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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

Commission file number: 000-23993

Broadcom Corporation

16215 Alton Parkway

(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

      As of April 30, 2004 the registrant had 253,015,347 shares of Class A common stock, $0.0001 par value, and 61,086,890 shares of Class B common stock, $0.0001 par value, outstanding.

BROADCOM CORPORATION

QUARTERLY REPORT ON FORM 10-Q

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

©2004 Broadcom Corporation. All rights reserved.

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PART I.     FINANCIAL INFORMATION

BROADCOM CORPORATION

See accompanying notes.

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BROADCOM CORPORATION

See accompanying notes.

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BROADCOM CORPORATION

See accompanying notes.

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BROADCOM CORPORATION

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

      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, 2004 and December 31, 2003 and the consolidated results of its operations and cash flows for the three months ended March 31, 2004 and 2003. The results of operations for the three months ended March 31, 2004 are not necessarily indicative of the results to be expected for future quarters or 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, 2003, included in the Company’s Annual Report on Form 10-K filed March 15, 2004 with the Securities and Exchange Commission (“SEC”).

      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 in the reporting period. The Company regularly evaluates 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. The Company bases its 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. The actual results experienced by the Company may differ materially and adversely from management’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.

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      The Company’s net revenue is principally generated by sales of its semiconductor products. Such sales represented over 97% of total net revenue in the first quarter of 2004 and 2003. The Company generates the remaining balance of its net revenue mainly from development agreements, software licenses and maintenance agreements, and system-level reference designs.

      The vast majority of the Company’s sales occur through its direct sales force. However, the Company derived approximately 7.9% and 8.5% of its total net revenue from sales made through distributors in the first quarter of 2004 and 2003, respectively.

      In accordance with SEC Staff Accounting Bulletin (“SAB”) No. 101, Revenue Recognition in Financial Statements (“SAB 101”) as well as the recently issued SAB No. 104, Revenue Recognition, the Company recognizes product revenue when the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists, (ii) transfer of title has occurred, (iii) the price to the customer is fixed or determinable, and (iv) collection of the resulting receivable is reasonably assured. In addition, the Company does not recognize revenue until all customer acceptance requirements have been met. These criteria are usually met at the time of product shipment. However, a portion of the Company’s sales are made through distributors under agreements allowing for pricing credits and/or rights of return. Product revenue on sales made through these distributors is deferred until the distributors sell the product to end customers. The Company records 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.

      Revenue under development agreements is recognized when applicable contractual milestones have been met, including deliverables, and in any case, does not exceed the amount that would be recognized using the percentage-of-completion method in accordance with Statement of Position (“SOP”) 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contacts (“SOP 81-1”). The costs associated with development agreements are included in cost of revenue. Revenue from licensed software is recognized in accordance with the provisions of SOP 97-2, Software Revenue Recognition, as amended by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions. Revenue from system-level reference designs is recognized in accordance with SAB 101. Revenue from cancellation fees is recognized when cash is received from the customer.

      Inventory consists of work in process and finished goods and is stated at the lower of cost (first-in, first-out) or market. The Company establishes inventory allowances 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. Shipping and handling costs are classified as a component of cost of revenue in the consolidated statements of operations.

      The Company accounts for rebates in accordance with Emerging Issues Task Force Issue No. 01-9, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products), and, accordingly, records reductions to revenue for rebates in the same period that the related revenue is recorded. The amount of these reductions is equal to 100% of the potential rebates based upon the terms of the Company’s rebate agreements.

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

      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 members of the Board of Directors 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 (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), and has adopted the disclosure-only alternative of Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation (“SFAS 123”) and SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure. The fair value of options granted to non-employees, as defined under SFAS 123, has been expensed in accordance with SFAS 123.

      In accordance with the requirements of the disclosure-only alternative of SFAS 123, set forth below is a pro forma illustration of the effect on net income (loss) and net income (loss) per share if the Company had valued stock-based awards to employees using the Black-Scholes option pricing model instead of applying the guidelines provided by APB 25.

