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UNITED STATES

Commission file number: 000-23993

Broadcom Corporation

(949) 450-8700

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

      The number of shares of the registrant’s common stock, $0.0001 par value, outstanding as of April 30, 2003: 208,900,265 shares of Class A common stock and 71,194,441 shares of Class B common stock.

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BROADCOM CORPORATION

QUARTERLY REPORT ON FORM 10-Q

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Broadcom®, the pulse logo, SystemI/ O^TM and ServerWorks^TM are trademarks of Broadcom Corporation and/or its affiliates in the United States and certain other countries. All other trademarks mentioned are the property of their respective owners.

©2003 Broadcom Corporation. All rights reserved.

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PART I. FINANCIAL INFORMATION

Item 1.     Financial Statements

BROADCOM CORPORATION

See accompanying notes.

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BROADCOM CORPORATION

See accompanying notes.

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BROADCOM CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes.

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BROADCOM CORPORATION

1.     Summary of Significant Accounting Policies

      Broadcom Corporation (the “Company”) uses proprietary technologies and advanced design methodologies to design, develop and supply complete system-on-a-chip solutions and related hardware and software applications for every major broadband communications market. The Company’s diverse product portfolio includes solutions for digital cable and satellite set-top boxes; 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 processors; and SystemI/O^TM server solutions.

      The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated.

      The condensed consolidated financial statements included herein are unaudited; however, they contain all normal recurring accruals and adjustments that, in the opinion of management, are necessary to present fairly the Company’s consolidated financial position at March 31, 2003, the consolidated results of operations for the three months ended March 31, 2003 and 2002, and the consolidated cash flows for the three months ended March 31, 2003 and 2002. The results of operations for the three months ended March 31, 2003 are not necessarily indicative of the results to be expected for the full fiscal year.

      The accompanying unaudited condensed consolidated financial statements do not include certain footnotes and financial presentations normally required under accounting principles generally accepted in the United States. Therefore, these financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2002, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2003.

      The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management 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 during the reporting period. The Company regularly evaluates the 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 contingencies. The Company bases the estimates and assumptions on historical experience and on various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.

      The Company recognizes product revenue upon concluding that all of the fundamental criteria for revenue recognition have been met. The criteria are usually met at the time of product shipment, except for shipments to stocking distributors where revenue is recognized upon sale to the end customer. In addition, the Company records reductions to revenue for estimated product returns and allowances such as competitive pricing programs and rebates. Development revenue is generally recognized under the percentage-of-

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completion method. Revenue from licensed software is recognized when persuasive evidence of an arrangement exists and delivery has occurred, provided that the fee is fixed and determinable and collectibility is probable. Revenue from post-contract customer support and any other future deliverables is deferred and earned over the support period or as contract elements are delivered.

      Inventory is stated at the lower of cost (first-in, first-out) or market. The Company provides inventory allowances based on estimates of excess and obsolete inventories. Shipping and handling costs are classified as a component of cost of revenue in the unaudited condensed consolidated statements of operations.

      The Company has in effect several stock-based plans under which incentive stock options have been granted to employees and non-qualified stock options have been granted to employees, non-employee board members and other non-employees. The Company also has an employee stock purchase plan for all eligible employees. The Company accounts for stock-based awards to employees in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), and has adopted the disclosure-only alternative of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“SFAS 123”). Options granted to non-employees, as defined, have been accounted for at fair market value in accordance with SFAS 123.

      In accordance with the requirements of the disclosure-only alternative of SFAS 123, set forth below are pro forma statements of operations data of the Company giving effect to the valuation of stock-based awards to employees using the Black-Scholes option pricing model instead of the guidelines provided by APB 25.

      Among other factors, the Black-Scholes model considers the expected life of the option and the expected volatility of the Company’s stock price in arriving at an option valuation. For pro forma purposes, the estimated fair value of the Company’s stock-based awards to employees is amortized over the vesting period of the underlying instruments.

      The Company’s products typically carry a one to three year warranty. The Company provides reserves for estimated product warranty costs, based upon the Company’s historical warranty experience, at the time revenue is recognized.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Certain amounts in the 2002 unaudited condensed consolidated financial statements have been reclassified to conform to the current period presentation.

      The following table presents details of the Company’s purchased intangible assets:

      In connection with the acquisition of assets of a business in the three months ended March 31, 2003, the Company recorded $2.4 million in completed technology and $0.9 million in customer backlog.

      At March 31, 2003 the unamortized balance of purchased intangible assets that will be amortized to future cost of revenue was $17.8 million, of which $11.1 million is expected to be amortized in the remainder of 2003 and approximately $6.7 million is expected to be amortized in 2004. At March 31, 2003 the unamortized balance of purchased intangible assets that will be amortized to future operating expense was $2.0 million, all of which is expected to be amortized in the remainder of 2003.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The following table presents details of the Company’s accrued liabilities:

      The following table sets forth the computation of net loss per share:

      Common share equivalents of 12,664,215 and 28,313,682 have been excluded from the diluted net loss per share calculation for the three months ended March 31, 2003 and 2002, respectively, because they were antidilutive as of such dates. These excluded common share equivalents could be dilutive in the future. Contingent equity consideration paid by the Company in connection with certain acquisitions is included, as appropriate, in the calculation of basic and diluted net loss per share as of the beginning of the period in which the respective equity consideration is earned.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The Company recorded income tax expense of $9.3 million and $6.0 million for the three months ended March 31, 2003 and 2002, respectively. The Company’s income tax expense for the three months ended March 31, 2003 and 2002 primarily reflects expected taxes on certain foreign subsidiaries. No income tax benefit has been recorded for domestic net operating losses for the three months ended March 31, 2003 and 2002 due to uncertainty regarding future realization of such benefits.

