm 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 connections that can be supported within telecommunication companies’ tight heat, power and space constraints. We also provide the inter-networking software that is enabling DSLAM technology to transition from Asynchronous Transfer Mode to Internet Protocol.
      VDSL Solutions. For VDSL applications, we offer our QAM-based V-thernet® product family, which supports Ethernet transport over standard telephone wires and is instrumental in developing standards and products for next-generation VDSL2 applications.
Digital Cable, Direct Broadcast Satellite Set-Top Boxes and Digital Television
      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 exist 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 or MPEG-4 advanced video coding 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 global market for DBS set-top boxes will outpace the market for cable set-top boxes.
      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 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, personal video recording, or 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 capability into television sets for the North American market by integrating today’s cable set-top box functionality directly 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 digital cable-ready TVs for connection into the North American cable infrastructure.

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      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. These high-end set-top boxes 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, radio frequency television tuners based on complementary metal oxide semiconductor, or CMOS, process technology, and digital visual interface chipsets. These cable-TV set-top box chips support most industry transmission and television standards, enabling universal interoperability and easy retail channel distribution. Peripheral modules incorporated into front-end devices also provide support for common set-top box peripheral devices, such as infrared remotes and keyboards, LED displays and keypads.
      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 Ethernet or wireless networking. In addition, our set-top box semiconductor solutions incorporate PVR functionality. This 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 developed comprehensive DBS solutions. These products include 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 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, combining 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 on 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.
Enterprise Networking
Local Area Networking
      Local area networks, or LANs, consist of different types of equipment, such as servers, workstations and desktop and laptop computers, interconnected by copper, fiber or coaxial cables utilizing a common networking

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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 the volume and complexity of network traffic continues to increase, communications bottlenecks have developed in corporate LANs. As a result, 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, desktop and laptop computers, VoIP phones and wireless access points 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 and cable 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 100 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

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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 control high-speed serial links for signal integrity and bit error rate performance to reduce development cycles and costly field maintenance support.
      Gigabit Ethernet Controllers. Built upon five generations of Gigabit Ethernet MAC technology, our NetXtreme® family of Gigabit Ethernet controllers supports peripheral component interconnect, or PCI®, PCI-X® and PCI Express® 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. In 2004 Broadcom introduced the NetXtreme IItm family of Ethernet controllers. The NetXtreme II family is comprised of converged network interface controllers that are designed to improve server performance by integrating a TCP/ IP offload engine, remote direct memory access, iSCSI storage and remote management. NetXtreme II controllers simultaneously perform storage networking, high-performance clustering, accelerated data networking and remote system management pass-through functions. The entire NetXtreme 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-plustm product family consists of Layer 2+ switch chips supporting five, eight, 16 and 24 port 10/100 Ethernet switches, and our ROBO-HStm 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. In 2004 we introduced a switch that integrates 24-port Fast Ethernet physical layer transceivers and 2-port Gigabit Ethernet media access controllers into a single chip tailored for small-to-medium-sized business networking applications. The ROBOswitch family includes products for unmanaged, smart and managed solutions.
      Our family of high-end StrataSwitch® products consists of wire-speed, multi-layer chips that combine multiservice provisioning capabilities with switching, routing and traffic classification functionality onto single-chip solutions. Replacing as many as 10 chips with one, our StrataSwitch IItm 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 and octal Gigabit Ethernet transceivers, enable system vendors to build 12, 24 and 48 port multi-layer Gigabit Ethernet stackable switches, supporting systems with up to 1,536 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. The StrataXGS family also

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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. In addition, our StrataXGS IIItm product family incorporates advanced features such as IPv6 routing, unified wired and wireless switch management, advanced security and intrusion detection features, sophisticated traffic management, and scalable buffer and routing tables for high end applications.
Servers, Storage and Workstations
      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.
      The dramatic increase in the volume of business-critical data that is generated, processed, stored and manipulated has also created challenges for organizations, which must find new ways to efficiently manage the proliferation of stored data. Traditionally, many companies accessed stored network data using a direct attached storage architecture in which a single server controls access to each storage device, and stored data is only available to applications running on the server directly connected to the storage device. However, with the proliferation of stored data, many companies found that this architecture created bottlenecks in their networks. As a result, many companies have moved to the use of new architectures such as networked attached storage, or NAS, and storage area networks, or SANs. In a NAS system, individual storage devices can be connected to a network and be made available to various servers on the network. In a SAN, multiple servers on a network are connected to a centralized pool of storage data devices using a switching element to enable data sharing at gigabit speeds. This shift in architecture has also inspired the creation of new interface protocols such as serial-ATA, or SATA, iSCSI and serial attached SCSI, or SAS, to connect computers, peripherals, storage devices and networks at high speeds.
      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.
      We provide core logic technology that manages the flow of data to and from a system’s processors, memory and peripheral I/ O devices. Our ServerWorks® 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 ServerWorks SystemI/ O products supports Intel Pentium® 4 processors, which 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. However, in response to the unique competitive dynamics within the Intel processor-based server I/ O chipset market, in the second half of 2003 we announced that we planned to actively diversify our ServerWorks products beyond Intel-based platforms. In 2004 we entered into an agreement with Advanced Micro Devices to provide core logic chipsets for AMD’s Opteron® product line. We currently anticipate that the Operton processor-based chipsets that we have developed under this agreement will be introduced in 2005.
      To date our SystemI/ O chips have been used primarily in servers sold by major PC server OEMs and motherboard manufacturers; however, recently we have leveraged our server chipset technology and our expertise in networking technology into other expanding markets such as storage and networking. In addition to developing our own chips for storage platforms, in early 2004 we acquired a provider of complete enterprise-class,

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redundant array of inexpensive disks, or RAID, software stack to enable us 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. Our initial RAID products included 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. During 2004 Broadcom also introduced two new RAID products based on the emerging SATA standard. These products are chip-, board- and software-based and began shipping to value added resellers and systems integrators in 2004. We also continued to expand our portfolio of storage products with NAS-on-chip solutions targeted to the small business and residential user, RAID controllers based upon the SAS standard, and our converged network interface controllers that incorporate iSCSI storage as well as a TCP/ IP offload engine, remote direct memory access, and remote management.
      Metropolitan and Wide Area Networking
      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 solutions, chips for Synchronous Optical Networks 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, forward error correction, 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.
      In addition, our latest generation of switch devices is designed for the Metro access and edge markets. These devices feature support for IPv4 and IPv6, MPLS, Ethernet over MPLS, advanced quality of service, and sophisticated packet classification and traffic management. They are also scalable to large systems with external memory.
Other Ethernet Markets
      The economies of scale derived from the Ethernet protocol have created emerging markets for Ethernet applications. Broadcom’s advance switch products are being used in second and third generation cellular infrastructures, IP DSLAM, Metro Ethernet, blade servers in data centers, passive optical networks and residential Ethernet applications. In addition, our Ethernet transceivers are now being integrated into printers, gaming consoles, LAN on motherboard applications, audiovisual equipment and a number of other consumer devices.
Security Processors and Adapters
      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.

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      Our SSL family of CryptoNetXtm 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 10,000 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 10 Gbps full duplex. 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 standalone 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
      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 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 1.2 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. Our devices are also being designed for utilization in the fast growing network storage market, including network attached storage, storage area networking and RAID applications. Our general purpose processors are ideal for the complex protocol conversions, virtualization and proxy computations that storage applications require.
Custom Silicon Products
      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.
Mobile & Wireless Networking
Wireless Local Area Networking
      Wireless local area networking, also known as wireless LAN or Wi-Fi® networking, allows equipment on a local area network to connect without the use of any cables or wires. Wireless local area networking adds the convenience of mobility to the powerful utility provided by high-speed data networks, and is a natural extension of broadband connectivity in the home and office.