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

      The Company operates in one reportable operating segment, broadband communications. SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information (“SFAS 131”), establishes standards for the way that public business enterprises report information about operating segments in annual consoli-

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dated financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. SFAS 131 also establishes standards for related disclosures about products and services, geographic areas and major customers. Although the Company had four operating segments at March 31, 2004, under the aggregation criteria set forth in SFAS 131 the Company only operates 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.

      Because the Company meets each of the criteria set forth in SFAS 131 and its four operating segments as of March 31, 2004 share similar economic characteristics, the Company aggregates its results of operations in one reportable operating segment.

      The Company meets each of the aggregation criteria for the following reasons:

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

      All of the Company’s 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 its business groups are the same and include factors such as (a) life cycle and price and cost fluctuations, (b) number of competitors, (c) product differentiation and (d) 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 the Company periodically reorganizes its business groups based upon changes in customers, end markets or products, acquisitions, long term growth strategies, and the experience and bandwidth of its vice presidents/general managers, the common financial goals for each business group remain constant.

      Certain amounts in the 2003 unaudited condensed consolidated financial statements have been reclassified to conform to the current period presentation.

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      The following table presents details of the Company’s inventory:

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

      In connection with an acquisition in the first quarter of 2004, the Company recorded $2.4 million in completed technology. At March 31, 2004 the unamortized balance of purchased intangible assets that will be amortized to future cost of revenue was approximately $7.0 million, of which $5.8 million and $1.2 million is expected to be amortized in the remainder of 2004 and in 2005, respectively.

     Accrued Liabilities

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

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     Accrued Rebates

      The following table presents details of the Company’s accrued rebates, which are included in accrued liabilities above:

     Warranty Reserve

      The following table presents details of the Company’s warranty reserve, which is included in the “other” line item of the accrued liabilities table:

     Long-Term Liabilities

      The following table presents details of the Company’s long-term liabilities:

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     Computation of Net Income (Loss) Per Share

      The following table presents the computation of net income (loss) per share:

      If the Company had reported net income in three months ended March 31, 2003, additional common share equivalents of 12,664,215 would have been included in the denominator for net loss per share (diluted) noted in the table above. These common share equivalents, calculated using the treasury stock method, have been excluded from the diluted net loss per share calculation because such equivalents were antidilutive as of such date. Contingent equity consideration paid by the Company in connection with certain acquisitions was 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 was earned.

      At March 31, 2004 common share equivalents were calculated based on options to purchase 100,678,563 shares of Class A or Class B common stock outstanding at a weighted average exercise price of $24.29 per share.

      In January 2004 the Company completed the acquisition of RAIDCore, Inc., a developer of redundant array of inexpensive disks (“RAID”) and virtualization software. In connection with the acquisition, the Company expects to pay approximately $16.5 million in cash, of which $10.0 million was paid in January 2004. The remaining amount will be paid to the founders and employees of RAIDCore subject to two to four year vesting periods and will result in additional compensation expense over those respective periods. The Company recorded a one-time charge in the first quarter of 2004 of approximately $2.3 million for purchased in-process research and development (“IPR&D”) expense related to the acquisition. The amount allocated to IPR&D in the first quarter of 2004 was determined through established valuation techniques used in the high technology industry and was expensed upon acquisition as it was determined that the underlying projects had not reached technological feasibility and no alternative future uses existed. In addition, the Company recorded approximately $5.5 million in goodwill and $2.4 million in completed technology.

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      The Company’s income tax expense of $12.9 million for the three months ended March 31, 2004 is based on an estimated annualized tax rate for 2004 of 24.5%. This annualized tax rate for 2004 is lower than the 35% federal statutory tax rate primarily due to foreign earnings taxed at less than the federal statutory tax rate. The Company’s income tax expense of $9.3 million for the three months ended March 31, 2003 primarily reflected taxes on certain foreign operations, with no income tax benefit recorded for 2003 domestic tax losses, due to uncertainty regarding future realization of such benefits.

      In 2003 the Internal Revenue Service commenced a routine examination of the Company’s returns for the 1999 and 2000 tax years. Management believes that the results of this examination will not have a material effect on the Company’s financial condition or results of operations.