4.     Debt and Other Obligations

      The following is a summary of the Company’s debt and other obligations:

      The Company maintains a bank credit facility with an outstanding balance at March 31, 2003 of $67.5 million. The Company may periodically choose the rate at which the credit facility bears interest at either (a) the higher of (i) 0.5% plus the Federal Reserve rate and (ii) the Bank of America prime rate or (b) LIBOR plus 0.75% (selected in one, two or three month periods). Interest is payable at either the selected interest period or quarterly. At March 31, 2003 the interest rate was 2.11%. A minimum of $67.5 million in marketable securities is required to secure the credit facility, and the carrying value of these restricted marketable securities at March 31, 2003 was $75.4 million. The credit facility is due and payable December 23, 2003 and may be paid earlier without premium or penalty.

      At March 31, 2003 the Company’s debt also included a stipulated judgment payable to a customer with a remaining balance of $13.2 million to be paid in three installments, with the final installment due in November 2003, plus interest on the unpaid principal balance remaining from time to time outstanding at a rate of approximately 2.78% per annum.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

5.     Shareholders’ Equity

      The components of comprehensive loss, net of taxes, are as follows:

      The components of accumulated other comprehensive income, as reported in the unaudited condensed consolidated balance sheets, net of tax are as follows:

6.     Restructuring Costs

      From the second quarter of 2001 through the third quarter of 2002, the Company implemented a plan (the “2001 Restructuring Plan”) to restructure its operations in response to the challenging economic climate. As a result of the prolonged downturn in the semiconductor industry, the Company announced an additional restructuring program that was implemented in the fourth quarter of 2002 (the “2002 Restructuring Plan”). The plans focused on cost reductions and operating efficiencies, including workforce reductions and lease terminations. Approximately 480 and 160 employees were terminated across all of the Company’s business functions and geographic regions in connection with the 2002 and 2001 Restructuring Plans, respectively. In addition, headcount was reduced through attrition and reductions in the number of temporary and contract workers employed by the Company. These restructuring plans resulted in certain business unit realignments, workforce reductions and consolidation of excess facilities.

      These restructuring costs were classified as operating expenses in the Company’s unaudited condensed consolidated statements of operations.

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

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

7.     Litigation

      Intellectual Property Litigation. In August 2000 Intel Corporation filed a complaint against the Company in the United States District Court for the District of Delaware asserting that the Company (i) infringes five Intel patents relating to video compression, high-speed networking and semiconductor packaging, (ii) induces the infringement of such patents, and (iii) contributorily infringes such patents. The complaint sought a preliminary and permanent injunction against the Company as well as the recovery of monetary damages, including treble damages for willful infringement. In the first phase of the trial, which concluded in December 2001 and involved two of the five patents in the suit, a Delaware jury unanimously determined that the Company did not infringe Intel’s networking patent and digital video patent at issue. Additionally, the jury unanimously determined that Intel’s networking patent was invalid. In March 2003 the court denied Intel’s post-trial motions and upheld the jury’s verdict of no infringement and invalidity in respect to Intel’s networking patent and no infringement in respect to one claim of the digital video patent. The court granted a new trial on the other asserted claim of the digital video patent and the Company’s licensing defense. The court has not yet set a date to retry these claims or to try claims relating to Intel’s remaining three patents or the Company’s counterclaims against Intel.

      In January 2002 Intel moved to amend its patent complaint against the Company in the Delaware action to assert that the Company infringes four additional Intel patents relating to video compression and direct memory access. The Company opposed Intel’s motion and filed a complaint against Intel for declaratory judgment in the United States District Court for the Northern District of California asserting that the four additional patents are not infringed. In August 2002 the Delaware court denied Intel’s motion to amend its complaint.

      In November 2001 the Company filed a complaint in the United States District Court for the Eastern District of Texas against Intel asserting that Intel (i) infringes two of the Company’s patents relating to graphics and memory access, (ii) induces the infringement of such patents, and (iii) contributorily infringes such patents. The complaint sought a preliminary and permanent injunction against Intel as well as the recovery of monetary damages, including treble damages for willful infringement. Intel denied the Company’s allegations of infringement and asserted related defenses and counterclaims in its January 2002 answer to the complaint. Intel also filed a motion to transfer the case to the Northern District of California, which the court denied. In July 2002 the court granted Intel’s motion to amend its pleadings by adding counterclaims of patent infringement against the Company relating to three Intel networking patents. Intel’s counterclaim sought a

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preliminary and permanent injunction against the Company as well as the recovery of monetary damages, including treble damages for willful infringement. The parties are currently completing discovery in this action. The court issued a patent claims construction order in May 2003, and trial on the five patents at issue is currently scheduled to begin in July 2003.

      In January 2001 Microtune, L.P., an affiliate of Microtune, Inc., filed a complaint against the Company in the United States District Court for the Eastern District of Texas asserting that (i) the Company’s BCM3415 silicon tuner chip infringes Microtune’s U.S. Patent No. 5,737,035 relating to tuner technology, (ii) the Company induces the infringement of such patent, and (iii) the Company contributorily infringes such patent. The complaint sought a preliminary and permanent injunction against the Company as well as the recovery of monetary damages, including treble damages for willful infringement. In March 2001 the Company answered the complaint and filed counterclaims seeking a declaratory judgment that Microtune’s patent is invalid, unenforceable and not infringed. Microtune subsequently amended its complaint to assert infringement by additional products, and the Company added the defenses that the patent in suit was procured by inequitable conduct and that Microtune’s bringing and maintaining the suit is a patent misuse. Trial was conducted in March 2003 and a jury found that Microtune’s patent is valid and infringed and that the Company’s infringement was willful. Judgment in this case is not yet final. In April 2003 the court denied the Company’s motions for judgment as a matter of law and issued a preliminary injunction. The court is still considering one of the Company’s post-trial motions for a new trial. Prior to trial, the parties stipulated to patent damages for an amount not to exceed approximately $1,200,000 for the Company’s sales of allegedly infringing products prior to January 2003. If the court denies the Company’s remaining post-trial motions, the court has the discretion to treble patent damages and to award attorneys fees to Microtune. The court may also consider Microtune’s motion to grant a permanent injunction against future infringement of the patent. The Company plans to appeal any adverse decision by the court.