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      The first widely adopted standard for Wi-Fi technology was the IEEE 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. However, over the past year technology based upon the 802.11g specification, which provides almost five times the data rate of 802.11b networks, has replaced 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. Wi-Fi technology was first utilized in applications such as computers and routers, and is now being embedded into a number of other electronic devices such as printers, digital cameras, gaming devices, PDAs, cellular phones and broadband modems.
      Our AirForcetm wireless LAN product family consists of standards-based 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 54gtm chipsets represent our 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. In 2003 we introduced our AirForce Onetm single-chip 802.11b wireless LAN solution that enables wireless LAN connectivity in pocket-sized mobile devices such as PDAs, cellular phones, MP3 players and digital cameras. In 2004 Broadcom introduced the AirForce One single-chip 802.11g solution designed for embedded applications, an 802.11g and 802.11a/g chipset for USB 2.0 devices, and an integrated router system-on-a-chip with advanced security designed for small-to-medium sized business requirements.
      In 2004 we also introduced a number of software and hardware performance enhancements for our wireless LAN product family, including 125 High Speed Modetm technology, which increases the speed of wireless transmissions, BroadRangetm technology, which extends Wi-Fi coverage range, and SecureEasySetuptm, a software wizard that enables simple setup of a secure wireless network. All of our AirForce products also offer advanced security features, including certified support for Wi-Fi Protected Accesstm, or WPA, the Cisco Compatible Extensions, and hardware accelerated Advanced Encryption Standard, or AES, encryption The entire AirForce family is comprised of all-CMOS solutions that are capable of self-calibrating based on usage temperature and other environmental conditions.
Cellular and Wireless Wide Area Networking
      The cellular handset market is transitioning from pure voice to broadband multimedia and data, transforming the traditional cellular phone from a voice-only device into a multimedia gateway. Products emerging from this transition will allow end-users to wirelessly download e-mail, view web pages, stream audio and video, and conduct videoconferences with 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. Enhanced data communications standards derived from GSM include General Packet Radio Services, or GPRS, Enhanced Data Rates for GSM Evolution, or EDGE, and Universal Mobile Telecommunications System, or UMTS. UMTS technologies, including Wideband Code Division Multiple Access (WCDMA), are typically referred to as 3G technologies. Each 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.
      We develop and market GSM, GPRS, EDGE and WCDMA chipsets and reference designs with complete software and terminal solutions for use in cellular phones, cellular modem cards and wireless PDAs. Our cellular and wireless wide area 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 to select customers, encompassing printed circuit board, RF and handset hardware, software development and integration, product verification and certification, and manufacturing support.
Wireless Personal Area Networking
      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

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phones, PDAs, headsets and automotive electronics. Bluetooth short-range wireless connectivity enables personal area networking, or PAN, at speeds 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 Bluetooth devices and software provides a complete solution that enables manufacturers to add Bluetooth functionality to almost any electronic device with a minimal amount of development time and resources. Our Bluetooth solutions, all of which have been qualified by the Bluetooth Qualification Board to meet version 1.2 of the Bluetooth specification, are incorporated in PCs, PDAs, wireless mouse and keyboard applications, and GSM/ GPRS/ UMTS and CDMA mobile phones.
      Our Bluetooth solutions 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 InConcerttm software to allow products enabled with our AirForce Wi-Fi and Blutonium Bluetooth chips to collaboratively coexist within the same radio frequency.
Mobile Multimedia Processors
      Multimedia is becoming increasingly prevalent in handheld devices such as cellular phones. To support new multimedia features including imaging, graphics, camera image capture, audio capture, music playback, music streaming, video streaming, video capture, gaming, mobile TV, and more, Broadcom offers a new line of video and multimedia processors based on a low power, high performance architecture referred to as Videocore®.
      Unlike hard-wired processor cores, Videocore devices are built to provide customers the benefit of total software flexibility and programmability. Videocore supports a wide variety of standard and non-standard software and codecs including, but not limited to, extremely low power implementations of MPEG-4 and H.264 for video, MP3 and AAC for audio, and MIDI. Providing the base codecs to our key customers allows them to rapidly develop next-generation products while maintaining backward compatibility of applications software. Because the fully programmable architecture of our mobile multimedia processors enables a complete range of multimedia functions to be executed in software, the system designer can quickly move to production without the costly overhead and time-to-market uncertainty of hardware accelerators. The scalability of the architecture allows features or new industry standard codecs to be added shortly before product release or through firmware upgrades in the field.
      Our Videocore processors can either be used as standalone multimedia processors or as co-processors in conjunction with a host processor such as a GSM, EDGE or WCDMA baseband. Videocore-enabled video and multimedia processors for advanced handheld multimedia products are designed and optimized for video record/playback, mobile TV and 3D mobile gaming. Videocore technology is designed to create power efficient, high performance processors focused on multimedia for cellular handsets, but we are also deploying Videocore processors into a number of other portable applications, where battery life and performance are important.
Voice over IP
      Voice over Internet Protocol refers to the transmission of voice over any IP packet-based network. VoIP is stimulating dramatic changes in the traditional public switched and enterprise telephone networks. 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 buildout of the Internet and deregulation of long distance and local phone service.
      The enterprise equipment market is being radically affected by the convergence of corporate data networks and voice communications. 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 enterprise equipment customers to provide cost-effective IP phones.

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      Within residential markets, VoIP is gaining momentum as a viable alternative to traditional public telephone networks. In addition to enabling cost savings for long-distance calls, VoIP creates a number of consumer product opportunities and applications for equipment vendors and service providers.
      IP Phone Processors. Our IP phone silicon and software solutions integrate packet processing, voice processing and switching technologies to provide the quality of service, high fidelity and reliability necessary for enterprise telephony applications. Our processors have enabled the development of new XML-based IP phones that can perform a wide variety of functions that traditional phones cannot support. Originally focused on Fast Ethernet, these processors now include support for Gigabit Ethernet as well to support the growing deployment of Gigabit Ethernet throughout enterprises.
      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.
      Wi-Fi Phone Processors. In 2004 we introduced our first Wi-Fi phone processor that enables the development of next generation, cordless phone replacement devices. These Wi-Fi phones are beginning to be deployed in both enterprises and homes as the use of broadband and Wi-Fi applications increases in these markets.
      All of our VoIP processors support our BroadVoice® technology, which features a wideband high fidelity mode that significantly improves the clarity and quality of telephony voice service.
Reference Platforms
      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 its market requirements and product introduction schedules.
Customers and Strategic Relationships
      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, Apple, Askey, Cisco, D-Link, Dell, Echostar, Hewlett-Packard, IBM, Motorola, Ningbo Bird, Nortel Networks, Scientific-Atlanta, Sony Ericsson, Thomson CE and 3Com, among others. To meet the current and future technical needs in our target markets, we have also established strategic relationships with multiservice 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 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.

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      A small number of customers have historically accounted for a substantial portion of our net revenue. Sales to our five largest customers represented approximately 51.1%, 51.6% and 52.3% of our net revenue in 2004, 2003 and 2002, respectively. See Note 13 of Notes to Consolidated Financial Statements, included in Part IV, Item 15 of this Report.
      We expect that our key customers will continue to account for a substantial portion of our net revenue in 2005 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.
Core Technologies
      Using proprietary technologies and advanced design methodologies, we design, develop and supply complete system-on-a-chip solutions and related hardware and software 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 of acquired or licensed technology, providing customers with a broad range of silicon options with differentiated networking and performance features.
      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 and board-level hardware reference platforms to enable complete system-level solutions.
Research and Development
      We have assembled a large team of experienced engineers and technologists, many of whom are leaders in their particular field or discipline. As of December 31, 2004 we had 2,282 research and development employees, the majority of whom hold advanced degrees. Our work force includes 291 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 achievement of higher levels of integration and the timely introduction of new products in our target markets is essential to our growth. Our current plans are to maintain our significant research and development staffing levels in 2005. In addition to our principal design facilities in Irvine, California and Santa Clara County, California, we have additional design centers in Tempe, Arizona; San Diego County, California; Duluth, Georgia; Germantown, Maryland; Andover, Massachusetts; Nashua, New Hampshire; Matawan, New Jersey; and Seattle, Washington. Internationally, we also have design facilities in Belgium, Canada, China, France, 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.

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      Our research and development expense was $495.1 million, $434.0 million and $461.8 million in 2004, 2003 and 2002, respectively. In addition, for employees engaged in research and development, we had non-cash stock-based compensation expense and stock option exchange expense of $58.6 million, $384.1 million and $252.4 million in 2004, 2003 and 2002, respectively. We also had amortization of purchased intangible assets related to research and development of $0.8 million and $19.6 million in 2003 and 2002, respectively. We had no amortization of purchased intangible assets related to research and development in 2004.
Manufacturing
Wafer Fabrication
      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 a 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 our foundries to have online work-in-progress control. Our approach makes the manufacturing subcontracting process transparent to our customers.
      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 from time to time 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, six and seven layer metal. We continuously evaluate the benefits, on a product-by-product basis, of migrating to smaller geometry process technologies, and in 2004 we began to migrate certain products to 90 nanometer, seven to eight layer metal, feature sizes. 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.
Assembly and Test
      Our wafer probe testing is conducted by either our 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: ASAT Ltd. in Hong Kong; STATSChipac in

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Singapore, Korea, Malaysia and China; Siliconware Precision in Taiwan; NEC Corporation in Japan; United Test and Assembly Center in Singapore; Signetics in Korea; and Amkor in Korea, Philippines and China. 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.
Quality Assurance
      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 yield levels. In cases where we purchase wafers on a fixed cost basis, any improvement in yields can reduce our cost per chip.
      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.
      While every effort is made to monitor and meet the quality requirements of Broadcom’s customers, including the use of industry standard procedures and other additional methods, it is possible that an unanticipated quality problem may result in interruptions or delays in product shipments to our end customers. In that event, our reputation may be damaged and customers may be reluctant to buy our products, and we may be required to incur significant capital and other resources to remedy any quality problem with our products.
Environmental Management
      Broadcom is also focusing on managing the environmental impact of our products. Our manufacturing flow is registered to ISO 14000, the international standards related to environmental management, by our subcontractors. Due to environmental concerns, the need for lead-free solutions in electronic components and systems is receiving increasing attention within the semiconductor industry and many companies are moving towards becoming compliant with the Restriction of Hazardous Substances Directive, the European legislation that restricts the use of a number of substances, including lead, effective July 2006. Broadcom believes that its products are compliant with the RoHS Directive and that materials will be available to meet these emerging regulations. However, it is possible that unanticipated supply shortages or delays may occur as a result of these new regulations.
Product Distribution
      Initially 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 put us closer to our suppliers and many key customers and improved 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, primarily in Asia, represented 79.0%, 77.7% and 70.0% of our total net revenue in 2004, 2003 and 2002, respectively.