     Registration Statements

      In February 2004 the Company filed a universal shelf registration statement on Form S-3 and an acquisition shelf registration statement on Form S-4. The universal shelf registration statement on Form S-3 permits the Company to sell, in one or more public offerings, shares of its Class A common stock, shares of preferred stock or debt securities, or any combination of such securities, for proceeds in an aggregate amount of up to $750 million. The acquisition shelf registration statement on Form S-4 enables the Company to issue up to 30 million shares of its Class A common stock in one or more acquisition transactions. These transactions may include the acquisition of assets, businesses or securities, whether by purchase, merger or any other form of business combination.

     Comprehensive Income (Loss)

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

      The components of accumulated other comprehensive income are as follows:

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      In January 2004 the Company acquired approximately 80 patents and patent applications related to the read channel and hard disk controller markets, for $18.0 million. The immediate purpose for acquiring this patent portfolio was to assist the Company in the defense and settlement of ongoing and future lawsuits. As a result, the Company was unable to estimate any future cash flows from the patents. The Company also does not have any plans to resell the patents to a third party. Due to the intended use for these assets, the Company concluded that indicators of impairment existed upon acquisition of the patents because it appeared that the carrying amount of the patents might not be recoverable. Upon determining that indicators of impairment existed, the Company performed a recoverability test in accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“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 resulting from reduced but undeterminable legal expenditures over the next several years. Due to the unpredictable nature of legal disputes, it is not possible to reasonably: (i) determine if the Company’s strategy with respect to the patents will be successful, (ii) forecast legal expenditures that would have been incurred if the patent portfolio was not acquired, 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 impairment of intangible assets in the unaudited condensed consolidated statements of operations in the first quarter of 2004.

      Activity and liability balances related to restructuring plans were as follows:

(1)	Cash payments related to net lease payments on excess facilities and non-cancelable lease costs.

      All of the restructuring liabilities above relate to consolidation of excess facilities costs, which will be paid over the respective lease terms through 2010.

      The Company recorded an accrual of $19.0 million in the first quarter of 2004 for estimated settlement costs in connection with outstanding litigation. Approximately $10.0 million of that accrual is scheduled to be paid in the second quarter of 2004.

      Intellectual Property Proceedings. 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 alleging 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

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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, and attorneys’ fees. 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 allege 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 Microtune’s patent to be valid and infringed and that the Company’s infringement was willful. The Court subsequently entered a damages award in Microtune’s favor of approximately $3.1 million plus interest, and further awarded Microtune its attorneys’ fees in the amount of $5.6 million plus interest. In April 2003 the court issued a preliminary injunction against the BCM3415 tuner and products merely colorably different therefrom. In May 2003 Microtune filed a motion for contempt alleging that the Company’s next generation BCM3416 tuner violated the court’s preliminary injunction against the BCM3415 tuner. At a hearing in August 2003, the court denied Microtune’s motion and ruled that the new BCM3416 tuner does not violate the preliminary injunction. The court later denied all post-trial motions and entered a permanent injunction against the BCM3415 tuner and products merely colorably different therefrom. The Company has filed an appeal of the case with the United States Court of Appeals for the Federal Circuit.

      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 sought a preliminary and permanent injunction against Microtune as well as the recovery of monetary damages, including treble damages for willful infringement, and attorneys’ fees. 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, which has been stayed pending the outcome of the Company’s action against Microtune in the United States International Trade Commission (“ITC”).

      In February 2003 Microtune, Inc. filed a complaint in the state District Court of Williamson County, Texas, alleging 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, and attorneys’ fees. In April 2003 the Company removed the case from the state court to the United States District Court for the Western District of Texas. Microtune subsequently filed an amended complaint in the latter court that tracks the allegations of the state complaint. In June 2003 the Company filed an answer to the complaint denying Microtune’s allegations. The parties have temporarily suspended all discovery on this matter and have agreed to postpone the commencement of trial from September 2004 to no earlier than summer 2005.