      In July 2002 the Company filed a complaint in the United States District Court for the Eastern District of Texas against Microtune, Inc. and Microtune, L.P. asserting that Microtune (i) infringes one of the Company’s patents relating to tuner technology, (ii) induces the infringement of such patent, and (iii) contributorily infringes such patent. The complaint sought a preliminary and permanent injunction against Microtune as well as the recovery of monetary damages, including treble damages for willful infringement. In August 2002 Microtune filed an answer to the complaint denying the Company’s allegations and seeking a declaratory judgment that the Company’s patent in the suit is invalid, not infringed and unenforceable. The parties are currently conducting discovery in this action, and trial is scheduled to commence in January 2004. A patent claims construction hearing is scheduled for May 2003.

      In January 2003 the Company filed a complaint in the United States District Court for the Northern District of California against Microtune, Inc. asserting that Microtune’s tuners, power amplifiers and Bluetooth products (i) infringe three of the Company’s patents relating to electrostatic discharge protection and wireless technologies, (ii) induce the infringement of such patents, and (iii) contributorily infringe such patents. The complaint seeks a preliminary and permanent injunction against Microtune as well as the recovery of monetary damages, including treble damages for willful infringement. In February 2003 Microtune filed an answer to the complaint denying the Company’s allegations and seeking a declaratory judgment that the Company’s patents in the suit are invalid and not infringed. Discovery has not yet commenced, and the court has not yet set a trial date for the case.

      In February 2003 Microtune, Inc. filed a complaint in the District Court of Williamson County, Texas, asserting that the Company has engaged in anti-competitive and monopolistic conduct as well as restraint of trade conduct in violation of the Texas Anti-Trust Act in connection with the sale of certain cable modem products. The complaint seeks the recovery of monetary damages, including treble damages for the alleged willful anti-competitive and monopolistic conduct. In April 2003, the Company removed the case from the

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District Court of Williamson County, Texas to the United States District Court for the Western District of Texas. Microtune subsequently filed an amended complaint that tracks the allegations of the state action complaint. The Company has not yet answered the amended complaint and discovery has not yet commenced.

      In March 2003 the Company filed a complaint in the U.S. International Trade Commission (the “ITC”) asserting that Microtune, Inc. has engaged in unfair trade practices by importing tuners, power amplifiers and Bluetooth products that infringe two of the Company’s patents. Accordingly, the complaint seeks an exclusion order to bar the importation into the United States of those devices, as well as cable modems, set-top boxes, PCTV cards and Bluetooth headsets that incorporate Microtune’s infringing chips. In addition, the complaint requests a cease and desist order to bar further sales of infringing products that have already been imported into the United States. In April 2003, the ITC voted to institute an investigation of certain power amplifier chips, broadband tuner chips, transceiver chips and products containing these chips imported into the United States by Microtune. The parties are currently conducting discovery in this action. The ITC has not yet set a date for an administrative hearing but it will likely occur during the fall of this year.

      In May 2003 the Company filed a complaint against Microtune for declaratory judgment in the United States District Court for the Eastern District of Texas asserting that the Company’s next generation BCM3416 silicon tuner chip does not infringe Microtune’s 5,737,035 patent relating to tuner technology. Microtune answered the complaint in May 2003. Discovery has not yet commenced in the case.

      In May 2002 National Semiconductor Corporation filed a complaint against the Company in the United States District Court for the Eastern District of California asserting that the Company (i) infringes 11 National patents relating to cable modems, servers, and other home and office networking equipment, (ii) induces the infringement of such patents, and (iii) contributorily infringes such patents. The complaint seeks a permanent injunction against the Company as well as the recovery of monetary damages, including treble damages for willful infringement. In July 2002 (and as amended in February 2003) the Company answered the complaint by denying National’s infringement allegations and filed counterclaims asserting that National (i) infringes five of the Company’s patents relating to high-speed networking, (ii) induces the infringement of such patents, and (iii) contributorily infringes such patents. The counterclaim sought a preliminary and permanent injunction against National as well as the recovery of monetary damages, including treble damages for willful infringement. The Company also filed counterclaims seeking a declaratory judgment that National’s patents are invalid and not infringed. The parties are currently conducting discovery in this action. The court has set a trial date for April 2005.

      In November 2002 STMicroelectronics, Inc. filed a complaint against the Company in the United States District Court for the Eastern District of Texas asserting that the Company (i) infringes six STMicroelectronics patents relating to technology used in integrated circuits, (ii) induces the infringement of such patents, and (iii) contributorily infringes such patents. The complaint seeks a permanent injunction against the Company as well as the recovery of monetary damages, including treble damages for willful infringement. In December 2002 (and as amended in March 2003) the Company answered the complaint by denying STMicroelectronic’s infringement allegations, and filed counterclaims asserting that STMicroelectronics (i) infringes five of the Company’s patents relating to high-speed communications, (ii) induces the infringement of such patents, and (iii) contributorily infringes such patents. The counterclaim sought a preliminary and permanent injunction against STMicroelectronics as well as the recovery of monetary damages, including treble damages for willful infringement. The Company also filed counterclaims seeking a declaratory judgment that STMicroelectronics’ patents are invalid and not infringed. The parties are currently conducting discovery in this action. The court has not yet set a trial date.