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Sales and Marketing
      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 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 13 of Notes to Consolidated Financial Statements, included in Part IV, Item 15 of this Report.
Backlog
      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.
Competition
      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:
  •  product quality;
  •  product capabilities;
  •  level of integration;
  •  reliability;
  •  price;
  •  time-to-market;
  •  market presence;
  •  standards compliance;
  •  system cost;
  •  intellectual property;
  •  customer interface and support; and
  •  reputation.
We believe that we compete favorably with respect to each of these factors.
      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

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average selling prices for our products. In all of our target markets, we also may face competition from newly established competitors, suppliers of products based on new or emerging technologies, and customers that 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, and may refuse to provide us with information necessary to permit the interoperability of our products with theirs. 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.
Intellectual Property
      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 more than 800 U.S. patents and have filed more than 3,000 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. 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. 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 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 time period. In addition, we often incorporate the intellectual property of our strategic customers into our designs, and therefore 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 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.

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      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, notices that claim we have infringed upon, misappropriated or misused other parties’ proprietary rights. Moreover, we have in the past and may continue to be engaged in litigation with parties who claim that we have infringed their patents or misappropriated or misused their trade secrets. We may also be sued by parties who may seek to invalidate one or more of our patents. Any 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 sought and may in the future seek to obtain a license under a third party’s intellectual property rights and have granted and may 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.
Employees
      As of December 31, 2004 we had 3,373 full-time, contract and temporary employees, including 2,282 individuals engaged in research and development, 444 engaged in sales and marketing, 268 engaged in manufacturing operations and 379 engaged in finance, legal and general administration activities. Our employees are not represented by any collective bargaining agreement, and we have never experienced a work stoppage. We believe our employee relations are good.
Item 2. Properties
      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, we lease additional design facilities in Tempe, Arizona; San Diego County, California; Duluth, Georgia; Germantown, Maryland; Andover, Massachusetts; Nashua, New Hampshire; Matawan, 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, France, 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 1.5 million square feet. Our principal facilities have lease terms expiring between 2005 and 2017. We believe that the facilities under lease by us will be adequate for at least the next 12 months. In December 2004 we entered into a lease agreement under which our corporate headquarters will move from our present location to a new, larger facility in Irvine, which will eventually consist of eight buildings with an aggregate of approximately 0.7 million square feet. The lease term is a period of ten years and two months beginning after the completion of the first two buildings and related tenant improvements, which is anticipated to occur in the first quarter of 2007.
      For additional information regarding our obligations under property leases, see Note 6 of Notes to Consolidated Financial Statements, included in Part IV, Item 15 of this Report.

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Item 3. Legal Proceedings
      The information set forth under Note 12 of Notes to Consolidated Financial Statements, included in Part IV, Item 15 of this Report, is incorporated herein by reference.
Item 4. Submission of Matters to a Vote of Security Holders
      No matters were submitted to a vote of security holders during the quarter ended December 31, 2004.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information and Holders
      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:
                   
    High   Low
         
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 Ended December 31, 2004
                
 
First Quarter
   $ 45.00     $ 34.08  
 
Second Quarter
     47.05       36.51  
 
Third Quarter
     46.75       25.25  
 
Fourth Quarter
     34.49       25.61  
Year Ending December 31, 2005
                
 
First Quarter (through February 25, 2005)
   $ 34.07     $ 29.79  
      As of December 31, 2004 there were 1,972 record holders of our Class A common stock and 303 record holders of our Class B common stock. On February 25, 2005 the last reported sale price of our Class A common stock on the NASDAQ National Market was $32.88 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 in most instances automatically converts upon sale or other transfer.
Dividend Policy
      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 for purchases of our common stock from time to time. We do not anticipate paying any cash dividends in the foreseeable future.
Securities Authorized for Issuance under Equity Compensation Plans
      The information under the caption “Equity Compensation Plan Information,” appearing in the Proxy Statement, is hereby incorporated by reference. For additional information on our stock incentive plans and activity, see Note 8 of Notes to Consolidated Financial Statements, included in Part IV, Item 15 of this Report.

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Issuer Purchases of Equity Securities
      Although we have made no purchases of our equity securities in the open market to date, in February 2005 our Board of Directors authorized a program to repurchase shares of our Class A common stock. The Board approved the repurchase of shares having an aggregate value of up to $250 million from time to time over a period of one year, depending on market conditions. These repurchases will be made in open market or privately negotiated transactions in compliance with SEC Rule 10b-18, subject to market conditions, applicable legal requirements and other factors. This program does not obligate us to acquire any particular amount of common stock and may be suspended at any time at our discretion.
Recent Sales of Unregistered Securities
      In the three months ended December 31, 2004, we issued an aggregate of 1,776,944 shares of our Class A common stock upon conversion of a like number of shares of our Class B common stock. The offer and sale of those securities were effected without registration in reliance on the exemption from registration provided by Section 3(a)(9) of the Securities Act.

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Item 6. Selected Financial Data
                                           
    Years Ended December 31,
     
    2004   2003   2002   2001   2000
                     
    (In thousands, except per share data)
Consolidated Statements of Operations Data
                                        
Net revenue
   $ 2,400,610     $ 1,610,095     $ 1,082,948     $ 961,821     $ 1,096,160  
Cost of revenue
     1,193,294       839,776       604,397       557,733       484,219  
                                         
Gross profit
     1,207,316       770,319       478,551       404,088       611,941  
Operating expense:
                                        
 
Research and development(1)
     495,075       434,018       461,804       446,648       250,676  
 
Selling, general and administrative(1)
     212,727       190,138       165,267       155,448       103,305  
 
Stock-based compensation
     73,320       263,960       359,790       484,039       115,307  
 
Amortization of purchased intangible assets
     3,703       3,504       22,387       27,192       1,255  
 
Settlement costs
     68,700       194,509       3,000       3,000       —  
 
In-process research and development
     63,766       —       —       109,710       713,050  
 
Impairment of goodwill and other intangible assets
     18,000       439,611       1,265,038       1,181,649       —  
 
Stock option exchange
     —       209,266       —       —       —  
 
Restructuring costs
     —       2,932       119,680       34,281       —  
 
Amortization of goodwill
     —       —       —       753,042       136,984  
 
Merger-related costs
     —       —       —       —       4,745  
                                         
Income (loss) from operations
     272,025       (967,619 )     (1,918,415 )     (2,790,921 )     (713,381 )
Interest income, net
     15,010       6,828       12,183       23,019       24,299  
Other income (expense), net
     7,317       26,053       (32,750 )     (30,875 )     (2,693 )
                                         
Income (loss) before income taxes
     294,352       (934,738 )     (1,938,982 )     (2,798,777 )     (691,775 )
Provision (benefit) for income taxes
     75,607       25,127       297,594       (56,729 )     (3,953 )
                                         
Net income (loss)
   $ 218,745     $ (959,865 )   $ (2,236,576 )   $ (2,742,048 )   $ (687,822 )
                                         
Net income (loss) per share (basic)(2)
   $ .68     $ (3.29 )   $ (8.35 )   $ (10.79 )   $ (3.13 )
                                         
Net income (loss) per share (diluted)(2)
   $ .63     $ (3.29 )   $ (8.35 )   $ (10.79 )   $ (3.13 )
                                         
                                         
    December 31,
     
    2004   2003   2002   2001   2000
                     
    (In thousands)
Consolidated Balance Sheet Data
                                        
Cash and cash equivalents
   $ 858,592     $ 558,669     $ 389,555     $ 403,758     $ 523,904  
Working capital
     1,087,342       492,227       187,767       265,107       673,092  
Goodwill and purchased intangible assets, net
     1,079,262       834,319       1,252,639       2,338,740       3,260,464  
Total assets
     2,885,839       2,017,622       2,216,153       3,631,409       4,677,822  
Long-term debt, including current portion
     —       —       113,470       118,046       23,649  
Total shareholders’ equity
     2,365,986       1,489,805       1,644,521       3,207,410       4,475,260  
 
(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 net income (loss) per share.
     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, 2004. The consolidated financial statements include the results of operations of acquisitions 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 prior and 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.”