      In March 2003 the Company filed a complaint in 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. The Company subsequently withdrew one of the two patents from suit in return for Microtune’s agreement to exit certain Bluetooth markets. 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

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by Microtune. The ITC administrative hearing was held in November 2003. An ITC administrative law judge issued an Initial Determination in April 2004 finding that, although Microtune infringed the patent in suit, the patent was deemed invalid in light of prior art. The Company has requested that the ITC review and reverse certain portions of the Initial Determination, and the ITC response is expected no later than July 2004.

      In May 2003 the Company filed a complaint against Microtune, L.P. 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. The Company has amended its complaint to add a claim for declaratory judgment of noninfringement of another of the Company’s next generation silicon tuner chips, the BCM3418. Microtune has amended its answer to allege infringement by the BCM3416 and BCM3418 tuner chips. The parties are currently engaged in discovery. Trial is scheduled to commence in June 2004.

      In November 2003 the Company filed a complaint in the United States District Court for the Western District of Wisconsin against Microtune, Inc. asserting that Microtune infringes a Company patent related to timing circuitry in integrated circuits. In March 2004 the court transferred the case to the United States District Court for the Eastern District of Texas. The parties are continuing to conduct discovery. The Texas Court has not yet set a trial date.

      In November 2002 STMicroelectronics, Inc. filed a complaint against the Company in the United States District Court for the Eastern District of Texas alleging that the Company infringed six STMicroelectronics patents relating to technology used in integrated circuits. The Company answered the complaint by denying STMicroelectronics’ infringement allegations, and filed counterclaims asserting that STMicroelectronics infringed five of the Company’s patents relating to high-speed communications. In April 2004 the parties entered into a comprehensive settlement agreement and patent cross-license, and dismissed all claims and counterclaims in their entirety with prejudice. Other terms of the settlement were not disclosed. The settlement did not have a material effect on the Company’s financial condition or results of operations.

      In May 2003 the Company filed a complaint in the United States District Court for the Northern District of California against Agere, Inc. asserting that Agere (i) infringes four of the Company’s patents relating to high speed communications and wireless technologies, (ii) induces the infringement of such patents, and (iii) contributorily infringes such patents. The complaint sought a preliminary and permanent injunction against Agere as well as the recovery of monetary damages, including treble damages for willful infringement, and attorneys’ fees. The complaint also sought a declaratory judgment that the Company does not infringe certain Agere patents. In July 2003 Agere answered the complaint by denying the Company’s allegations, and filed counterclaims alleging that the Company (i) infringes four Agere patents and (ii) induces the infringement of such patents. The counterclaims sought injunctive relief, monetary damages, including treble damages for willful infringement, and attorneys’ fees, as well as a declaratory judgment that the Company’s patents are invalid and not infringed.

      Subsequently, in May 2003 Agere filed a complaint against the Company in the United States District Court for the Eastern District of Pennsylvania alleging that the Company (i) infringes six Agere patents relating to wireless technologies and circuit designs, (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, and attorneys’ fees. In July 2003 the Company answered the complaint by denying Agere’s allegations, and filed counterclaims asserting that Agere (i) infringes certain of the Company’s patents, (ii) induces the infringement of such patents, and (iii) contributorily infringes such patents. The counterclaims seek injunctive relief, monetary damages and attorneys’ fees, as well as a declaratory judgment that Agere’s patents are invalid and not infringed.

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      In August 2003 the United States District Court for the Northern District of California granted the Company’s motion to dismiss or transfer its complaint and Agere’s counterclaims to the Eastern District of Pennsylvania. The California action has been dismissed, and all claims and counterclaims from that action have now been consolidated with the Pennsylvania action. Agere subsequently added allegations of an additional Agere patent by the Company. The parties are currently conducting discovery in the action. The court conducted a claims construction hearing in May 2004 and has set trial to begin in November 2004.

      In February 2004 the Company filed a complaint against Agere in the United States District Court for the Western District of Wisconsin asserting that Agere infringes five of the Company’s patents relating to disk drive technology. The complaint seeks monetary damages and a permanent injunction against Agere. In response, Agere filed a motion to dismiss the case or, in the alternative, to transfer it to another jurisdiction. The court has not ruled on that motion. Trial is scheduled to commence in February 2005.