      Although the Company believes that it has strong defenses to the claims of Intel, Microtune, National Semiconductor and STMicroelectronics in the foregoing actions, and is defending the claims vigorously, a finding of infringement by the Company as to one or more patents in any of these unrelated actions could lead

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to liability for monetary damages (which could be trebled in the event that the infringement were found to have been willful), attorneys fees and costs, the issuance of an injunction requiring that the Company withdraw various products from the market, and indemnification claims by the Company’s customers and/or strategic partners, each of which events could have a material and adverse effect on the Company’s business, results of operations and financial condition.

      Securities Litigation. From March through May 2001 the Company and several of its executives were served with a number of complaints, brought as purported shareholder class actions and filed primarily in the United States District Court for the Central District of California, alleging violations of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In June 2001 the court consolidated the lawsuits into a single action entitled In re: Broadcom Corp. Securities Litigation. This case is now in discovery. The Court has established a discovery cut-off of September 5, 2003 and has set the case for a pre-trial conference on December 5, 2003. The Company believes the allegations in the purported consolidated shareholder class action are without merit and is defending the action vigorously.

      In February 2002 an additional complaint was filed by several persons and entities in the Superior Court of the State of California for the County of Orange, against the Company and several of its executives, entitled Arenson, et al. v. Broadcom Corp., et al. The Company removed the lawsuit to the United States District Court for the Central District of California. The plaintiffs subsequently filed an amended complaint that tracks the allegations of the class action complaint. The Company believes the allegations in this lawsuit are also without merit and is defending the action vigorously. The Court has established a discovery cut-off of November 5, 2003 and has set the case for a pre-trial conference on February 6, 2004. The Company anticipates that the schedule in this case will be coordinated with the federal class action case.

      From March through June 2001 the Company, the Company’s then directors, Chief Financial Officer and other officers, were sued in five purported shareholder derivative actions based upon the same general set of alleged facts and circumstances as in the purported consolidated shareholder class action. Four of these actions were filed in the Superior Court of the State of California for the County of Orange, and by order of the court these four actions were consolidated into a single action entitled David v. Wolfen, et al. One purported derivative action was filed in the United States District Court for the Central District of California, entitled Aiken v. Nicholas, et al. The parties have stipulated that the federal Aiken case will be stayed while the consolidated David derivative lawsuit proceeds in the California Superior Court. Following motion practice concerning the sufficiency of the consolidated amended complaint in the state action, the Company and individual defendants answered the complaint in August 2002, denying the plaintiffs’ material allegations. The case is now in discovery. The Company believes the allegations in these purported derivative actions are also without merit and is defending the actions vigorously.

      Altima Communications Litigation. In December 1999 Level One Communications, Inc., a subsidiary of Intel, filed a complaint in the United States District Court for the Eastern District of California against Altima Communications, Inc., a subsidiary the Company acquired in September 2000. The complaint asserts that Altima’s AC108R repeater products infringe a U.S. patent owned by Level One. The complaint seeks an injunction against Altima as well as the recovery of monetary damages, including treble damages for willful infringement.

      In March 2000 Level One filed a related complaint with the ITC seeking an exclusion order and a cease and desist order based on alleged infringement of the same patent. (Monetary damages are not available in the ITC.) In July 2000 Intel and Level One filed a second complaint with the ITC asserting that certain of Altima’s repeater, switch and transceiver products infringe three additional U.S. patents owned by Level One or Intel. In September 2000 Altima filed declaratory judgment actions against Intel and Level One in the United States District Court for the Northern District of California asserting that Altima has not infringed the

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three additional Intel and Level One patents and that such patents are invalid or unenforceable. Each of the district court actions was stayed pending completion of the ITC proceeding.

      In October 2001 the ITC issued a Limited Exclusion Order that excludes from importation into the United States integrated repeaters, such as Altima’s AC105R and AC108R devices, and circuit boards and carriers containing such devices, that are manufactured abroad and/or imported by or on behalf of Altima or any of its affiliates, parents, subsidiaries or other related entities, such as Broadcom, and that are covered by Level One’s U.S. Patent No. 5,742,603. The Order also excludes from importation integrated repeaters, switches, and other products in plastic ball grid array packages, such as Altima’s AC105R and AC108 devices, and circuit boards and carriers containing such devices, that are manufactured abroad and/or imported by or on behalf of Altima or any of its affiliates, parents, subsidiaries or other related entities, such as Broadcom, and that are covered by Intel’s U.S. Patent No. 5,894,410 (the “410 patent”). The Order does not prohibit importation of any downstream products, such as finished hubs, that contain those devices. The Company believes that exclusion of the AC105R and AC108 devices from importation has not had and will not have a material impact on the Company’s business or on the business of Altima. In May 2002 Altima and Broadcom, respectively, filed appeal briefs asking the United States Court of Appeals for the Federal Circuit to vacate the finding of violation with respect to the 410 patent and to vacate and revise the Order to exclude Broadcom products from its coverage. In June 2002 the ITC filed its appeal brief, which indicated that the Order does not prohibit Broadcom from importing its own discrete products. In February 2003 Altima, Broadcom, Intel/ Level One and the ITC presented oral arguments to the United States Court of Appeals for the Federal Circuit. An adverse ruling by the court on these appeals might result in the exclusion of certain Altima or Broadcom products from U.S. markets and might result in claims for indemnification.

      In February 2002 Altima’s declaratory judgment actions against Intel and Level One in the Northern District of California were resumed, and Level One’s action against Altima in the Eastern District Court of California was resumed. In addition, in February 2002 Intel and Level One moved to dismiss claims concerning two of the four Intel and Level One patents that were the basis of the infringement charges filed by Intel and Level One at the ITC. Intel has indicated that Intel and Level One will not sue Altima for infringement of any claims of these two patents with respect to products previously or currently manufactured or sold by Altima. In May 2002 Altima agreed to dismissal of the claims in the declaratory judgment actions with respect to these two patents. In June 2002 all claims relating to the two patents were formally dismissed from the case in accordance with an agreement between the parties. A patent claims construction hearing in the Eastern District case was held in March 2003. The court has not yet issued a claims construction order. Trial is currently scheduled to begin in February 2004. A patent claims construction hearing in the Northern District case is scheduled for September 2003. The court has not yet set a trial date in the Northern District case.