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Item 7. 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.
Overview
      Broadcom Corporation is a global leader in wired and wireless broadband communications semiconductors. Our products enable the convergence of high-speed data, high definition video, voice and audio at home, in the office and on the go. Broadcom provides manufacturers of computing and networking equipment, digital entertainment and broadband access products, and mobile devices with complete system-on-a-chip and software solutions. Our diverse product portfolio addresses every major broadband communications market, and includes solutions for digital cable, satellite and IP 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/ Otm server solutions.
      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 is generated principally by sales of our semiconductor products. Such sales represented approximately 99.0%, 98.5% and 95.7% of our total net revenue in 2004, 2003 and 2002, respectively. We derive the remaining balance of our net revenue predominantly from development agreements, software licenses and maintenance agreements, system-level reference designs and cancellation fees.
      The majority of our sales occur through the efforts of our direct sales force. However, we derived approximately 9.6%, 7.1% and 10.4% of our total net revenue from sales made through distributors in 2004, 2003 and 2002, 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:
  •  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;
  •  the rate at which our present and future customers and end-users adopt our products and technologies in our target markets;
  •  our ability to specify, develop or acquire, complete, introduce, market and transition to volume production new products and technologies in a cost effective and timely manner; and
  •  the qualification, availability and pricing of competing products and technologies and the resulting effects on sales and pricing of our products.
      For these and other reasons, our net revenue and results of operations in 2004 and prior periods may not necessarily be indicative of future net revenue and results of operations.
      From time to time, our key customers place large orders causing our quarterly net revenue to fluctuate significantly. We expect these fluctuations will continue.

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      Sales to our significant customers, including sales to their manufacturing subcontractors, as a percentage of net revenue were as follows:
                         
    Years Ended
    December 31,
     
    2004   2003   2002
             
Hewlett-Packard(1)
     12.9 %     15.5 %     14.8 %
Motorola
     12.4       *       12.1  
Dell
     *       11.9       11.3  
Cisco(2)
     *       *       10.0  
Five largest customers as a group
     51.1       51.6       52.3  
 
 *   Less than 10% of net revenue.
(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 2005 and for the foreseeable future. The identity of our largest 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, excluding foreign subsidiaries or manufacturing subcontractors of customers that are headquartered in the United States, as a percent of total net revenue was as follows:
                         
    Years Ended
    December 31,
     
    2004   2003   2002
             
Asia
     15.0 %     19.6 %     20.5 %
Europe
     6.4       5.9       4.4  
Other
     0.2       0.3       0.4  
                         
      21.6 %     25.8 %     25.3 %
                         
      Net revenue derived from actual shipments to international destinations, primarily to Asia, represented approximately 79.0%, 77.7% and 70.0% of the Company’s net revenue in 2004, 2003 and 2002, respectively.
      All of our revenue to date has been denominated in U.S. dollars.
      Gross Margin. Our gross profit as a percentage of net revenue, or 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;
  •  stock-based compensation expense;
  •  the position of our products in their respective life cycles;
  •  the effects of competition;
  •  the effects of competitive pricing programs;
  •  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;
  •  provisions for excess or obsolete inventories;
  •  product warranty costs;
  •  amortization of purchased intangible assets; and
  •  licensing and royalty arrangements.

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      Net Income (Loss). Our net income (loss) 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:
  •  stock-based compensation expense;
  •  amortization of purchased intangible assets;
  •  settlement costs;
  •  in-process research and development, or IPR&D;
  •  impairment of goodwill and intangible assets;
  •  stock-option exchange expense; and
  •  restructuring costs.
      In 2004 our net income was approximately $218.7 million as compared to a net loss of approximately $959.9 million in 2003, a difference of $1.179 billion. This significant improvement in profitability in 2004 was the direct result of a 49.1% improvement in net revenue and a 2.5 percentage point improvement in gross margin. This resulted in an increase of $437.0 million of gross profit. In addition, we had significant reductions in 2004 in stock-based compensation expense, settlement costs, impairment of goodwill and intangible assets, and stock option exchange expense, aggregating approximately $947.3 million, offset by an increase in IPR&D of approximately $63.8 million.
      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. The rate of new orders may vary significantly from month to month and quarter to quarter. 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. An 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, incorporate enhanced functionality into and complement our existing product offerings, augment our engineering workforce, and/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 2004, 2003 and 2002 we completed eight acquisitions for original aggregate equity consideration of $458.0 million and cash consideration of $86.0 million. In 2004 we acquired RAIDCore, Inc., a developer of redundant array of inexpensive disks, or RAID, and virtualization software; Sand Video, Inc., a developer of advanced video compression semiconductor technology; M-Stream, Inc., a developer of solutions for signal-to-noise ratio performance improvements in cellular handsets; WIDCOMM, Inc., a provider of software solutions for Bluetooth wireless products; Zyray Wireless Inc., a developer of baseband co-processors addressing WCDMA (Wideband Code Division Multiple Access) mobile devices; and Alphamosaic Limited, a developer of advanced mobile imaging, multimedia and 3D graphics technology optimized for use in cellphones and other mobile devices. In 2003 we acquired certain assets of Gadzoox Networks, Inc., a provider of storage networking technology. In 2002 we acquired Mobilink Telecom, Inc., a supplier of chipsets and reference designs for use in mobile phones, PDAs and cellular modem cards. 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. The Financial Accounting Standards Board, or FASB, 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 and requires that those enterprises report selected information about operating segments in

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interim financial reports. SFAS 131 also establishes standards for related disclosures about products and services, geographic areas and major customers. Although we had four operating segments at December 31, 2004, 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.
We meet each of the aggregation criteria for the following reasons:
  •  the sale of integrated circuits is the only material source of revenue for each of our four operating segments or business groups;
  •  the integrated circuits sold by each of our operating segments use the same standard CMOS manufacturing processes;
  •  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.
      All of our business groups share similar economic characteristics as they have a similar long term business model, operate at similar gross margins, and have similar research and development expenses and similar selling, general and administrative expenses. The causes for variation among each of our business groups are the same and include factors such as (i) life cycle and price and cost fluctuations, (ii) number of competitors, (iii) product differentiation and (iv) size of market opportunity. Additionally, each business group is subject to the overall cyclical nature of the semiconductor industry. The number and composition of employees and the amount and types of tools and materials required are similar for each business group. Finally, even though we periodically reorganize our business groups based upon changes in customers, end markets or products, acquisitions, long-term growth strategies, and the experience and bandwidth of our vice presidents/general managers, the common financial goals for each business group remain constant.
      Because we meet each of the criteria set forth in SFAS 131 and our four business groups as of December 31, 2004 share similar economic characteristics, we aggregate our results of operations in one reportable operating segment.
Critical Accounting Policies and Estimates
      The preparation of financial statements in accordance with U.S. generally accepted accounting principles 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, litigation and other loss contingencies. We base our estimates and assumptions on current facts, historical experience and 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. The actual results experienced by us may differ materially and adversely from management’s estimates. To the extent there are material differences between our estimates and the actual results, our future results of operations will be affected.

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      We believe the following critical accounting policies require us to make significant judgments and estimates in the preparation of our consolidated financial statements:
  •  Net Revenue We recognize product revenue when the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (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, when applicable. 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 not recognized until the distributors ship the product to their customers. Customer purchase orders and/or contracts are generally used to determine the existence of an arrangement. Shipping documents and the completion of any customer acceptance requirements, when applicable, are used to verify product delivery or that services have been rendered. We assess whether a price is fixed or determinable based upon the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. We assess the collectibility of our accounts receivable based primarily upon the creditworthiness of the customer as determined by credit checks and analysis, as well as the customer’s payment history.
 
  •  Sales Returns and Allowance for Doubtful Accounts. 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. We also maintain an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. If the financial condition of any of our customers was to deteriorate, resulting in an impairment of its ability to make payments, additional allowances could be required.
 
  •  Inventory and Warranty Reserves. We write down our inventory for estimated obsolescence or unmarketable inventory in an amount equal to the difference between the cost of inventory and its 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. 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.
 