      In April 2004 Lonestar Inventions, L.P. filed a complaint against the Company, Marvell Semiconductor, Inc. and Analog Devices, Inc. in the United States District Court for the Western District of Texas in Austin alleging that the Company and the other named defendants (i) infringe a single patent relating to circuit technology, and (ii) induce infringement of 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, and attorneys’ fees. The Company has not yet answered or otherwise responded to the complaint.

      Although the Company believes that it has strong defenses to the claims of Microtune, Agere and Lonestar 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 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, interest and court 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 three of its executive officers 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. In June 2001 the court consolidated the lawsuits into a single action entitled In re: Broadcom Corp. Securities Litigation. On October 15, 2003 the Court issued an order certifying a class of all persons or entities who purchased or otherwise acquired publicly traded securities of the Company, or bought or sold options on the Company’s stock, between July 31, 2000 and February 26, 2001, with certain exceptions. This case is now in discovery. The court has scheduled a discovery cut-off in July 2004, a pre-trial conference in October 2004 and a trial beginning in November 2004. 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, entitled Arenson, et al. v. Broadcom Corp., et al., was filed by a number of persons and entities in the Superior Court of the State of California for the County of Orange, against the Company and three of its executive officers. The Company removed the lawsuit to the United States District Court for the Central District of California. The plaintiffs subsequently filed an amended complaint in that court that tracks the allegations of the federal class action complaint. The parties are now conducting discovery. The court has scheduled a discovery cut-off in July 2004, a pre-trial conference in October 2004 and a trial beginning in November 2004. The Company believes the allegations in this lawsuit are also without merit and is defending the action vigorously.

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      From March through June 2001 the Company, its then directors, and certain of its 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. 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.

      The Company has entered into indemnification agreements with each of its directors and officers. Under these agreements, the Company is required to indemnify each such director or officer against expenses, including attorney’s fees, judgments, fines and settlements (collectively “Liabilities”) paid by such individual in connection with the purported shareholder class action, purported shareholder derivative actions and the Arenson suit (other than Liabilities arising from willful misconduct or conduct that is knowingly fraudulent or deliberately dishonest).

      General. The foregoing discussion includes material developments that occurred during the three months ended March 31, 2004 or thereafter in material legal proceedings in which the Company and/or its subsidiaries are involved. For additional information regarding such legal proceedings, see Note 13 of Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

      The Company and its subsidiaries are also involved in other legal proceedings, claims and litigation arising in the ordinary course of business.

      The pending unsettled lawsuits involve complex questions of fact and law and likely will require the expenditure of significant funds and the diversion of other resources to defend. From time to time the Company may enter into discussions regarding the potential settlement of such lawsuits; however, there can be no assurance that any such discussions will result in a settlement. Moreover, the settlement of any pending litigation could require the Company to incur settlement payments and costs and, in the case of the settlement of any intellectual property proceeding against the Company, may require the Company to obtain a license under a third party’s intellectual property rights that could require royalty payments in the future and to grant a license to certain of its intellectual property rights to a third party under a cross-license agreement. See Note 8. Although management currently believes the outcome of outstanding legal proceedings, claims and litigation involving the Company, its subsidiaries, directors and officers will not have a material adverse effect on the Company’s business, results of operations and financial condition taken as a whole, the results of litigation are inherently uncertain, and adverse outcomes are possible.

10.     Subsequent Events

      In April 2004 the Company completed the acquisition of Sand Video, Inc., a developer of advanced video compression semiconductor technology for a broad range of consumer digital video applications. In connection with the acquisition, the Company issued or reserved for issuance approximately 1.7 million shares of its Class A common stock and paid approximately $7.4 million in cash consideration in exchange for all outstanding shares of Sand Video capital stock and upon exercise of outstanding employee stock options and other rights of Sand Video. Pursuant to the terms of the acquisition agreement between the Company and Sand Video, following the consummation of the acquisition, the Company filed a registration statement on

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED

Form S-3 with the Securities and Exchange Commission to register the resale by former stockholders of Sand Video of the shares of Class A common stock issued in the acquisition. A portion of the consideration paid is subject to escrow pursuant to the terms of the acquisition agreement.