      Although these district court proceedings are in their initial phases, Altima intends to vigorously contest any allegation of patent infringement with respect to the remaining two patents. However, an adverse determination that Altima products infringe any of the patents at issue could lead to liability for monetary damages (which could be trebled in the event that the infringement were found to have been willful), attorneys fees and costs, and the issuance of an injunction requiring that Altima withdraw various products from the market. An adverse determination could also result in indemnification claims by Altima’s customers and/or strategic partners. Any of the foregoing events could have a material and adverse effect on Altima’s, and possibly Broadcom’s, business, results of operations and financial condition.

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

      On May 5, 2003 the offer period ended and the Company accepted for exchange and cancellation 32,642,634 vested eligible options to purchase Class A or Class B common stock, with a weighted average exercise price of $48.59. In exchange, the Company issued 8,574,033 fully vested, non-forfeitable shares of the Company’s Class A common stock and will record stock-based compensation expense of approximately $162.3 million in the quarter ending June 30, 2003 related to the issuance of such vested shares based on the closing price of the Company’s Class A common stock on May 5, 2003 of $18.93. The 8,574,033 shares will be included in the Company’s calculation of earnings (loss) per share beginning in the quarter ending June 30, 2003. Additionally, on May 5, 2003 the Company 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. In exchange, new options to purchase up to 19,039,280 shares of the Company’s Class A common stock will be granted on a date to be determined by the Company that will be no earlier than November 6, 2003 and no later than December 31, 2003. The terms and conditions of the new options, including the vesting schedules, will be substantially the same as the terms and conditions of the options cancelled. The grant price for the new options will be the last reported trading price of the Company’s Class A common stock on the grant date.

      Certain of the Company’s employees hold eligible options that were assumed by the Company in connection with its acquisitions that were accounted for using the purchase method of accounting. The Company has recorded deferred compensation with respect to those options based upon stock market valuations at the time of acquisition. To the extent those employees tendered, and the Company accepted for exchange and cancellation, such assumed eligible options, the Company is required to immediately accelerate the amortization of the related deferred compensation previously recorded. Consequently, the Company will record a non-cash charge in the quarter ending June 30, 2003 of approximately $55.6 million reflecting the acceleration from future periods of stock-based compensation expense.

      In addition to the non-cash charges, the Company has incurred certain associated employer payroll taxes and professional fees in connection with the offering. Employees were responsible for satisfying their portion of the payroll taxes, either through direct cash payment to the Company or through the sale of a portion of their new shares.

      In May 2003 the Company completed a management transition at its ServerWorks Corporation subsidiary and entered into a settlement agreement resolving various issues and disputes raised by employees and former securities holders of ServerWorks relating to agreements entered into when the Company acquired ServerWorks in January 2001, including issues and disputes with three departing employees. In connection with the settlement, in the quarter ending June 30, 2003, the Company will incur approximately $25 million in cash payments and expenses and record a one-time non-cash charge of approximately $88 million reflecting the acceleration from future periods of stock-based compensation expense, most of which was previously

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

recorded deferred compensation established upon the acquisition of ServerWorks (and based upon stock market valuations at the time of the acquisition). Existing applicable non-competition, non-solicitation and proprietary information obligations of the former employees remain in effect.

      In connection with its acquisition of ServerWorks in 2001, the Company reserved shares of its Class A common stock for future issuance upon the attainment of certain future internal performance goals. The final performance goals were met in the quarter ending June 30, 2003. As a result the Company will record additional non-cash charges of approximately $41 million in the quarter ending June 30, 2003 relating to the issuance of its Class A common stock in satisfaction of such performance goals.

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Cautionary Statement

      You should read the following discussion and analysis in conjunction with our Unaudited Condensed Consolidated Financial Statements and related Notes thereto contained elsewhere in this Report. The information contained in this Quarterly Report on Form 10-Q is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this Report and in our other reports filed with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended December 31, 2002 and subsequent reports on Forms 10-Q and 8-K, which discuss our business in greater detail.

      The section entitled “Risk Factors” set forth below, and similar discussions in our other SEC filings, discuss some of the important risk factors that may affect our business, results of operations and financial condition. You should carefully consider those risks, in addition to the other information in this Report and in our other filings with the SEC, before deciding to purchase, hold or sell our common stock.

      All statements included or incorporated by reference in this Report, other than statements or characterizations of historical fact, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Examples of forward-looking statements include, but are not limited to, statements concerning projected revenue, expenses, gross profit and income, manufacturing capacity, 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 cost and success of our development projects, the timing of new product introductions, the adoption of future industry standards, our production capacity, our ability to migrate to smaller process geometries, our ability to consummate acquisitions and integrate their operations successfully, the need for additional capital and the results of pending litigation. These forward-looking statements are based on our current expectations, estimates and projections about our industry, management’s beliefs, and certain assumptions made by us. Forward-looking statements can often be identified by words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “believes,” “seeks,” “estimates,” “may,” “will,” “should,” “would,” “could,” “potential,” “continue,” similar expressions, and variations or negatives of these words. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. These forward-looking statements speak only as of the date of this Report and are based upon the information available to us at this time. Such information is subject to change, and we will not necessarily inform you of such changes. These statements are not guarantees of future results 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 statement as a result of various factors, some of which are listed under the section “Risk Factors” below. We undertake no obligation to revise or update publicly any forward-looking statement for any reason.