  •  Goodwill and Purchased Intangible Assets. Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the net tangible and intangible assets acquired. The amounts and useful lives assigned to other intangible assets impact the amount and timing of future amortization, and the amount assigned to in-process research and development is expensed immediately. 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 common stock, (iii) another significant slowdown in the worldwide economy or the semiconductor industry or (iv) any failure to meet the performance projections included in our forecasts of future operating results. We evaluate these assets, including purchased intangible assets deemed to have indefinite lives, on an annual basis in the fourth quarter or more frequently if we believe 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 intangible 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

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  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.
 
  •  Deferred Taxes and Contingencies. We utilize the liability method of accounting for income taxes. 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 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. We record estimated tax liabilities to the extent the contingencies are probable and can be reasonably estimated. However the actual liability in any such tax contingencies may be materially different from our estimates, which could result in the need to record additional tax liabilities or potentially reverse previously recorded tax liabilities.
 
  •  Litigation and Settlement Costs. From time to time, we are involved in disputes, litigation and other legal actions. We are aggressively defending our current litigation matters, including our pending securities class action lawsuit. 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 and/or substantial settlement charges. In addition the resolution of any future intellectual property litigation may require us to make royalty payments, which could adversely impact gross margins in future periods. If any of those events were to occur, our business, financial condition and results of operations could be materially and adversely affected. We record a charge equal to at least the minimum estimated liability for a loss contingency when both of the following conditions are met: (i) information available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements and (ii) the range of loss can be reasonably estimated. 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.

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Results of Operations
      The following table sets forth certain Consolidated Statements of Operations data expressed as a percentage of net revenue for the periods indicated:
                           
    Years Ended December 31,
     
    2004   2003   2002
             
Net revenue
     100.0 %     100.0 %     100.0 %
Cost of revenue
     49.7       52.2       55.8  
                         
Gross profit
     50.3       47.8       44.2  
Operating expense:
                        
 
Research and development(1)
     20.6       27.0       42.6  
 
Selling, general and administrative(1)
     8.9       11.8       15.3  
 
Stock-based compensation
     3.0       16.3       33.1  
 
Amortization of purchased intangible assets
     0.2       0.2       2.1  
 
Settlement costs
     2.9       12.1       0.3  
 
In-process research and development
     2.7       —       —  
 
Impairment of goodwill and other intangible assets
     0.7       27.3       116.8  
 
Stock option exchange
     —       13.0       —  
 
Restructuring costs
     —       0.2       11.1  
                         
Income (loss) from operations
     11.3       (60.1 )     (177.1 )
Interest income, net
     0.7       0.4       1.1  
Other income (expense), net
     0.3       1.6       (3.0 )
                         
Income (loss) before income taxes
     12.3       (58.1 )     (179.0 )
Provision for income taxes
     3.2       1.5       27.5  
                         
Net income (loss)
     9.1 %     (59.6 )%     (206.5 )%
                         
 
(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.
Years Ended December 31, 2004 and 2003
Net Revenue, Cost of Revenue and Gross Profit
      The following table presents net revenue, cost of revenue and gross profit for 2004 and 2003:
                                                 
    Years Ended December 31,        
             
    2004   2003        
                 
        % of Net       % of Net       %
    Amount   Revenue   Amount   Revenue   Increase   Change
                         
    (In thousands, except percentages)
Net revenue
   $ 2,400,610       100.0 %   $ 1,610,095       100.0 %   $ 790,515       49.1 %
Cost of revenue
     1,193,294       49.7       839,776       52.2       353,518       42.1  
                                               
Gross profit
   $ 1,207,316       50.3 %   $ 770,319       47.8 %   $ 436,997       56.7  
                                               

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      Net Revenue. Our revenue is generated principally by sales of our semiconductor products. Net revenue is revenue less reductions for rebates and provisions for returns and allowances. The following table presents net revenue from each of our major target markets and their contributions to the increase in net revenue in 2004 as compared to 2003:
                                                 
    Years Ended December 31,        
             
    2004   2003        
                 
        % of Net       % of Net       %
    Amount   Revenue   Amount   Revenue   Increase   Change
                         
    (In thousands, except percentages)
Enterprise networking
   $ 1,121,090       46.7 %   $ 917,876       57.0 %   $ 203,214       22.1 %
Broadband communications
     780,383       32.5       373,562       23.2       406,821       108.9  
Mobile and wireless
     499,137       20.8       318,657       19.8       180,480       56.6  
                                               
Net revenue
   $ 2,400,610       100.0 %   $ 1,610,095       100.0 %   $ 790,515       49.1  
                                               
      The growth in net revenue resulted primarily from an increase in the volume of shipments of our semiconductor products stemming from the rise in demand for our products in each of our major target markets in 2004, except for Intel processor-based server chipsets, included in enterprise networking, which declined. The previously anticipated decline in shipments of our Intel processor-based server chipsets resulted in a $46.9 million decrease in net revenue for those products in 2004 as compared with 2003.
      Our enterprise networking products include Ethernet controllers, transceivers, switches, broadband network and security processors, server chipsets and storage products. Our broadband communications products include solutions for cable modems, digital cable set-top boxes, direct broadcast satellites, personal video recording applications, DSL applications, IP set-top boxes, HD-DVD and digital TV. Our mobile and wireless products include wireless LAN, cellular, Bluetooth, mobile multimedia and VoIP solutions.
      The following table presents net revenue from each of our major target markets and their contributions to the decrease in net revenue that occurred in the three months ended December 31, 2004 as compared to the three months ended September 30, 2004:
                                                 
    Three Months Ended   Three Months Ended        
    December 31, 2004   September 30, 2004        
                 
        % of Net       % of Net       %
    Amount   Revenue   Amount   Revenue   Decrease   Change
                         
    (In thousands, except percentages)
Enterprise networking
   $ 238,048       44.1 %   $ 295,724       45.8 %   $ (57,676 )     (19.5 )%
Broadband communications
     175,354       32.5       218,810       33.8       (43,456 )     (19.9 )
Mobile and wireless
     125,988       23.4       131,981       20.4       (5,993 )     (4.5 )
                                               
Net revenue
   $ 539,390       100.0 %   $ 646,515       100.0 %   $ (107,125 )     (16.6 )
                                               
      The decrease in net revenue from the third quarter of 2004 to the fourth quarter of 2004 resulted primarily from overall industry weakness, specifically related to inventory corrections in the direct broadcast satellite and networking markets. In addition, as expected, we experienced a quarter-to-quarter decline in shipments of our Intel processor-based server chipsets of approximately $35.0 million.
      We currently anticipate that total net revenue in the first quarter of 2005 will be relatively consistent with the $539.4 million achieved in the fourth quarter of 2004. In the first quarter of 2005, we expect continued softness in the enterprise networking market and a further decline in shipments of our Intel processor-based server chipsets. In addition we expect to see some seasonality in our mobile and wireless business, offset by an increase in our Bluetooth business. We also believe we are seeing signs of recovery in our direct broadcast satellite business, as well as in other areas of our broadband communications target market.
      We recorded rebates to certain customers in the amounts of $263.6 million and $165.2 million in 2004 and 2003, respectively. We account for rebates in accordance with FASB Emerging Issues Task Force Issue, or EITF,

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Issue No. 01-9, Accounting for Consideration Given by a Vendor to Customer (Including a Reseller of the Vendor’s Products), and, accordingly, record reductions to revenue for rebates in the same period that the related revenue is recorded. The amount of these reductions is based upon the terms included in our rebate agreements. Historically, reversals of rebate accruals have not been material. We anticipate that accrued rebates in absolute dollars will vary in future periods based on the level of overall sales to customers who participate in our rebate programs. However, we do not expect rebates to impact our gross margin as our prices to these customers and corresponding revenue and margins are already net of such rebates.
      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 and provisions for excess or obsolete inventories. Gross profit represents net revenue less the cost of revenue.
      The 2004 increase in absolute dollars of gross profit resulted primarily from the 49.1% increase in net revenue. Gross margin increased from 47.8% in 2003 to 50.3% in 2004. The primary factors that resulted in this 2.5 percentage point improvement in gross margin were (i) a 1.5 percentage point improvement in product margin primarily due to changes in product mix, (ii) decreases in stock option exchange expense, the amortization of purchased intangible assets and stock-based compensation expense, which improved gross margin by 0.7, 0.6 and 0.3 percentage points, respectively, (iii) offset by an increase in the provision for excess and obsolete inventory of 0.4 percentage points.
      In 2004 we increased our provision for excess and obsolete inventory as compared to 2003 as a result of an increase in gross inventory. The primary factors that resulted in increased inventory were the expansion of inventory in response to higher levels of purchase orders received from our customers, shorter lead times for certain of our customers, and the buildup of buffer inventory based upon our forecast of future demand for certain key products. Our inventory levels are determined based on these factors as well as the stage at which our products are in their respective product life cycles and competitive situations in the marketplace. Such considerations are balanced against the risk of obsolescence or potentially excess inventory levels and may require us to make additional provisions.
      The following table presents details of certain non-cash expenses incurred in manufacturing operations for 2004 and 2003 that are included in cost of revenue:
                                                 