      In April 2004 the Company completed the acquisition of substantially all of the assets of M-Stream, Inc., a developer of solutions for signal-to-noise ratio performance improvements in cellular handsets. In connection with the acquisition, the Company paid approximately $8.6 million in cash consideration (including a prior investment of $0.8 million) and issued or reserved for future issuance approximately 27,000 shares of its Class A common stock in exchange for all the outstanding shares of M-Stream capital stock and upon exercise of outstanding employee stock options and other rights of M-Stream. A portion of the consideration paid is subject to escrow pursuant to the terms of the acquisition agreement.

      The Company expects to complete the acquisition of WIDCOMM, Inc., a provider of software solutions for Bluetooth wireless products, in May 2004. In connection with the acquisition, the Company has elected to pay approximately $49.0 million in cash in exchange for all the outstanding shares of WIDCOMM capital stock. A portion of the consideration to be paid will be subject to escrow pursuant to the terms of the acquisition agreement.

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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, or SEC, including our Annual Report on Form 10-K for the year ended December 31, 2003 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, describe 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, our accounting estimates, assumptions and judgments, , the market acceptance and performance of our products, our dependence on a few significant customers for a substantial portion of our revenue, 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 availability and pricing of third party semiconductor foundry and assembly capacity and raw materials, the competitive nature of and anticipated growth in our markets, , the status of evolving technologies, the length of our sales cycles, the timing of new product introductions, the adoption of future industry standards, our ability to consummate acquisitions and integrate their operations successfully, the need for additional capital and the results of pending and possible future litigation. These forward-looking statements are based on our current expectations, estimates and projections about our industry, management’s beliefs, and certain assumptions made by us, all of which are subject to change. Forward-looking statements can often be identified by words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “believes,” “seeks,” “estimates,” “may,” “will,” “should,” “would,” “could,” “potential,” “continue,” “ongoing,” similar expressions, and variations or negatives of these words. 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 described under the section “Risk Factors” below. 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.

Overview

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

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      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 principally generated by sales of our semiconductor products. Such sales represented over 97% of total net revenue in each of the first quarters of 2004 and 2003. We generate the remaining balance of our net revenue mainly from development agreements, software licenses and maintenance agreements, and system-level reference designs.

      The vast majority of our sales occur through our direct sales force. However, we derived approximately 7.9% and 8.5% of our total net revenue from sales made through distributors in the first quarter of 2004 and 2003, 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;
	•	our ability to specify, develop or acquire, complete, introduce, market and transition to volume production new products and technologies in a timely manner;
	•	the qualification, availability and pricing of competing products and technologies and the resulting effects on sales and pricing of our products; and
	•	the rate at which our present and future customers and end-users adopt our products and technologies in our target markets.

      For these and other reasons, our net revenue in first quarter of 2004 and prior periods may not necessarily be indicative of future net revenue.

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

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

*	Less than 10% of net revenue.

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

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

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      Net revenue derived from all independent customers located outside the United States, excluding subsidiaries or manufacturing subcontractors of customers that are headquartered in the United States, as a percent of total net revenue was as follows:

      All of our revenue to date has been denominated in U.S. dollars.

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

	•	our product mix and volumes of product sales;
	•	the position of our products in their respective life cycles;
	•	the effects of competition;
	•	the effects 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;
	•	amortization of purchased intangible assets;
	•	stock-based compensation expense;
	•	product warranty costs;
	•	provisions for excess or obsolete inventories;
	•	licensing and royalty arrangements; and
	•	the mix of product revenue and development revenue.

      Product Cycles. The cycle for test, evaluation and adoption of our products by customers can range from three to more than six months, with an additional three to more than nine months before a customer commences volume production of equipment incorporating our products. Due to this lengthy sales cycle, we may experience significant delays from the time we incur expenses for research and development, selling, general and administrative efforts, and investments in inventory, to the time we generate corresponding revenue, if any. We anticipate that the rate of new orders may vary significantly from month to month. If anticipated sales or shipments in any quarter do not occur when expected, expenses and inventory levels could be disproportionately high, and our results of operations for that quarter, and potentially for future quarters, would be materially and adversely affected.