Overview

      Broadcom Corporation is the leading provider of highly integrated silicon solutions that enable broadband communications and networking of voice, video and data services. Using proprietary technologies and advanced design methodologies, Broadcom designs, develops and supplies complete system-on-a-chip solutions and related hardware and software applications for every major broadband communications market. Our diverse product portfolio includes solutions for digital cable and satellite set-top boxes; 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; VoIP, gateway and telephony systems; broadband network processors; and SystemI/O server solutions.

      From Broadcom’s inception in 1991 through 1994, we were primarily engaged in product development and the establishment of strategic customer and foundry relationships. During that period, we generated the

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      Net Revenue. The percentage of our net revenue derived from independent customers located outside of the United States was approximately 31.9% for the three months ended March 31, 2003 as compared with 23.7% for the three months ended March 31, 2002. All of our revenue to date has been denominated in U.S. dollars.

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

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

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

      We expect that our largest customers will continue to account for a substantial portion of our net revenue in 2003 and for the foreseeable future. These customers and their respective contributions to our net revenue have varied and will likely continue to vary from period to period.

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

	•	our product mix and volumes;
	•	the position of our products in their respective life cycles;
	•	the effects of competition and competitive pricing strategies;
	•	manufacturing cost efficiencies and inefficiencies;
	•	fluctuations in direct product costs and overhead costs such as prototyping expenses;
	•	amortization of purchased intangible assets;
	•	stock-based compensation expense;
	•	licensing and royalty arrangements; and
	•	the mix of product revenue and development revenue.

      Product Cycles. The cycle for test, evaluation and adoption of our products by customers can range from three to six months or more, with an additional three to nine months or more before a customer commences volume production of equipment incorporating our products. Moreover, in light of the continuing significant economic slowdown in the technology sector, it may take significantly longer than three to nine months before customers commence volume production of equipment incorporating some of 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, and the generation of corresponding revenue, if any. We anticipate that the rate of new orders may vary significantly from month to

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

Critical Accounting Policies and Estimates

      The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net revenue and expenses during 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 contingencies. We base our estimates and assumptions on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. To the extent there are material differences between our estimates and the actual results, our future results of operations will be affected.

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

	•	Revenue, Receivables and Inventory. We recognize product revenue upon concluding that all of the fundamental criteria for revenue recognition have been met. The criteria are usually met at the time of product shipment, except for shipments to stocking distributors where revenue is recognized upon sale to the end customer. In addition, we record reductions to revenue for estimated product returns and allowances such as competitive pricing programs and rebates. Additional reductions to revenue would result if actual product returns or pricing adjustments exceed our estimates. Our products typically carry a one to three year warranty. We provide reserves for estimated product warranty costs at the time revenue is recognized. Although we engage in extensive product quality programs and processes, our warranty obligation is affected by product failure rates, use of materials and service delivery costs incurred in correcting any product failure. Should actual product failure rates, use of materials or service delivery costs differ from our estimates, additional warranty reserves could be required, which could reduce gross margins. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances could be required. We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated realizable value based upon assumptions about future demand and market conditions. If actual conditions are less favorable than those projected by management, additional inventory write-downs could be required.
	•	Goodwill and Purchased Intangible Assets. The purchase method of accounting for acquisitions requires extensive use of accounting estimates and judgments to allocate the purchase price to the fair value of the net tangible and intangible assets acquired, including in-process research and development, or IPR&D. Goodwill and intangible assets deemed to have indefinite lives are no longer amortized but are subject to annual impairment tests. The amounts and useful lives assigned to other intangible assets impact future amortization, and the amount assigned to IPR&D is expensed immediately. If the assumptions and estimates used to allocate the purchase price are not correct, purchase price adjustments or future asset impairment charges could be required.

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	•	Impairment of Goodwill and Other Intangible Assets. The value of our intangible assets, including goodwill, could be impacted by future adverse changes such as (i) any future declines in our operating results, (ii) another significant slowdown in the technology sector and the semiconductor industry or a continuation or an increase in severity of the existing significant economic slowdown or (iii) any failure to meet the performance projections included in our forecasts of future operating results. We evaluate these assets used in operations, including purchased intangible assets deemed to have indefinite lives, on an annual basis or more frequently if indicators of impairment exist. In the process of our annual impairment review, we primarily use the income approach methodology of valuation that includes the discounted cash flow method as well as other generally accepted valuation methodologies to determine the fair value of our assets. Significant management judgment is required in the forecasts of future operating results that are used in the discounted cash flow method of valuation. The estimates we have used are consistent with the plans and estimates that we use to manage our business. It is reasonably possible, however, that the plans and estimates used may be incorrect. If our actual results, or the plans and estimates used in future impairment analyses, are lower than the original estimates used to assess the recoverability of these assets, we could incur additional impairment charges.
	•	Strategic Investments. We have made strategic investments in publicly traded and privately held companies for the promotion of business and strategic objectives. Strategic investments with less than a 20% voting interest are carried at the lower of cost or fair value. We will use the equity method to account for strategic investments in which we have a voting interest of 20% to 50% or in which we otherwise have the ability to exercise significant influence. Under the equity method, the investment is originally recorded at cost and adjusted to recognize our share of net earnings or losses of the investee, limited to the extent of our investment in, advances to and financial guarantees for the investee that create additional basis in the investee. The share prices of the publicly traded securities have been volatile, and the value of the non-publicly traded securities is difficult to determine. We periodically review these investments for other-than-temporary declines in fair value based on the specific identification method and write down investments to their fair value, with a corresponding loss recorded in other expense in the statement of operations, when an other-than-temporary decline has occurred. We generally believe an other-than-temporary decline has occurred when the fair value of the investment is below the carrying value for two consecutive quarters, absent evidence to the contrary. Fair values for investments in public companies are determined using their quoted market prices. Fair values for investments in privately held companies are estimated based upon one or more of the following: pricing models using historical and forecasted financial information, the values of recent rounds of financing, and/or quoted market prices of comparable public companies. Although we believe our estimates reasonably reflect the fair value of the non-publicly traded securities held by us, had there been an active market for the equity securities, the carrying values might have been materially different than the amounts reported. Future adverse changes in market conditions or poor operating results of companies in which we have made such investments could result in losses or an inability to recover the carrying values of the investments that may not be reflected in the investments’ current carrying values and which could require a future impairment charge.
	•	Deferred 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 recent cumulative losses and the full utilization of our loss carryback potential, we concluded that a full valuation allowance against our net deferred tax assets was appropriate. If, in the future, we believe that we will realize a deferred tax asset which currently has a valuation allowance, we would record a reduction to income tax expense in the period of such determination.
	•	Restructuring Charges. Over the last several quarters we have undertaken, and we may continue to undertake, significant restructuring initiatives, which have required us to develop formalized plans for exiting certain business activities. We have had to record estimated expenses for lease cancellations, long-term asset write-downs, severance and outplacement costs and other restructuring costs. Given