    Years Ended December 31,        
             
    2004   2003        
                 
        % of Net       % of Net       %
    Amount   Revenue   Amount   Revenue   Decrease   Change
                         
    (In thousands, except percentages)
Stock-based compensation expense
   $ 1,367       0.1 %   $ 6,528       0.4 %   $ (5,161 )     (79.1 )%
Amortization of purchased intangible assets
     12,821       0.5       17,207       1.1       (4,386 )     (25.5 )
Stock option exchange expense
     —       —       11,454       0.7       (11,454 )     —  
                                               
    $ 14,188       0.6 %   $ 35,189       2.2 %   $ (21,001 )     (59.7 )
                                               
      The 2004 decrease in stock-based compensation expense related primarily to a reduction in the number of assumed unvested options and shares of restricted stock being amortized and the elimination of deferred compensation as a result of the termination of employment of certain employees. At December 31, 2004 the unamortized balance of deferred compensation, which will be amortized to cost of revenue through 2007, was approximately $0.2 million. However, if there are any modifications or cancellations of the underlying unvested stock options or restricted stock, 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 cost of revenue may be increased by its amortization.
      The 2004 decrease in amortization of purchased intangible assets resulted from fewer purchased intangible assets being amortized. At December 31, 2004 the unamortized balance of completed technology was

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approximately $12.2 million, of which $9.2 million and $3.0 million are expected to be amortized to cost of revenue in 2005 and 2006, respectively. However, if we acquire purchased intangible assets in the future, our cost of revenue may be increased by the amortization of those assets.
      We charged approximately $11.5 million in stock option exchange expense to cost of revenue in 2003. There were no comparable charges incurred in 2004.
      Gross margin has been and will likely continue to be impacted in the future by competitive pricing programs, 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, possible future changes in product mix and the introduction of products with lower margins, among other factors. Our gross margin may also be impacted by additional stock-based compensation expense and amortization of purchased intangible assets related to future acquisitions and will be negatively impacted by the effectiveness of the FASB’s revised rules on stock option expensing in the third quarter of 2005. For a discussion of the effects of future expensing of stock options, see “Recent Accounting Pronouncements,” below. We anticipate that gross margin in the first quarter of 2005 will be relatively consistent with the 49.9% reported in the fourth quarter of 2004.
       Research and Development and Selling, General and Administrative Expenses
      The following table presents research and development and selling, general and administrative expenses for 2004 and 2003:
                                                 
    Years Ended December 31,        
             
    2004   2003        
                 
        % of Net       % of Net       %
    Amount   Revenue   Amount   Revenue   Increase   Change
                         
    (In thousands, except percentages)
Research and development
   $ 495,075       20.6 %   $ 434,018       27.0 %   $ 61,057       14.1 %
Selling, general and administrative
     212,727       8.9       190,138       11.8       22,589       11.9  
      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 2004 increase in research and development expense in absolute dollars resulted primarily from a $41.2 million increase in personnel-related expenses. The increase in personnel-related expenses was primarily due to a 22.3% increase in the number of employees engaged in research and development activities in 2004, through acquisitions and hiring. In addition, there were increases in outsourced engineering, facilities and engineering design tool expenses in 2004, offset in part by lower depreciation expense on computer software and equipment. 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 anticipate that research and development expense in the first quarter of 2005 will increase from the $127.4 million incurred in the fourth quarter of 2004.
      We remain committed to significant research and development efforts to extend our technology leadership in the broadband communications markets in which we operate. We hold over 800 U.S. patents, and we maintain an active program of filing for and acquiring additional U.S. and foreign 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 advertising expenses. Selling, general and administrative expense does not include amounts associated with stock-

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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 2004 increase in selling, general and administrative expense in absolute dollars resulted primarily from a $22.5 million increase in personnel-related expenses. The increase in personnel-related expenses was primarily due to a 22.1% increase in the number of employees engaged in selling, general and administrative activities in 2004, through acquisitions and hiring. In addition, there were increases in expenses for travel and entertainment, marketing and accounting, which were offset by decreases in legal expense. Based upon past experience, we anticipate that selling, general and administrative expense in absolute dollars will continue to increase over the long-term 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 future litigation. We anticipate that selling, general and administrative expense in the first quarter of 2005 will increase from the $51.4 million incurred in the fourth quarter of 2004.
Stock-Based Compensation Expense
      The following table presents stock-based compensation expense for employees engaged in research and development and selling, general and administrative activities for 2004 and 2003, which expense was segregated from the presentation of those items in the consolidated statements of operations:
                                                 
    Years Ended December 31,        
             
    2004   2003        
                 
        % of Net       % of Net       %
    Amount   Revenue   Amount   Revenue   Decrease   Change
                         
    (In thousands, except percentages)
Research and development
   $ 58,611       2.4 %   $ 219,337       13.6 %   $ (160,726 )     (73.3 )%
Selling, general and administrative
     14,709       0.6       44,623       2.7       (29,914 )     (67.0 )
                                               
    $ 73,320       3.0 %   $ 263,960       16.3 %   $ (190,640 )     (72.2 )
                                               
      Stock-based compensation expense generally represents the amortization of deferred compensation resulting from acquisitions. 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 exercise price of each unvested stock option or each share of restricted stock assumed in the acquisition. To a much lesser extent, stock-based compensation expense represents expense related to restricted stock units issued to employees. Deferred compensation is presented as a reduction of shareholders’ equity and is amortized ratably over the respective vesting periods of the applicable unvested securities, generally three to five years.
      The 2004 decrease in stock-based compensation expense related primarily to a reduction in the number of assumed unvested options and shares of restricted stock being amortized and the elimination of deferred compensation as a result of the termination of employment of certain employees. At December 31, 2004 the unamortized balance of deferred compensation, which will be amortized to operating expenses through 2008, was approximately $40.5 million. However, if there are any modifications or cancellations of the underlying unvested stock options or restricted stock, 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 expenses would be increased by its amortization.
      For a discussion of the effects of future expensing of stock options, see the “Recent Accounting Pronouncements,” below.

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Amortization of Purchased Intangible Assets
      The following table presents amortization of purchased intangible assets related to research and development and selling, general and administrative activities for 2004 and 2003, which expense was segregated from the presentation of those items in the consolidated statements of operations:
                                                 
    Years Ended December 31,        
             
    2004   2003        
                 
        % of Net       % of Net   Increase   %
    Amount   Revenue   Amount   Revenue   (Decrease)   Change
                         
    (In thousands, except percentages)
Research and development
   $ —       — %   $ 815       0.0 %   $ (815 )     — %
Selling, general and administrative
     3,703       0.2       2,689       0.2       1,014       37.7  
                                               
    $ 3,703       0.2 %   $ 3,504       0.2 %   $ 199       5.7  
                                               
      Purchased intangible assets primarily include completed technology, customer relationships, customer 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.
      At December 31, 2004 the unamortized balance of customer relationships and other purchased intangible assets that will be amortized to future operating expense was approximately $4.9 million, of which $3.6 million and $1.3 million are expected to be amortized in 2005 and 2006, respectively. However, if we acquire purchased intangible assets in the future, our operating expenses would be increased by the amortization of those assets.
Settlement Costs
      The following table presents settlement costs for 2004 and 2003:
                                                 
    Years Ended December 31,        
             
    2004   2003        
                 
        % of Net       % of Net       %
    Amount   Revenue   Amount   Revenue   Decrease   Change
                         
    (In thousands, except percentages)
Settlement costs
   $ 68,700       2.9 %   $ 194,509       12.1 %   $ (125,809 )     (64.7 )%
      We recorded $68.7 million in settlement costs in 2004. Of this amount, $60.0 million was related to the settlement of various litigation matters, and the remaining $8.7 million reflects settlement costs related to a claim arising from an acquisition and certain indemnification costs. For a more detailed discussion of our settled and outstanding litigation, see Notes 3 and 12 of Notes to Consolidated Financial Statements.
      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 litigation between the companies as well as litigation involving our respective affiliates. In connection with the settlement agreement, we paid Intel $60.0 million in 2003.
      We recorded an additional $21.2 million in settlement costs in 2003 in connection with the settlement of other litigation and third party claims.