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

      In January 2004 we completed the acquisition of RAIDCore, Inc., a developer of redundant array of inexpensive disks, or RAID, and virtualization software, for cash consideration of up to $16.5 million. See Note 3 of Notes to Unaudited Condensed Consolidated Financial Statements.

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

      Because we meet each of the criteria set forth in SFAS 131 and our four operating segments as of March 31, 2004 share similar economic characteristics, we aggregate our results of operations in one reportable operating segment.

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

      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 (a) life cycle and price and cost fluctuations, (b) number of competitors, (c) product differentiation and (d) 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 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.

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 in the reporting period. We regularly evaluate our estimates and assumptions related to allowances for doubtful accounts, sales returns and allowances, warranty reserves, inventory reserves, goodwill and purchased intangible asset valuations, strategic investments, deferred income tax asset valuation allowances, restructuring costs and litigation and other loss contingencies. We base our estimates and assumptions on historical

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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:

	•	Revenue, Gross Margin, Accounts Receivable and Inventory. We recognize product revenue when the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists, (ii) transfer of title has occurred, (iii) our price to the customer is fixed or determinable, and (iv) collection of the resulting accounts receivable is reasonably assured. In addition, we do not recognize revenue until all customer acceptance requirements have been met. These criteria are usually met at the time of product shipment. However, a portion of our sales are through distributors under agreements allowing for pricing credits and/or rights of return. Product revenue on sales made through these distributors is deferred until the distributors sell the product to end customers. In addition, we record reductions to revenue for estimated product returns and pricing adjustments, such as competitive pricing programs and rebates, in the same period that the related revenue is recorded. The amount of these reductions is based on historical sales returns, analysis of credit memo data, specific criteria included in rebate agreements, and other factors known at the time. Additional reductions to revenue would result if actual product returns or pricing adjustments exceed our estimates. Our products typically carry a one to three year warranty. We establish reserves for estimated product warranty costs at the time revenue is recognized. Although we engage in extensive product quality programs and processes, our warranty obligation is affected by product failure rates, use of materials and service delivery costs incurred in correcting any product failure. Should actual product failure rates, use of materials or service delivery costs differ from our estimates, additional warranty reserves could be required, which could reduce gross margins. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances could be required. We write down our inventory for estimated obsolescence or unmarketable inventory in an amount equal to the difference between the cost of inventory and the estimated realizable value based upon assumptions about future demand and market conditions. If actual demand and market conditions are less favorable than those projected by management, additional inventory write-downs could be required.
	•	Goodwill and Purchased Intangible Assets. The accounting for acquisitions requires extensive use of accounting estimates and judgments to allocate the purchase price to the fair value of the net tangible and intangible assets acquired, including in-process research and development, or IPR&D. Goodwill and intangible assets deemed to have indefinite lives are not amortized but are subject to annual impairment tests. The amounts and useful lives assigned to other intangible assets impact the amount and timing of future amortization, and the amount assigned to IPR&D is expensed immediately. If the assumptions and estimates used to allocate the purchase price are not correct, or if business conditions change, purchase price adjustments or future asset impairment charges could be required.
	•	Impairment of Goodwill and Other Intangible Assets. The value of our intangible assets, including goodwill, could be impacted by future adverse changes such as: (i) any future declines in our operating results, (ii) a decline in the valuation of technology company stocks, including the valuation of our common stock, (iii) another significant slowdown in the worldwide economy and the semiconductor industry or (iv) any failure to meet the performance projections included in our forecasts of future operating results. We evaluate these assets, 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