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

Results of Operations for the Three Months Ended March 31, 2003 Compared to the Three Months Ended March 31, 2002

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

      Net Revenue. Our revenue consists principally of product revenue generated by sales of our semiconductor products, and to a much lesser extent, from development revenue generated under development contracts with our customers and licenses of software and the provision of software support services. Net revenue is revenue less provisions for returns and allowances. Net revenue for the three months ended March 31, 2003 was $327.5 million, an increase of $88.7 million or 37.1% as compared with net revenue of $238.8 million for the three months ended March 31, 2002.

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      This increase in net revenue resulted primarily from contributions from our emerging businesses, including wireless local area networking and mobile communications, and from an increase in volume shipments of our enterprise networking products. We anticipate that net revenue in the second quarter of 2003 will increase by approximately 12% to 14% over the first quarter 2003 level.

      Gross Profit. Gross profit represents net revenue less the cost of revenue. 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, and contracted development work. Gross profit for the three months ended March 31, 2003 was $155.4 million or 47.5% of net revenue, an increase of $50.8 million or 48.5% from gross profit of $104.7 million or 43.8% of net revenue for the three months ended March 31, 2002.

      The increase in gross profit as a percentage of net revenue resulted primarily from lower amortization of purchased intangible assets and stock-based compensation expense.

      Approximately $2.5 million and $3.3 million of stock-based compensation expense were included in cost of revenue for the three months ended March 31, 2003 and 2002, respectively. Approximately $6.1 million and $13.2 million of amortization of purchased intangible assets were included in cost of revenue for the three months ended March 31, 2003 and 2002, respectively. At March 31, 2003 the unamortized balance of purchased intangible assets that will be amortized to cost of revenue in the future was $17.8 million, of which $11.1 million and $6.7 million are expected to be amortized in the remainder of 2003 and 2004, respectively.

      We anticipate that gross profit will continue to be impacted by the non-cash amortization of acquisition-related charges. In addition, gross profit has been and will likely continue to be impacted in the future by competitive pricing strategies, fluctuations in the volume of our product sales, fluctuations in silicon wafer costs, and possible future changes in product mix and the introduction of certain lower margin products, among other factors.

      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, subcontracting costs, systems level testing and prototyping costs, and facilities expenses. Research and development expense does not include expense amounts associated with stock-based compensation of employees engaged in research and development or expense amounts associated with amortization of purchased intangible assets related to research and development. Research and development expense for the three months ended March 31, 2003 was $103.1 million or 31.5% of net revenue, a decrease of $8.6 million or 7.7% as compared with research and development expense of $111.7 million or 46.8% of net revenue for the three months ended March 31, 2002. The decrease in absolute dollars resulted primarily from a reduction in personnel related expenses as a result of the restructuring plan we began implementing in the fourth quarter of 2002 (the “2002 Restructuring Plan”), which included workforce reductions. Savings from our restructuring plan may be offset by certain strategic new hires in the future, a change in our employee compensation policies which will be implemented in the second quarter of 2003, and any future acquisitions. In addition, based upon past experience, we anticipate that research and development expense in absolute dollars will continue to increase over the long term as a result of the growth and diversification of the markets we serve, new product opportunities and any expansion into new markets and technologies.

      Selling, General and Administrative Expense. Selling, general and administrative expense consists primarily of personnel-related expenses, legal and other professional fees, facilities expenses, communications expenses and trade show expenses. Selling, general and administrative expense does not include expense amounts associated with stock-based compensation of administrative employees or expense amounts associated with amortization of purchased intangible assets. Selling, general and administrative expense for the three months ended March 31, 2003 was $41.4 million or 12.6% of net revenue, an increase of $0.9 million or 2.2% as compared with selling, general and administrative expense of $40.5 million or 16.9% of net revenue for the three months ended March 31, 2002. The slight increase in absolute dollars reflected higher facilities related, insurance and legal costs, offset in part by lower expenditures for travel and entertainment, maintenance and supplies, and advertising costs. Selling, general and administrative costs for the three months ended March 31,

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      Stock-Based Compensation Expense. Stock-based compensation expense generally represents the amortization of deferred compensation as well as expense related to options subject to variable accounting. Deferred compensation is presented as a reduction of shareholders’ equity and is amortized ratably over the respective vesting periods of the applicable options, generally three to five years. Deferred compensation primarily represents the difference between the fair value of our common stock at the measurement date of each acquisition and the exercise price of the unvested stock options assumed in the acquisition. Additional deferred compensation related to earned contingent consideration is measured and recorded at the date the contingency is met. We recorded approximately $88,000 of net deferred compensation for the three months ended March 31, 2003. No deferred compensation was recorded for the three months ended March 31, 2002. Employee terminations for the three months ended March 31, 2003 and the full year ended December 31, 2002 resulted in the elimination of approximately $7.4 million and $103.0 million, respectively, of deferred compensation that is no longer amortized.