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In-Process Research and Development
      IPR&D totaled $63.8 million for acquisitions completed in 2004. No comparable amount of IPR&D was recorded in 2003. The amounts allocated to IPR&D were determined through established valuation techniques used in the high technology industry and were expensed upon acquisition as it was determined that the underlying projects had not reached technological feasibility and no alternative future uses existed. In accordance with SFAS No. 2, Accounting for Research and Development Costs, as clarified by FASB Interpretation, or FIN, No. 4, Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method — an Interpretation of FASB Statement No. 2, amounts assigned to IPR&D meeting the above-stated criteria were charged to expense as part of the allocation of purchase price.
      The fair value of the IPR&D for each of the acquisitions was determined using the income approach. Under the income approach, the expected future cash flows from each project under development are estimated and discounted to their net present value at an appropriate risk-adjusted rate of return. Significant factors considered in the calculation of the rate of return are the weighted-average cost of capital and return on assets, as well as the risks inherent in the development process, including the likelihood of achieving technological success and market acceptance. Each project was analyzed to determine the unique technological innovations, the existence and reliance on core technology, the existence of any alternative future use or current technological feasibility, and the complexity, cost and time to complete the remaining development. Future cash flows for each project were estimated based on forecasted revenue and costs, taking into account product life cycles, and market penetration and growth rates.
      The IPR&D charges include only the fair value of IPR&D performed as of the respective acquisition dates. The fair value of developed technology is included in identifiable purchased intangible assets, and future research and development is included in goodwill. We believe the amounts recorded as IPR&D, as well as developed technology, represent the fair values and approximate the amounts an independent party would pay for these projects at the time of the respective acquisition dates.
      The following table summarizes the significant assumptions at the acquisition dates underlying the valuations of IPR&D for our acquisitions completed in 2004:
                                                 
        Weighted                
        Average   Average       Risk    
        Estimated   Estimated   Estimated   Adjusted    
        Percent   Time to   Cost to   Discount    
Company Acquired   Development Projects   Complete   Complete   Complete   Rate   IPR&D
                         
            (In years)   (In millions)       (In millions)
RAIDCore
     RAID software stack       60 %     1     $ 1.8       23 %   $ 2.3  
Sand Video
     Decoder/codec chips       45       1.5       6.4       28       20.5  
M-Stream
     Algorithm implemented in DSP chip       30       1       1.3       26       3.7  
Zyray
     WCDMA baseband co-processor       80       1       5.6       24       25.9  
Alphamosaic
     Multimedia co-processor       50       1       11.5       21       11.3  
      We completed the development projects related to the RAIDCore acquisition. For one development project related to the Sand Video acquisition, we reallocated the resources to focus on semiconductor products that we believe are a higher priority. All other development projects are still in process.
      Except as noted above, actual results to date have been consistent, in all material respects, with our assumptions at the time of the acquisitions. The assumptions consist primarily of expected completion dates for the IPR&D projects, estimated costs to complete the projects, and revenue and expense projections for the products once they have entered the market.
      As of the respective acquisition dates of the 2004 acquisitions, certain ongoing development projects were in process. Research and development costs to bring the products of the acquired companies to technological feasibility are not expected to have a material impact on our results of operations or financial condition.

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       Impairment of Goodwill and Other Intangible Assets
      The following table presents impairment of goodwill and other intangible assets for 2004 and 2003:
                                                 
    Years Ended December 31,        
             
    2004   2003        
                 
        % of Net       % of Net        
    Amount   Revenue   Amount   Revenue   Decrease   % Change
                         
    (In thousands, except percentages)
Impairment of goodwill and other intangible assets
   $ 18,000       0.7 %   $ 439,611       27.3 %   $ (421,611 )     (95.9 )%
      We performed annual impairment assessments of the carrying value of goodwill recorded in connection with various acquisitions as required under SFAS No. 142, Goodwill and Other Intangible Assets, or SFAS 142, in October 2004 and 2003. Upon completion of the October 2004 and 2003 annual impairment assessments, we determined no impairment was indicated as the estimated fair values of our four reporting units exceeded their respective carrying values. 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, 2004 and 2003 we determined and identified our four 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 FASB Concepts Statement 7, Using Cash Flow Information and Present Value in Accounting Measurements, or Concepts Statement 7. Specifically, the income approach valuations included reporting unit cash flow discount rates ranging from 13% to 17%, and terminal value growth rates ranging from 0% to 11%. Publicly available information regarding the market capitalization of our company was also considered in assessing the reasonableness of the cumulative fair values of our reporting units estimated using the discounted cash flow methodology.
      In May 2003 we determined that indicators of impairment existed for two of our reporting units, ServerWorks and mobile communications, and an additional impairment assessment was performed at that time. We tested the goodwill of these two reporting units for impairment 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 2003, we calculated the fair value of certain assets, including developed technology and IPR&D. To determine the implied value of goodwill, fair values were allocated to the assets and liabilities of each of the affected reporting units in 2003. 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 $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

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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 January 2004 we acquired approximately 80 patents and patent applications related to the read channel and hard disk controller market, for $18.0 million. The immediate purpose for acquiring this patent portfolio was to assist us in the defense and settlement of then ongoing and future intellectual property litigation. As a result, we were unable to estimate any future cash flows from the patents. We also did 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 the carrying value of the patents might not be recoverable. Upon determining that indicators of impairment existed, we performed a recoverability test in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, or SFAS 144. 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 only cash flows expected to arise as a direct result of the use of the patents are the cash savings expected to result from reduced but undeterminable litigation expenses 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 litigation expenses that would have been incurred if the patent portfolio was not acquired, or (iii) forecast cash flows generated as a result of acquiring the patents. As a result, no reasonable analysis could be prepared to support future cash flows associated with the patents. Accordingly, pursuant to SFAS 144 the patents were determined to be fully impaired at the date of acquisition. The impairment charge for the patent portfolio was classified as an impairment of goodwill and other intangible assets in the consolidated statements of operations in 2004.
      For further discussion of impairment of goodwill and other intangible assets, see Notes 1 and 9 of Notes to Consolidated Financial Statements.
       Stock Option Exchange Expense
      In April 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. In connection with this offering we recorded a stock option exchange expense for employees engaged in research and development and selling, general and administrative activities in the amount of $209.3 million in 2003. No comparable charges were incurred in 2004.
      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

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options was $35.12 per share which was the last reported trading price of our Class A common stock on the grant date.
      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 EITF 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 0.70 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 FIN 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, we recorded approximately $0.3 million and $3.5 million in 2004 and 2003, respectively, of stock-based compensation expense related to the portion of these variable options that vested during the periods.
      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 for satisfying their portion of the payroll taxes, either through direct cash payment to us or through the sale of a portion of their new shares.

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       Restructuring Costs
      Activity and liability balances related to the 2002 and 2001 Restructuring Plans were as follows:
                                         
    2001 Restructuring Plan   2002 Restructuring Plan    
             
        Consolidation       Consolidation    
    Workforce   of Excess   Workforce   of Excess    
    Reductions   Facilities   Reductions   Facilities   Total
                     
    (In thousands)
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 (1)
     —       —       —       6,815       6,815  
Non-cash costs(2)
     (135 )     (4,868 )     (46,821 )     (1,495 )     (53,319 )
Cash payments(3)
     (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(2)
     —       —       (972 )     —       (972 )
Cash payments(3)
     —       (11,195 )     (3,504 )     (5,778 )     (20,477 )
                                         
Restructuring liabilities at December 31, 2003
     —       18,359       —       18,815       37,174  
Liabilities assumed in acquisitions (1)
     —       —       —       3,411       3,411  
Cash payments(3)
     —       (6,066 )     —       (7,402 )     (13,468 )
                                         
Restructuring liabilities at December 31, 2004
   $ —     $ 12,293     $ —     $ 14,824     $ 27,117  
                                         
 
(1)  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 in 2002 and $3.4 million in connection with the Sand Video, WIDCOMM, Zyray and Alphamosaic acquisitions in 2004, for the consolidation of excess facilities, relating primarily to lease terminations, non-cancelable lease costs and write-offs of leasehold improvements. These costs were accounted for under EITF Issue No. 95-3, Recognition of Liabilities in Connection with Purchase Business Combinations, and were recognized as liabilities assumed in the purchase business combinations and offset by corresponding increases in goodwill. The liabilities related to these acquisitions have been classified as restructuring liabilities for presentation in the consolidated balance sheets.
 
(2)  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.
 
(3)  Cash payments relate to severance and fringe benefits, net lease payments on excess facilities, lease terminations and non-cancelable lease costs.
     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.