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		we have used are consistent with the plans and estimates that we use to manage our business. It is possible, however, that the plans and estimates used may be incorrect. If our actual results, or the plans and estimates used in future impairment analyses, are lower than the original estimates used to assess the recoverability of these assets, we could incur additional impairment charges.
	•	Strategic Investments. We have made strategic investments in publicly traded and privately held companies for the promotion of business and strategic objectives. Strategic investments in which we hold less than a 20% voting interest and as to which we do not have the ability to exercise significant influence are carried at the lower of cost or fair value. The share prices of publicly traded securities have been volatile, and the value of non-publicly traded securities is difficult to determine. We periodically review these investments for other-than-temporary declines in fair value based on the specific identification method and write down investments to their fair value, with a corresponding loss recorded in other income (expense), net, in the statement of operations, when we believe an other-than-temporary decline has occurred. When determining whether a decline is other-than-temporary, we examine: (i) the length of time and the extent to which the fair value of an investment has been lower than its carrying value; (ii) the financial condition and near-term prospects of the investee, including any specific events that may influence the operations of the investee such as changes in technology that may impair the earnings potential of the investee; and (iii) our intent and ability to retain our investment in the investee for a sufficient period of time to allow for any anticipated recovery in market value. We generally believe an other-than-temporary decline has occurred when the fair value of the investment is below its carrying value for two consecutive quarters, absent evidence to the contrary. Fair values for investments in public companies are determined using their quoted market prices. Fair values for investments in privately held companies are estimated based upon one or more of the following: (a) the values of recent rounds of financing, (b) pricing models using historical and forecasted financial information, and/or (c) quoted market prices of comparable public companies. Although we believe our estimates reasonably reflect the fair value of the non-publicly traded securities that we hold, had there been an active market for the equity securities, the carrying values might have been materially different than the amounts reported. Future adverse changes in market conditions or poor operating results of companies in which we have made such investments could result in losses or an inability to recover the carrying values of the investments that may not be reflected in the investments’ current carrying values, and could require future impairment charges.
	•	Deferred Taxes. We utilize the liability method of accounting for income taxes as set forth in SFAS No. 109, Accounting for Income Taxes, or SFAS 109. We record a valuation allowance to reduce our deferred tax assets to the amount that we believe is more likely than not to be realized. In assessing the need for a valuation allowance, we consider all positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and recent financial performance. As a result of our recent cumulative losses and the full utilization of our loss carrybacks, we concluded that a full valuation allowance against our net deferred tax assets was appropriate. In the future, if we realize a deferred tax asset that carries a valuation allowance, we may record a reduction to income tax expense in the period of such realization.
	•	Restructuring Charges. We have undertaken, and we may in the future undertake, significant restructuring initiatives, which have required us to develop formalized plans for exiting certain business activities and/or facilities. We have had to record estimated expenses for lease cancellations, long-term asset write-downs, severance and outplacement costs and other restructuring costs. Given the significance, complexity, and timing of the execution of such activities, we periodically reassess the estimates we made at the time the original decisions were made. Through 2002 the accounting rules for restructuring costs and asset impairments required us to record provisions and charges when we had a formal and committed plan. In calculating the cost to dispose of our excess facilities, we had to estimate our future space requirements and the timing of exiting excess facilities and then estimate for each location the future lease and operating costs to be paid through the termination of the lease and the amount, if any, of sublease income. To form our estimates for these costs, we performed an assessment of the affected facilities and considered the current market conditions for each site. Our

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		assumptions on future space requirements, operating costs until termination and/or offsetting sublease revenues may be incorrect, and our actual costs may be materially different from our estimates, which could result in the need to record additional costs or to reverse previously recorded liabilities. We periodically evaluate the adequacy of the remaining liabilities under our restructuring initiatives. Beginning in 2003 the accounting rules require us to record any future provisions and charges at fair value in the period in which they are incurred. As management continues to evaluate the business, there may be additional charges for new restructuring activities as well as changes in amounts previously recorded.
	•	Litigation and Settlement Costs. From time to time, we are involved in legal actions arising in the ordinary course of business. We are aggressively defending our current litigation matters. However, there are many uncertainties associated with any litigation and we cannot assure you that these actions or other third party claims against us will be resolved without costly litigation or settlement payments. If that occurs, our financial position, results of operations or cash flows could be materially and adversely affected, and we may be required to make future royalty payments, which could adversely impact gross margins. If information becomes available that causes us to determine that a loss in any of our pending litigation is probable, and we can reasonably estimate a range of loss associated with such litigation, we would record at least the minimum estimated liability. However the actual liability in any such litigation may be materially different from our estimates, which could result in the need to record additional costs.

Results of Operations for the First Quarter of 2004 Compared to the First Quarter of 2003

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