      Stock-based compensation expense for the three months ended March 31, 2003 was $68.8 million or 21.1% of net revenue, a decrease of $32.6 million or 32.2% as compared with stock-based compensation expense of $101.5 million or 42.4% of net revenue for the three months ended March 31, 2002. The decrease in stock-based compensation expense related primarily to the elimination of deferred compensation due to the termination of certain employees and the decrease in our quarter end stock price, which is used to remeasure stock-based compensation for options subject to variable accounting. Approximately $2.5 million and $3.3 million of additional stock-based compensation expense were classified as cost of revenue for the three months ended March 31, 2003 and 2002, respectively. Approximately $0.3 million of additional stock-based compensation expense was classified as restructuring costs for the three months ended March 31, 2003, resulting from an extension of the exercise period for vested stock options of the employees terminated in connection with our 2002 Restructuring Plan.

      Outstanding stock options assumed in certain acquisitions are subject to variable accounting and will be revalued quarterly over their vesting periods until the earlier of (i) all of the performance goals have been met, (ii) the time period in which all of the performance goals may be met has lapsed, whether the goals have been satisfied or not, or (iii) the options are exercised. If any of the applicable options are forfeited, cancelled or expire, any related previously recorded stock-based compensation expense will be reversed. In addition, if there is a decrease in our stock price at the end of each quarterly reporting period prior to the stock-based compensation charge becoming fixed, previously recorded stock-based compensation expense will be reversed. Due to the decrease in our stock price during the three months ended March 31, 2003, we recorded approximately $3.1 million in reversals of previously recorded stock-based compensation expense related to stock options subject to variable accounting in accordance with Financial Accounting Standards Board, or FASB, Interpretation, or FIN, No. 44, Accounting for Certain Transactions Involving Stock Compensation — An Interpretation of APB Opinion No. 25, or FIN 44, and FIN No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans, or FIN 28. During the three months ended March 31, 2002 we recorded approximately $3.7 million in stock-based compensation expense related to stock options subject to variable accounting in accordance with FIN 44 and FIN 28. These reversals and charges have been and in the future are expected to continue to be based on the amount by which our Class A common stock closing price at the end of the reporting period, or at the date of exercise, if earlier, exceeds the exercise price of the stock options. Depending upon movements in the market value of our Class A common stock, the variable accounting treatment of certain stock options may result in significant additional stock-based compensation expense in future periods. At March 31, 2003 options to purchase 4,664,408 shares of

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      In connection with certain of our acquisitions, if specified future internal performance goals are satisfied, the aggregate consideration for these acquisitions will be increased. At March 31, 2003 a total of 3,534,177 shares of Class A common stock were reserved for future issuance if the remaining internal performance goals established in connection with our acquisitions of ServerWorks Corporation and Mobilink Telecom, Inc. are met. If the remaining internal performance goals had been met at March 31, 2003, additional equity consideration of approximately $43.6 million, based on the closing price of our Class A common stock on March 31, 2003, would have been recorded and allocated between goodwill, stock-based compensation and deferred compensation. The amount of actual additional equity consideration to be recorded will vary depending on which, if any, of the remaining internal performance goals are met and the actual market values of our Class A common stock on the dates such internal performance goals are achieved. See “Subsequent Events” below for a discussion of developments occurring after March 31, 2003.

      Amortization of Purchased Intangible Assets. Purchased intangible assets primarily include completed technology and customer relationships, contracts and backlog, and are amortized on a straight-line basis over the estimated remaining useful lives of the respective assets, ranging from one to three years. The amortization of purchased intangible assets, excluding completed technology, for the three months ended March 31, 2003 was $1.5 million or 0.5% of net revenue, a decrease of $3.9 million or 71.5%, as compared with $5.4 million or 2.3% of net revenue for the three months ended March 31, 2002. The decrease was primarily a result of certain purchased intangible assets being fully amortized. At March 31, 2003 the unamortized balance of purchased intangible assets that will be amortized to future operating expense was $2.0 million, all of which is expected to be amortized in the remainder of 2003. In addition, approximately $6.1 million and $13.2 million of amortization of completed technology were classified as cost of revenue for the three months ended March 31, 2003 and 2002, respectively.

      Restructuring Costs. From the second quarter of 2001 through the third quarter of 2002, we implemented a plan (the “2001 Restructuring Plan”) to restructure our operations in response to the challenging economic climate. As a result of the prolonged downturn in the semiconductor industry, we announced an additional restructuring program, the 2002 Restructuring Plan, which was implemented in the fourth quarter of 2002. The plans focused on cost reductions and operating efficiencies, including workforce reductions and lease terminations. These restructuring plans resulted in certain business unit realignments, workforce reductions and consolidation of excess facilities. Approximately 480 and 160 employees were terminated across all of our business functions and geographic regions in connection with the 2002 and 2001 Restructuring Plans, respectively. In addition, headcount was reduced through attrition and reductions in the number of temporary and contract workers employed by us. We recorded restructuring costs totaling $0.8 million for the three months ended March 31, 2003 for workforce reduction charges related to severance and fringe benefits. In the three months ended March 31, 2002 we recorded $4.8 million in restructuring costs, which consisted primarily of charges of $4.6 million for the consolidation of excess facilities and workforce reduction charges of $0.2 million related to severance and fringe benefits. Restructuring costs are classified as operating expense in the unaudited condensed consolidated statements of operations. We may record additional restructuring costs in the remainder of 2003 as we continue to implement the 2002 Restructuring Plan.

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