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       Interest and Other Income, Net
      The following table presents interest and other income, net for 2004 and 2003:
                                                 
    Years Ended December 31,        
             
    2004   2003        
                 
        % of Net       % of Net   Increase   %
    Amount   Revenue   Amount   Revenue   (Decrease)   Change
                         
    (In thousands, except percentages)
Interest income, net
   $ 15,010       0.7 %   $ 6,828       0.4 %   $ 8,182       119.8 %
Other income, net
     7,317       0.3       26,053       1.6       (18,736 )     (71.9 )
      Interest Income, Net. Interest income, net, reflects interest earned on average cash and cash equivalents and marketable securities balances. The increase in 2004 was primarily the result of an overall increase in our cash and marketable securities balances and an increase in interest rates.
      Other Income, Net. Other income, 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. We recognized gains from strategic investments in the amounts of $5.2 million and $24.4 million in 2004 and 2003, respectively. The 2003 gain on investment was incurred on an investment that 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. The 2003 gain was offset in part by $2.3 million in losses, representing other-than-temporary declines in the value of other strategic investments. For additional information, see the comparable discussion included under “Years Ended December 31, 2003 and 2002,” below.
Provision for Income Taxes
      The following table presents the provision for income taxes for 2004 and 2003:
                                                 
    Years Ended December 31,        
             
    2004   2003        
                 
        % of Net       % of Net       %
    Amount   Revenue   Amount   Revenue   Increase   Change
                         
    (In thousands, except percentages)
Provision for income taxes
   $ 75,607       3.2 %   $ 25,127       1.5 %   $ 50,480       200.9 %
      The federal statutory rate was 35% for 2004 and 2003. The difference between our effective tax rate for 2004 and the federal statutory rate resulted primarily from the effects of nondeductible IPR&D and foreign earnings taxed at rates differing from the federal statutory rate. In addition, we realized tax benefits resulting from the reversal of certain prior period tax accruals of $21.3 million related to foreign subsidiaries due to the expiration of the statute of limitations for the assessment of taxes related to such periods. The difference between our effective tax rate for 2003 and the federal statutory rate resulted primarily from the effects of impairment of goodwill, foreign earnings taxed at rates differing from the federal statutory rate, as well as the effects of 2003 domestic losses recorded without tax benefit. We utilize the liability method of accounting for income taxes as set forth in SFAS No. 109, Accounting for Income Taxes, or 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 cumulative losses and the full utilization of our loss carrybacks, we provided a full valuation allowance against our net deferred tax assets in 2004 and 2003.

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Years Ended December 31, 2003 and 2002
Net Revenue, Cost of Revenue and Gross Profit
      The following table presents net revenue, cost of revenue and gross profit for 2003 and 2002:
                                                 
    Years Ended December 31,        
             
    2003   2002        
                 
        % of Net       % of Net       %
    Amount   Revenue   Amount   Revenue   Increase   Change
                         
    (In thousands, except percentages)
Net revenue
   $ 1,610,095       100.0 %   $ 1,082,948       100.0 %   $ 527,147       48.7 %
Cost of revenue
     839,776       52.2       604,397       55.8       235,379       38.9  
                                               
Gross profit
   $ 770,319       47.8 %   $ 478,551       44.2 %   $ 291,768       61.0  
                                               
      Net Revenue. The following table presents net revenue from each of our target markets and their contributions to the increase in net revenue in 2003 as compared to 2002:
                                                 
    Years Ended December 31,        
             
    2003   2002        
                 
        % of Net       % of Net       %
    Amount   Revenue   Amount   Revenue   Increase   Change
                         
    (In thousands, except percentages)
Enterprise networking
   $ 917,876       57.0 %   $ 702,562       64.9 %   $ 215,314       30.6 %
Broadband communications
     373,562       23.2       288,609       26.7       84,953       29.4  
Mobile and wireless
     318,657       19.8       91,777       8.4       226,880       247.2  
                                               
Net revenue
   $ 1,610,095       100.0 %   $ 1,082,948       100.0 %   $ 527,147       48.7  
                                               
      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.
      Cost of Revenue and Gross Profit. The 2003 increase in absolute dollars of gross profit resulted primarily from the 48.7% growth in net revenue. The increase in gross margin 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 certain non-cash expenses incurred in manufacturing operations for 2003 and 2002 that are included in cost of revenue:
                                                 
    Years Ended December 31,        
             
    2003   2002        
                 
        % of Net       % of Net   Increase   %
    Amount   Revenue   Amount   Revenue   (Decrease)   Change
                         
    (In thousands, except percentages)
Stock-based compensation expense
   $ 6,528       0.4 %   $ 12,917       1.2 %   $ (6,389 )     (49.5 )%
Amortization of purchased intangible assets
     17,207       1.1       56,032       5.2       (38,825 )     (69.3 )
Stock option exchange expense
     11,454       0.7       —       —       11,454       —  
                                               
    $ 35,189       2.2 %   $ 68,949       6.4 %   $ (33,760 )     (49.0 )
                                               

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Research and Development and Selling, General and Administrative Expenses
      The following table presents research and development and selling, general and administrative expenses for 2003 and 2002:
                                                 
    Years Ended December 31,        
             
    2003   2002        
                 
        % of Net       % of Net   Increase   %
    Amount   Revenue   Amount   Revenue   (Decrease)   Change
                         
    (In thousands, except percentages)
Research and development
   $ 434,018       27.0 %   $ 461,804       42.6 %   $ (27,786 )     (6.0 )%
Selling, general and administrative
     190,138       11.8       165,267       15.3       24,871       15.0  
      Research and Development Expense. 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 cost 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.
      Selling, General and Administrative Expense. 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.
Stock-Based Compensation Expense
      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, which expense was segregated from the presentation of those items in the consolidated statements of operations:
                                                 
    Years Ended December 31,        
             
    2003   2002        
                 
        % of Net       % of Net       %
    Amount   Revenue   Amount   Revenue   Decrease   Change
                         
    (In thousands, except percentages)
Research and development
   $ 219,337       13.6 %   $ 252,365       23.3 %   $ (33,028 )     (13.1 )%
Selling, general and administrative
     44,623       2.7       107,425       9.8       (62,802 )     (58.5 )
                                               
    $ 263,960       16.3 %   $ 359,790       33.1 %   $ (95,830 )     (26.6 )
                                               
      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.
      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.

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Amortization of Purchased Intangible Assets
      The following table presents amortization of purchased intangible assets related to research and development and selling, general and administrative activities for 2003 and 2002, which expense was segregated from the presentation of those items in the consolidated statements of operations:
                                                 
    Years Ended December 31,        
             
    2003   2002        
                 
        % of Net       % of Net       %
    Amount   Revenue   Amount   Revenue   Decrease   Change
                         
    (In thousands, except percentages)
Research and development
   $ 815       0.0 %   $ 19,566       1.8 %   $ (18,751 )     (95.8 )%
Selling, general and administrative
     2,689       0.2       2,821       0.3       (132 )     (4.7 )
                                               
    $ 3,504       0.2 %   $ 22,387       2.1 %   $ (18,883 )     (84.3 )
                                               
      The 2003 decrease in amortization of purchased intangible assets was primarily a result of certain purchased intangible assets becoming fully amortized during the year.
Impairment of Goodwill and Other Intangible Assets
      The following table presents impairment of goodwill and other intangible assets for 2003 and 2002:
                                                 
    Years Ended December 31,        
             
    2003   2002        
                 
        % of Net       % of Net       %
    Amount   Revenue   Amount   Revenue   Decrease   Change
                         
    (In thousands, except percentages)
Impairment of goodwill and other intangible assets
   $ 439,611       27.3 %   $ 1,265,038       116.8 %   $ (825,427 )     (65.2 )%
      For impairment of goodwill and other intangible assets in 2003, see the comparable discussion included under “Years Ended December 31, 2004 and 2003,” above.
      We performed our annual impairment assessment of the carrying value of goodwill recorded in connection with our various acquisitions required under SFAS 142 in October 2002 and 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.
      We tested the goodwill of these reporting units for impairment in accordance with SFAS 142, as described above. 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

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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 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 $1.0 million and $24.0 million, respectively. Pursuant to SFAS 144 the patents were determined to be fully impaired at their respective dates of acquisition. The impairment charge for the patent portfolio was classified as an impairment of intangible assets in the consolidated statements of operations in 2003 and 2002.
      For further discussion of impairment of goodwill and other intangible assets, see Notes 1 and 9 of Notes to Consolidated Financial Statements.
Settlement Costs
      The following table presents settlement costs for 2003 and 2002:
                                                 
    Years Ended December 31,        
             
    2003   2002        
                 
        % of Net       % of Net       %
    Amount   Revenue   Amount   Revenue   Increase   Change
                         
    (In thousands, except percentages)
Settlement costs
   $ 194,509       12.1 %   $ 3,000       0.3 %   $ 191,509       6,383 %
      For settlement costs in 2003, see the comparable discussion included under “Years Ended December 31, 2004 and 2003,” above.
      For a more detailed discussion of our settled and outstanding litigation, see Notes 3 and 12 of Notes to Consolidated Financial Statements.
Stock Option Exchange Expense
      For stock option exchange expense in 2003, see the comparable discussion included under “Years Ended December 31, 2004 and 2003,” above. There was no comparable stock option exchange expense in 2002.
Restructuring Costs
      The f